United States Supreme Court Delcares Choice of Forum Clauses Enforceable

United States Supreme Court Delcares Choice of Forum Clauses Enforceable

In June of 2013 we reported that the United States Supreme Court agreed to decide In re Atlantic Marine Construction Co. to resolve a split between the United States Courts of Appeals regarding whether a federal court must honor a forum selection clause in a construction contract by transferring the case to the forum so designated in the contract.

On October 9, 2013, the Supreme Court heard oral argument in the Atlantic Marine case.  Less than two months later, on December 3, 2013, the nation’s highest court issued an opinion declaring that upon motion of one of the parties, a federal district court should transfer a case to the forum selected in the contract “unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor the transfer.”

The Supreme Court’s Atlantic Marine opinion reaffirms the enforceability of choice of forum clauses and suggests that courts may only disregard the contractually designated forum for litigating disputes under exceptionally rare circumstances.  Accordingly, owner, contractors and subcontractors should pay particular attention to the choice of forum clauses in their contracts and subcontracts because federal courts now have a clear mandate that they must be enforced.

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

United States Supreme Court to Hear Case Regarding Enforceability of Forum Selection Clauses

Construction subcontracts often contain “forum selection” clauses requiring that the parties to the contract settle all of their disputes in arbitration or litigation in some state that seems entirely unrelated to the construction project but happens to be the state where the general contractor maintains its home office.  These clauses provide economic and strategic benefits to the general contractor by eliminating or mitigating the travel expenses for key personnel and by requiring litigation in a court familiar to the contractor’s legal counsel.

This ability to contract for a “home field advantage” has been eroded by provisions included in some states’ recently enacted prompt payment laws (which require that all disputes by resolved by courts in the jurisdiction of the project location), and it was more recently rejected by the Court of Appeals for the Fifth Circuit in In re Atlantic Marine Construction Company, Inc.  In that case, the Fifth Circuit held that a subcontractor could file suit against a general contractor in Texas (where the project was located), despite a clause in the subcontract agreement requiring that all disputes arising from the contract be resolved in a specific federal court in Virginia.

The Fifth Circuit’s decision directly contradicts the majority of federal circuit courts, including the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, all of which have held that a forum selection clause in a contract negotiated at arms’ length should be enforced by the federal courts. On April 1, 2013, United States Supreme Court agreed to review the split between the Circuit Courts on the choice of forum issue by granting certiorari for the Atlantic Marine case.  This nation’s highest Court will hold argument in case and decide it next term, which begins in October of this year.  We will post the Supreme Court’s ruling on this important case as soon as it is issued.