Is the Forum Selection Clause* in Your Construction Contract Enforceable?
Is the Forum Selection Clause* in Your Construction Contract Enforceable?
Written by Brian Thomas Moore
The United States Supreme Court recently took a critical stand for subcontractors in the case, Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, which limits the use offorum selection clauses in construction contracts. With this step, the Court upheld the law of 24 states, which will shape the future of forum selection clauses across the country.
In Atlantic Marine, a Virginia based general contractor hired a Texas subcontractor, J-Crew Management, Inc., 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." Contract signed; everyone started work.
J-Crew then subcontracted a portion of the job to additional subcontractors located in Fort Hood, Texas. At the conclusion of the project, J-Crew disputed the lack of certain payments 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. In other words, there are exceptions to the rule.
On appeal, the Fifth Circuit agreed with the district court's ruling. Atlantic Marine then appealed to the US Supreme Court. The Supreme Court heard oral argument, and affirmed the district court's opinion. 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" as found in the forum selection clause; the court should only consider the public interests as provided by the state's legislated statute. In essence, the Supreme Court acknowledged that state laws will be permitted to trump forum selection clauses found in private party agreements.
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, a lot of contractors demand the venue be located in their home state, without any regard to the project's location. Obviously, the hope is to reduce costs for the contractor and gain any potential advantage created by litigating against an out-of-state subcontractor in the contractor's home state.
Applying this reasoning and the outcome 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 across the board. 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 and it will depend heavily on the existence of state statute. As a result, contractors and subcontractors should be aware of how forum selection clauses are treated by the state law where the project is located. Ultimately, such knowledge will provide insight as to whether the forum selection clause is one that is actually enforceable for the particular project.
*Forum Selection Clause
This is a contract which allows two parties entering into a contract to agree that any litigation resulting from the contract will happen a particular way. There are three options:
– it could be a specific court in an agreed upon jurisdiction
– may refer to a particular dispute resolution process
– or the clause may refer to both