U.S. Supreme Court enforces forum selection clause in a construction contract
As 2013 rushes to a close, we pause to thank our clients, colleagues and friends for your interest in our Client Alerts and your feedback.
It has been an exciting year. The construction industry economic recovery continues – perhaps not as fast as we would all like to see, but improvement nonetheless. As business improves, legal developments like the one reported here come sharply into focus.
We welcomed Bill Geisen, Jessi Hill, Zach Jones and Walter Booth to our Construction Service Group and expanded our operations into Northern Kentucky, Ohio and Indiana. The response has been gratifying and we look forward to more growth in these areas and others.
In this year-end Client Alert, we append to our April 2013 Client Alert, which reported on a recent federal court case from Texas causing concern about the effectiveness of forum selection clauses in construction contracts, especially subcontracts. On December 3, 2013, the United States Supreme Court issued an opinion in that case, Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas et al., Case no. 12-929, 571 US__ (2013). The Court’s unanimous decision enforced a forum selection clause in a construction subcontract and found it to be the controlling factor supporting motion to transfer venue.
That case involved a subcontract between a general contractor, Atlantic, and its subcontractor, J-Crew, for a construction project located at Fort Hood, Texas. The subcontract contained a forum selection clause providing for all disputes to be “litigated in the Circuit Court for the city of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” After a payment dispute developed, the subcontractor chose not to follow the forum selection clause and instead filed suit in the United States District Court for the Western District of Texas, the district where the project was located.
Atlantic filed a motion to dismiss the lawsuit or, in the alternative, to transfer the case to federal court in Virginia based upon the forum selection clause. The Texas district court denied both motions prompting Atlantic to appeal to the Fifth Circuit Court of Appeals. After the Fifth Circuit Court of Appeals refused to disturb the district court’s decision, Atlantic persuaded the United States Supreme Court to review the case. Atlantic has now prevailed in the United States Supreme Court, which reversed and remanded the Fifth Circuit decision.
Despite that reversal, the Supreme Court did agree with the lower courts on a procedural issue. The Court found that a motion to dismiss under 28 U.S.C. §1406 (a) was not the correct procedure for enforcing a forum selection clause. Instead, the Court decided that the exclusive mechanism to enforce a forum selection clause is a motion to transfer under 28 U.S.C. §1404 (a). The Court added that if the forum selection clause specifies a non-federal forum, then the correct procedure to enforce it is a motion invoking the doctrine of forum non conveniens.
Since this case involved a motion to transfer to the federal court in Virginia, the Supreme Court analyzed transfers under §1404 (a), which provides:
[f]or the convenience of the parties and witnesses, and in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought, or to any district or division to which all parties have consented.
The Court noted that the parties had contracted to have their disputes litigated in Virginia and concluded that their agreement should be enforced “unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.”
The Court further explained that a forum selection clause alters the analysis of the motion to transfer under §1404 (a) in three ways. First, no weight should be given to the Plaintiff’s choice of forum and the Plaintiff should bear the burden of demonstrating why the case should not be transferred in accordance with the clause. Second, private interests relating to inconvenience of the parties or their witnesses should not be considered, because any such inconvenience was foreseeable by the parties when they entered into the contract. Since private interests should not weigh in the decision, only public interest factors should be considered in evaluating a motion to transfer. Third, the choice of law principles of the court in which the case was originally filed should not follow the case if it is transferred to the forum selected by the parties in their contract.
Applying these principles, the Supreme Court rejected J-Crew’s argument that the case should remain in Texas because the majority of its witnesses were located in that state and could not be compelled to appear for trial in Virginia. The Court was not persuaded by any of the public interest arguments that had been made in opposition to the motion to transfer. However, it remanded the case to the lower courts to further consider the public interest factors.
The Supreme Court’s focus on procedural issues should not obscure the importance of this decision, which resolves a split between lower federal courts and strongly endorses the parties’ right to contractually specify the forum where litigation of disputes under the contract must occur. This is encouraging to those who take extra care to include dispute resolution clauses that specify how and where disputes will be resolved in construction contracts.
Our Construction Service Group wishes you a blessed Holiday Season and a prosperous 2014.