Client Alerts
April 30, 2013

How effective are forum selection clauses in design or construction contracts?

Stites & Harbison Client Alert, April 30, 2013

Construction and commercial contracts frequently include provisions that require any disputes under the contract to be litigated in a specifically named forum. Subject to certain state and federal statutory restrictions, courts have generally enforced such “forum selection clauses” absent fraud, overreaching, or special circumstances. Interestingly, a recent case from the United States Court of Appeals for the Fifth Circuit1 that could undermine the effectiveness of forum selection clauses, at least in some federal courts,2 is headed to the U.S. Supreme Court.

The dispute involved a construction project at Fort Hood in Texas. The general contractor, Atlantic, entered into a subcontract that contained a forum selection clause requiring that all disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District for the Eastern District of Virginia, Norfolk division.” Despite that contract clause, the subcontractor sued in Texas federal court in the district where the project was located, claiming that Atlantic had failed to pay for work performed under the subcontract. Atlantic filed a motion to dismiss the lawsuit or in the alternative to transfer it to federal court in Virginia based upon the forum selection clause. The Texas district court denied both motions, prompting Atlantic to file a petition for writ of mandamus in the Fifth Circuit Court of Appeals, that resulted in a reasoned decision presenting both sides of the issue.

The Fifth Circuit ruled against Atlantic and found that the district court had not clearly abused its discretion by refusing to dismiss the case or transfer it to Virginia. In its majority opinion, the court first determined that under the federal statute3 venue in the Western District of Texas was proper, because the construction contract was performed in that district. Then the court decided that privates parties should not have the power through a forum selection clause to supersede a venue statute enacted by Congress.

Having decided that venue was proper, the Fifth Circuit refused to dismiss the case4 and then turned its attention to the motion to transfer.5 The court considered the forum selection clause to be a “significant” factor in favor of transfer, to be weighed against other factors such as convenience of parties and location of witnesses. The court ultimately decided that the case should not be transferred to Virginia because several witnesses were in Texas and could not be subpoenaed to appear at a trial in Virginia. The court implied that there might have been a different outcome if the forum selection clause had exclusively prescribed state court or if the parties had included a choice of law provision, presumably specifying state law.

The concurring opinion by Judge Haynes is sharply critical of the court’s ruling and the analysis in the majority opinion.6 He noted that the venue statute relied upon by the majority was permissive not mandatory and expressed his view that that contracting parties should be free to choose among permissible venues. He concluded that dismissal of the case would have been appropriate, because the parties had contractually agreed that Texas was the “wrong venue.”

As to the transfer motion he criticized the district court for conducting a standard convenience analysis without giving any weight “in practical terms” to the forum selection clause. He cited the strong policy favoring forum selection clauses stating: “[a] forum selection clause that was negotiated and agreed to by sophisticated parties and is not challenged based on fraud, unreasonableness, or anything similar should be given effect.”7 In fact, the concurring opinion goes so far as to encourage Atlantic to request review of the decision by the United States Supreme Court.

Atlantic has done just that and the United States Supreme Court has agreed to review the Fifth Circuit’s decision.8 So the stage is set for the effectiveness of forum selection clauses to be addressed by the nation’s highest court. The sequel to this e-alert will summarize that decision when it occurs.

1In re: Atlantic Marine Construction Company Inc., 701 F. 3rd 736 (5th Cir. 2012)

2For the time being, federal courts outside the Fifth Circuit are not bound by the Atlantic decision.

328 U.S.C. Section 1391

4The court refused to dismiss under Federal Rule of Civil Procedure or to transfer under 28 U.S.C.§1406, which applies only to transfer of a case that was filed in an improper venue.

5The court performed the transfer analysis under 28 U.S.C.§1404(a), which governs motions to transfer where venue was proper in the court where case was filed.

6The concurring Judge rejected the analysis of the majority opinion. However, he concurred in the holding, because of the high standard necessary to grant a writ of mandamus, which requires the petitioner to show that its right to the writ is “clear and indisputable.”

7Id. at 748.

8In re: Atlantic Marine Construction Company Inc., 701 F. 3rd 736 (5th Cir. 2012) cert. granted, 12-929, 2013 WL 1285318 (U.S. Apr. 1, 2013).

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