Contractually Controlling Future Litigation: Unanimous Supreme Court Enforces Forum-Selection Clauses

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Many contracts today include "forum-selection clauses" which are intended to eliminate some of the uncertainty inherent in litigation by choosing at the outset where any disputes will be litigated. Last week, the United States Supreme Court in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, No. 12-929 (U.S. Dec. 3, 2013), announced the appropriate method for enforcing forum-selection clauses in federal proceedings. The Court held that an action filed in disregard of a forum-selection clause must be transferred to the contractually selected location in all but the most unusual of cases. This signals the Court's continued adherence to the view that forum-selection clauses are good for commerce. Atlantic Marine is a welcome addition to the law of federal procedure, and should promote predictability and certainty in the often complex world of interstate commerce.

The Decision

After securing a government contract to build a child-development center in Texas, Virginia-based Atlantic Marine subcontracted with Texas-based J-Crew Management, Inc. for work on the project.  The parties’ contract included a forum-selection clause that chose either the Circuit Court of the City of Norfolk, Virginia or the United States District Court for the Eastern District of Virginia, Norfolk Division, as the exclusive forums for any litigation regarding the contract.   However, when a dispute arose concerning payment, J-Crew sued in a federal court in Texas.  Atlantic Marine asked the trial court to dismiss the complaint on the basis of the forum-selection clause, or to alternatively transfer the case to the federal district court in Virginia.  The trial court denied both requests, and the Fifth Circuit Court of Appeals denied Atlantic Marine’s request to overturn that decision. 

In light of a split in the various Circuit Court opinions on the issue, the Supreme Court agreed to hear the case and later reversed the Fifth Circuit in a unanimous opinion.  The Court began its analysis by rejecting Atlantic Marine’s argument that dismissal was necessary because the venue was “improper” or “wrong” when the filing ignored the forum-selection clause.  Rather, the Court held that the proper way to enforce a forum-selection clause is through a motion to transfer the case to the appropriate court. “When the parties have agreed to a valid forum-selection clause, a district court should ordinarily transfer the case to the forum specified in that clause.  Only under extraordinary circumstances unrelated to the convenience of the parties should [such] a motion be denied...  When parties have contracted in advance to litigate a dispute in a particular forum,” the Court explained, “courts should not unnecessarily disrupt the parties’ settled expectations.”  The Court noted that no exceptional factors cutting against transfer appeared in the record, but sent the case back to the Fifth Circuit for a fresh look at that issue.

Lessons from the Decision

Atlantic Marine offers a few important lessons. First, federal procedural matters are complicated, as demonstrated by the circuit split that sparked the Court's interest in hearing the case. While a federal court will many times offer institutional advantages over a state court, the highly-technical procedural rules that govern lawsuits brought in federal court can be a quagmire for litigants and lawyers lacking experience and expertise in federal litigation.

Second, in view of the decision, federal district courts will be very likely to enforce forum-selection clauses, perhaps more so than state courts. If a contract claim is filed in a state court in disregard of a forum-selection clause, it may make sense to remove the matter to federal court (assuming federal jurisdiction exists) and then request a transfer to the agreed-upon forum. Removing the action will not waive a later transfer request.

Third, entities that do business in different states may wish to start bargaining for the inclusion of forum-selection clauses in their contracts, if they do not do so already. Such clauses offer predictability regarding where the entity may be sued on the contract and, in the absence of a separate provision in the contract to the contrary, will also affect which state's choice-of-law rules will apply. The language used in such clauses is crucial; avoid stating simply that the contracting parties "consent" or "submit" to suit a particular forum, which courts reasonably can read as merely a waiver of venue and personal-jurisdiction objections (so-called "permissive forum-selection clauses") and not a true forum-selection clause.

Topics:  Forum Selection Clause, SCOTUS

Published In: Civil Procedure Updates, General Business Updates, Construction Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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