September 02, 2014 BY Eric Mull
Forum Selection Clauses In Construction Contracts- Enforceable Or Not?
Late last year in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, 134 S.Ct. 568 (2013), the United States Supreme Court took a critical stand for subcontractors, limiting the use of forum selection clauses in construction contracts. In so holding, the Court upheld the law of twenty-four states, which will now shape the future of forum selection clauses across the country.
In Atlantic Marine, a Virginia based general contractor, Atlantic Marine, hired a Texas subcontractor, J-Crew Management, Inc. (“J-Crew”), to build a child care facility in Fort Hood, Texas. The subcontract contained a forum selection clause providing that all disputes “shall 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.” J-Crew then subcontracted a portion of its work to subcontractors in Fort Hood, Texas. During the course of the project, all work was performed by J-Crew and its subcontractors in Texas. At the conclusion of the project, J-Crew disputed the lack of certain payments allegedly due under the subcontract, and sued Atlantic Marine to recover $160,000. J-Crew filed suit in federal court (Western District of Texas), where the project was located. Atlantic Marine, citing the forum selection clause found within the subcontract, moved to dismiss or transfer J-Crew’s case to federal court in Virginia.
In examining Atlantic Marine’s motion to dismiss, the Western District of Texas held that because the claim arose in Texas, all the participants had been in Texas, and most of the evidence concerning the claim was located in Texas, the case should not be transferred to Virginia. Guiding the district court was a Texas statute, which provides that construction contracts for improvements to real property located in Texas are “voidable by the party obligated by the contract to perform the construction” if the contract requires litigation in another state.
On appeal, the Fifth Circuit agreed with the district court’s ruling. Atlantic Marine then appealed to the United States Supreme Court. The Supreme Court heard oral argument in October of 2013, and affirmed the district court’s opinion. In so holding, the Supreme Court deferred to individual state’s rights, directing that when a federal court considers the forum for a case, “the court should not consider the parties’ private interests aside from those embodied in the forum-selection clause; it may consider only public interests.” In essence, the Supreme Court acknowledged that state laws will be permitted to trump forum selection clauses found in private party agreements.
In light of the Court’s decision in Atlantic Marine, it is important to understand how the Court’s opinion effects contractors. As an initial matter, forum selection clauses are common in contracts, establishing the venue for a dispute related to the contract. For example, a general contractor from New York and a subcontractor from North Carolina working on a construction project in Georgia might have in their subcontract that all disputes related to the contract must be resolved in Georgia. The logic generally makes sense, as the parties are working on a Georgia project, where most of the witnesses and evidence are located. However, contractors will often place venue not where a project is located, but in their home state, where they could arguably receive favorable treatment over an out-of-state subcontractor.
In the commercial context, forum selection clauses are generally enforceable. However, in the construction context, some states have enacted statutes voiding forum selection clauses in favor of the location where the project actually occurred. The rationale, right or wrong, is that the contractor’s home state, which is often the required jurisdiction for litigating disputes, will unfairly favor the general contractor and that it is unfair and costly to require a subcontractor to prosecute or defend a case outside the jurisdiction where the construction project is located.
Applying this reasoning and the holding from Atlantic Marine to contractors and subcontractors negotiating subcontracts with forum selection clauses, it is important to note that Atlantic Marine did not render all forum selection clauses unenforceable. Rather, the decision permits a balancing between the parties’ rights to contract and public policy, strongly indicating that forum selection clauses will not automatically be upheld. As a result, contractors and subcontractors should be aware of how forum selection clauses are treated by state law where their projects are located. Ultimately, such knowledge will provide insight as to whether forum selection clause will be enforced or trumped by state law.
The Journal is a publication for the clients of Drew Eckl & Farnham, LLP. It is written in a general format and is not intended to be legal advice to any specific circumstance. Legal Opinions may vary when based upon subtle factual differences. All rights reserved.
H. Michael Bagley