Validity of Forum Selection Clause in Construction Contract Goes to Supreme Court.
Sophisticated parties to a construction contract will often negotiate the manner, location, forum, and governing law for disputes. For example, they can choose arbitration or litigation; they can choose state or federal court; they can choose which state’s law should be applied. In theory, this seems to be a simple exercise of selecting various options for how the parties will resolve any disputes. In practice, however, the exercise can result in further disputes and litigation about “the process” for resolving disputes.
Recently, in the case of In re Atlantic Marine Construction Co., the United States Court of Appeals for the Fifth Circuit, addressed the validity and interpretation of a forum selection clause contained in a construction contract. The noteworthiness of the case is that on April 1, 2013, the Supreme Court announced that it will review the decision of the Fifth Circuit. The Supreme Court receives approximately 10,000 petitions each year, but grants and hears oral argument in about 75 to 80 cases.
UNDERLYING FACTS
The dispute related to a subcontract agreement on a construction project located on Fort Hood in Texas. When the general contractor did not pay the subcontractor for its work, the subcontractor filed a lawsuit in federal court in Texas based upon diversity jurisdiction (…that means a dispute in excess of $75k between parties of different states…). The general contractor tried to get out of the lawsuit by filing a motion to dismiss or, in the alternative, tried to get the case transferred to Virginia based upon a forum selection clause in the subcontract agreement.
COURT PROCEEDINGS
The trial judge did not dismiss the case, nor did he agree to transfer the case to Virginia. The court held that the project, and most of the project documentation, was located in Texas. In addition, almost all of the witnesses lived in Texas and would not be able to testify if the case were transferred to Virginia.
The general contractor filed an appeal to the Fifth Circuit in the form of what was called a Petition for Writ of Mandamus in an attempt to reverse the trial court’s ruling. The Fifth Circuit denied the writ petition. In its decision, the majority of the panel concluded that the parties’ contractual choice of forum was not the only factor which should be weighed in a motion to transfer venue. Stated differently, the majority reasoned that the federal venue statutes, not the parties’ contractual forum selection clause, should govern whether Texas, as opposed to Virginia, was a proper forum for the case to be heard. That decision is being reviewed by the Supreme Court.
PRACTICAL LESSONS
While the issues on appeal are not construction-specific, such as whether “pay if paid clauses” are enforceable, the ultimate decision may affect the contracting process for parties to a construction project. Until there is clear guidance from the Supreme Court on these issues, some things to think about include:
- Forum selection clauses are not always enforced as written. As demonstrated in the Atlantic Marine Construction case, a court may focus instead on whether the plaintiff’s chosen venue is proper under the statutes. The court may not place the same emphasis on where the parties agreed to litigate.
- When drafting a forum selection clause, you should think about all the “where” questions: (a) where the parties are located; (b) where the witnesses reside; (c) where the contract negotiations took place; and (d) where the project is located.
- By requiring in your forum selection clause that disputes be resolved in state court, you can eliminate these issues from the dispute. For example, the majority panel in Atlantic Marine Construction noted dismissal would have been proper had the parties’ forum selection clause required the case to be heard only in state court since federal courts may only transfer cases to other federal courts.
When the Supreme Court issues its decision in the Atlantic Marine Construction case, there may be some additional practical implications. But for now remember to carefully review the disputes provisions in your construction contracts. ■
About The Author:
Matthew DeVries, construction attorney and LEED AP, is a member of the Construction Service Group of Stites & Harbison, PLLC, as well as the founder of www.bestpracticesconstructionlaw.com. He can be reached at matthew.devries@stites.com.
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Modern Contractor Solutions, June 2013
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