U.S. Supreme Court’s Decision is Music to the Ears of Large General Contractors

It’s rare for state Supreme Courts to hear construction cases.  Rarer still are construction cases heard by the Supremes.

← No, not those Supremes.

“The” Supremes. As in the U.S. Supreme Court. The High Court. The Big Nine. The Supremo Juristimos.

Those Supremes.

But earlier this month the U.S. Supreme Court did just that.  In Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, Case No 12-929 (December 3, 2013), the Supremes weighed in on the enforceability of forum selection clauses . . . and their decision . . . was music to the ears of large general contractors.

Forum Selection Clauses

Forum selection clauses are contractual provisions which dictate where disputes will be litigated. A fairly simple example would be:

“Should any dispute arise under this contract, the parties agree that such disputes shall be litigated in U.S. District Court for the Northern District of California.”

Under such a provision all disputes would have to be litigated in the U.S. District Court for the Northern District of California.  It wouldn’t matter where the project is located or even where the parties to the contract are headquartered.  Although, typically, parties with the stronger bargaining power will require that disputes be litigated in the court closest to where they are headquartered, both to have a home field advantage because they will likely be more familiar with the laws and judges in their jurisdiction and have established relationships with local counsel as well as to make make it more costly and difficult for the other party to litigate away from home.

The Atlantic Marine Case

The Atlantic Marine case involved a forum selection clause which provided that all disputes would be litigated in Virginia. The clause was contained in a subcontract between general contractor Atlantic Marine Construction Co., Inc. (“Atlantic Marine”), headquartered in Virginia, and its subcontractor J-Crew Management, Inc. (“J-Crew), headquartered in Texas, involving a federal construction project for the U.S. Army Corps of Engineers in Fort Hood, Texas.

When a payment dispute arose, J-Crew filed suit in the U.S. District Court for the Western District of Texas. Atlantic Marine then filed a motion to dismiss or transfer the case to Virginia because the forum selection clause in the parties’ subcontract provided that all disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United Stated District Court for the Eastern District of Virginia, Norfolk Division.”

The District Court denied the motion holding that Atlantic Marine bore the burden of showing that transferring the case to Virginia was appropriate, and that Atlantic Marine failed to carry its burden because many of J-Crew’s witnesses could not be compelled to testify in Virginia and there would be “significant expense” for those witnesses who were willing to testify.

On appeal, the Fifth Circuit Court of Appeals upheld the District Court, finding that the District Court had not abused its discretion in refusing to transfer the case. However, the Court of Appeals noted that while the forum selection clause allowed for disputes to be litigated in either state or federal court in Virginia, if the forum selection clause had only allowed for disputes to be litigated in state court, the correct result would have been dismissal of J. Crew’s complaint rather than transfer of the case to the federal court in Virginia.

The Supreme Court Decision

The U.S. Supreme Court, with a few exceptions, chooses which cases they decide to hear, and usually chooses cases involving undecided issues arising under federal law or to resolve “splits” between two or more federal circuit courts whose decisions are inconsistent.  The Atlantic Marine case involved a circuit court split between:

• A majority of circuit courts who have held that lawsuits brought in a federal district court different than that specified in a forum selection clause are “improper” and should be dismissed; and

• A minority of circuit courts who have held that lawsuits brought in a federal district court different than that specified in a forum selection clause are not “improper,” but rather, that the forum selection clause is one of several factors that should be considered by the district court when deciding whether to transfer the case to the district court specified in the forum selection clause.

The U.S. Supreme Court sided with the minority of circuit courts but set a high bar for challenging the enforceability of forum selection clauses holding that such clauses should be enforced unless “extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.”

In so holding, the U.S. Supreme Court set forth three standards to be applied by district courts, which, together, strongly support the enforceability of forum selection clauses:

(1)     The party defying a forum selection clause bears the burden of proof.   Typically, the party seeking to transfer a case to another court bears the burden of showing that transfer is appropriate.  The U.S. Supreme Court inverted this burden in cases where parties have entered into a contract with a forum selection clause.  In such cases, the plaintiff’s choice of forum bears no weight held the Supreme Court.  Rather, the Supreme Court stated, “as the party defying the forum-selection clause, the plaintiff bears the burden of establishing that transfer to the forum for which the parties bargained is unwarranted.”

(2)     The inconvenience to the party defying a forum selection clause bears no weight.  Ordinarily, when a party seeks to transfer a case the court weighs a variety of private and public interests.  Private interests include the relative ease of access to evidence, the ability to require the attendance of witnesses and the cost to the parties of litigating in a court in a different geographical area.  Public interests include the relative congestion of the competing courts, the locality’s interest in having local issues decided at home and the competing courts’ familiarity with the law that will govern the case.  The U.S. Supreme Court held that only public interest factors are to be considered because, by agreeing to a forum selection clause, the parties contracted away their right to argue that the selected forum is inconvenient.  Since, in most cases, the most compelling reason for denying a transfer is the inconvenience and cost to a party and its witnesses, by holding that courts are not to look at private interests, most forum selection clauses will be enforced.

(3)     The law of the selected forum applies when determining whether to transfer a case.  Usually, when determining whether to transfer a case the court will apply the law of the jurisdiction in which the case was filed.   However, in cases involving forum selection clauses, the U.S. Supreme Court found that to do so would be “inequitable” and “encourage gamesmanship,” and “reject[ed] the rule that the law of the court in which the plaintiff inappropriately filed suit should follow the case to the forum contractually selected by the parties.”

Conclusion

The U.S. Supreme Court’s decision clearly has a broader impact than just on forum selection clauses in construction contracts.  Nevertheless, the decision is music to the ears for larger general contractors who usually have more bargaining leverage in contract negotiations and can insist upon forum selection clauses favorable to them.

There are, however, some important caveats, provisos and quid pro quos so to speak:

• First, the U.S. Supreme Court’s decision only applies to litigation in federal court not state court.  And unless the project is a federal project or the case involves parties from different states, most construction cases are brought in state court not federal court, so the decision will only effect the minority of construction cases brought in federal court.

• Second, the decision only applies to forum selection clauses addressing litigation not arbitration.  Nevertheless, arbitration provisions providing that arbitration is to be conducted in a particular state or locality are already strongly enforced.

• Third, the decision does not address whether it applies to cases in which federal Miller Act claims are being litigated, since such cases are required under the Miller Act to be  brought either in the federal court in the state in which the project is located or where the contract was entered.

• And, finally, the decision does not address the effect of state laws requiring that construction lawsuits be brought in the state where the project is located.