With its unanimous decision in Atlantic Marine Construction Co., Inc. v. U.S. District Court for the Western District of Texas the United States Supreme Court stated its strong support for the enforcement of contractual forum-selection clauses. Specifically, the Court outlined how federal courts should determine whether to transfer a case filed in a federal district court different than the contractually selected forum. In describing this process the Court recognized that it would be rare for a court to not follow the forum-selection clause. While this decision is good news for contractors attempting to enforce their contracts the Court’s decision leaves open some important questions which may lead to future uncertainty related to these clauses.
Atlantic Marine, a Virginia based company, entered into a contract with the U.S. Army Corps of Engineers to construct a child development center at Fort Hood in Texas. It entered into subcontract with J-Crew Management, Inc., a Texas company work. This subcontract contained a forum-selection clause mandating that any action under the subcontract must be litigated in state or federal court in Norfolk, Virginia. Atlantic and J-Crew ended up in a payment dispute related to its subcontract work. J-Crew ignored the forum selection clause and filed a lawsuit in a Texas federal district court. Atlantic moved to either dismiss the claim or have it transferred to Virginia in accordance with the forum selection clause. The district court denied Atlantic’s motion and the court of appeals upheld that decision.
The Supreme Court reversed. It held that when defendant files a motion to transfer venue based upon a forum selection clause, the district court should transfer the matter unless there are “extraordinary circumstances unrelated to the convenience of the parties.” In reaching this holding the Court set out a method of analyzing such a motion in light of a valid forum selection clause. Specifically the Court held:
- A court must give no weight to the plaintiff’s choice of forum as it is the “party defying the forum-selection clause”. The plaintiff, therefore, has the burden to demonstrate the transfer is unwarranted. This is an inversion of the typical burden of proof for such motions particularly where, as in this case, the forum would have been otherwise acceptable under applicable federal statues and rules.
- Second, in evaluating the defendant’s motion to transfer the court may not consider the parties’ private interests (i.e. – inconvenience, cost to travel, etc.). In agreeing to the clause the parties have already addressed these interests. A court should consider “public interest factors” only. The Supreme Court seemed to set a fairly high bar here, though. It noted that since “those factors will rarely defeat a transfer motion, the practical result is that the form-selection clauses should control except in unusual cases” which, in the Court’s view, “will not be common.”
- Finally, where a party “flouts its contractual obligation and files suit in a different forum” the law of the state to which the case is transferred will apply. Normally, the law of the state of the original lawsuit would follow a case transferred to a different federal district court. The Court created an exception to this rule, in effect, as a punishment to the party that ignores its contractual obligation. To allow the original state law to follow the case, the Court noted, would be to reward the breach of contract.
At first glance, this decision appears to be fairly definitive – a dispute subject to a forum-selection clause must be transferred under applicable federal venue statutes except in rare circumstances. What the Court did not have the opportunity to review in this decision, however, is the impact of various state “build-here, sue-here” laws. These statutes purport to invalidate forum-selection clauses in construction contracts that require disputes to be heard in a jurisdiction other than where the project is located. There is a possibility that a party attempting to ignore its contractual obligations, such as J-Crew, will argue this is a “public interest factor” that should automatically prevent the transfer. It is not clear that such an argument would prevail, however. As noted above, the Supreme Court indicated a forum selection clause would be ignored on such grounds very rarely. Indeed, Texas, the location of this project, is one state that has such a statute. Further, these “build-here, sue-here” laws are not a universal inoculation to a clear forum-selection clause. A number of cases, for example, have held that the Federal Arbitration Act would preempt such laws and obligate the parties to arbitrate in the contractually mandated location.
This decision should provide some comfort to contractors seeking to enforce forum-selection clauses in a federal court. It is not a complete panacea, however, as questions may still remain in jurisdictions with “build-here, sue-here” statutes. This is not, therefore, the end of this story.