Why Forum Selection Clauses Matter

On Dec. 3, 2013, a United States Supreme Court decision forced a Texas corporation to head to Virginia to litigate its construction contract with its Virginia subcontractor, even though all the work under the contract was performed in Texas.  The reason for the cross-country travel to a distant court: the parties’ forum selection clause.  In Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas, et. al., the United States Supreme Court overturned the Fifth Circuit’s decision, which upheld a district court’s refusal to enforce a forum selection clause.  Even though the district court found that the convenience of the parties and the witnesses weighed in favor of a Texas forum, the United States Supreme Court held the parties to their contractual choice.  Here’s a Trial Alert detailing why the United States Supreme Court reached this decision, written by my colleague Mark Bayer.

More recently on Feb. 28, 2014, the Texas Supreme Court in In re Mark Fisher and Reece Boudreaux followed the United States Supreme Court’s lead when it held that a trial court abused its discretion by failing to enforce a forum selection clause.  This particular case centered on a particular Texas statute, the Civil Practice and Remedies Code § 15.020, which deals with the enforcement of venue selection clauses in “major transactions,” which defines transactions as those involving $1 million or more.  The question was whether the plaintiff could maintain his venue in Wise County, Texas, rather than be forced to transfer to Tarrant County, Texas (the county specified in the parties’ mandatory forum selection clause).  Plaintiff’s leading argument was that his claims did not “arise from” the parties’ acquisition documents, which had the forum selection clause, but instead from the parties’ partnership agreement, which did not contain a forum selection clause.  The Texas Supreme Court rejected this argument, noting that the Texas statute did not apply to actions arising from particular agreements, but to actions “arising from a major transaction.”  Essentially, the Texas Supreme Court allowed the forum selection clause of the acquisition documents to be transferred to another agreement between the parties because all of the agreements (and the claims alleged) arose from the “major transaction.”

Though this Texas Supreme Court case arises out of entirely different set circumstances than the U.S. Supreme Court case (different facts, different legal analysis, different types of contracts), the underlying lesson is the same –

forum selection clauses will be enforced in Texas, both in federal and state courts.

Both the U.S. and Texas Supreme Courts recite the strong policy favoring the enforcement of forum selection clauses.  The United States Supreme Court notes that a valid forum-selection clause should be “given controlling weight in all but the most exceptional cases[,]” and the Texas Supreme Court echoes this principle, stating that “[f]orum selection clauses are presumptively valid” and that “[a]llowing a lawsuit to proceed in a forum other than that for which the parties contracted promotes forum shopping with its attendant judicial inefficiency, waste of judicial resources, delays of adjudication of the merits, and skewing of settlement dynamics.”

The warning is evident — once you agree to a forum in your contracts, you will not be able to shop for one later.  Chances are you will be stuck with it.  And the consequences might be worse than you think.  It could require you to pack up evidence and fly your employee witnesses across the country just to recover amounts from your own subcontractors for work they did in your own backyard.  If it’s a “major transaction,” it may mean that a forum selection clause in only one of your agreements will require you to litigate claims arising out of multiple agreements in a county you don’t want.  All of this could result in more expense, more inconvenience, and even an unfair advantage to the other party.

The opportunity is also evident — you can shop now!  So put the forum selection clause back on your contract check lists, and when you get to the negotiation table, don’t hesitate to bring them up.  Better to shop now for the forum that will work best because there will be no shopping later.