Unassuming Yet Dangerous: Taking Advantage of Forum-Selection Clauses

columnsSubcontracts commonly include forum-selection clauses whereby the subcontractor can bring suit only in the venue of the prime contractor’s choosing, regardless of where the project actually took place.  Although many jurisdictions previously held such clauses unenforceable, that is almost certain to change in light of a recent decision by the U.S. Supreme Court.  Contractors should closely take note of this change in the law since a well-drafted forum-selection clause can potentially have harsh consequences, forcing a subcontractor to litigate its disputes in a different part of the country, under an unfavorable choice of law, and with an unfriendly trier-of-fact.

In Atlantic Marine Construction Co., Inc. v. U.S. Dist. Court, 234 S.Ct. 568 (December 3, 2013), Atlantic Marine, a Virginia-based company, served as the prime contractor on a U.S. army contract to build a child development center at Fort Hood, Texas.   Atlantic Marine hired a local Texas subcontractor and, within the subcontract, included a clause requiring that all disputes be litigated in Virginia.  When the subcontractor sued in Texas, the district court denied Atlantic Marine’s motion to transfer the case to Virginia.  The appellate court upheld the denial, similarly holding that it was appropriate to litigate the case in Texas since the dispute arose there and most of the relevant witnesses were located there.

The U.S. Supreme Court held differently, however, overruling the district and appellate court and holding that forum selection causes are unenforceable only when there are “extraordinary” circumstances that affect the public.  Stated the Supreme Court:  “When parties agree to a forum selection clause, they waive the right to challenge the preselected forum as inconvenient or less convenient for themselves or their witnesses, or for pursuit of the litigation.”  Similarly, the Supreme Court also held that the choice-of-law rules of the selected forum will apply with respect to determining what law will govern the dispute.

The Court ruling is a significant change in the law in many parts of the country, and it will make it far more difficult for a subcontractor to avoid the forum selected in the subcontract by filing suit in a different jurisdiction that may be more favorable to the employee’s interest.  In light of this decision, we recommend that prime contractor consider including favorable forum-selection and choice-of-law provisions in their subcontracts—regardless of where the project site is located.  We also recommend that subcontractors think twice before agreeing to forum-selection clauses that are far from the project site and inconvenient for the resolution of disputes.

When drafting or reviewing a forum selection clause, it is important to note the difference between “permissive” and “mandatory” clauses.  A “permissive” clause typically provides that the parties consent to jurisdiction in a particular forum, without expressly making that forum the mandatory or sole forum for resolution of dispute.   Such clauses are often deemed unenforceable.  A mandatory clause, on the other hand, uses words like “shall” or “exclusive” or “must” to make unequivocally clear that the parties must litigate within the stated jurisdiction.  Such clauses are widely enforceable in light of the U.S. Supreme Court’s recent decision in Atlantic Marine.