Last week the U.S. Supreme Court announced that it will review an important Circuit Court case, which focuses on the enforceability of forum selection clauses. These contract clauses identify where parties must litigate claims in the event of a dispute. Contractors, especially federal contractors who perform work for the Government across the country and throughout the world, should, and most often do, include these clauses in their subcontract agreements.
Forum selection clauses can give a prime contractor a “home court” advantage if litigation should become necessary. Contractors, when forced to litigate, generally prefer to litigate where they are primarily situated for a variety of reasons, almost all of which pertain to cost. By litigating in a court near its home base, a prime contractor can likely save on travel costs for key personnel, have its case tried in a court familiar to its legal counsel and make an adversary come to it, escalating the costs incurred for that company. It’s a huge advantage. Further, for companies that conduct business over a broad geographic area, forum selection clauses provide more certainty. It allows them to anticipate costs better by avoiding litigation in multiple venues.
As evidenced by a recent decision of the U.S. Court of Appeals for the Fifth Circuit, however, forum selection clauses may not always be as iron-clad as they appear, and in some circumstances, may be ignored entirely. In In re: Atlantic Marine Construction Company, Inc., despite clear language in a subcontract that identified a specific federal court in Virginia to resolve disputes, the Fifth Circuit ruled that a plaintiff subcontractor could file suit in Texas, where the project and witnesses are located, as the forum selection clause represented but one factor to consider when determining whether the contractually specified forum could be enforced. This decision follows decisions in several other Circuit Courts, but remains the minority position among the Circuits. The majority of the U.S. Circuit Courts will enforce forum selection clauses, unless there is fraud or the chosen forum is unreasonable. The U.S. Supreme Court’s review of the Atlantic Marine decision will likely resolve the current split among the Circuits.
The Fifth Circuit did, however, suggest ways in which a contractor could draft a forum selection clause to improve its likelihood of being enforced, including identifying only specific state courts or arbitration tribunals, as opposed to federal courts, as appropriate forums. The wisdom of the Fifth Circuit’s decision will be scrutinized by the Supreme Court, which will hopefully provide some clarity to this increasingly cloudy issue.
As you can imagine, forum selection clauses, and the ability to enforce them, have important legal and business consequences. Contractors that have a national and/or international platform should include well thought-out and effective forum selection clauses in their subcontracts to give themselves the best chance of securing that home court advantage. You should certainly consult with a legal professional on how best to achieve this result, especially considering Atlantic Marine. We will keep you updated on this interesting and important case.