Earlier in the year, I made an April Fool's Day joke on Twitter about the Supreme Court granting an appeal in a construction dispute. Apparently, the joke was on me...because the Supreme Court did take an appeal in a construction dispute!
On December 3, 2012, the Supreme Court issued its opinion in In re Atl. Marine Const. Co., Inc., which reversed the Fifth Circuit's decision reported at 701 F.3d 736 (5th Cir. 2012).
Forum selection clause. The underlying 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.
Trial court. 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 appeals court. The general contractor filed an appeal to the United States Court of Appeals for 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. All three panel members agreed that the standard for obtaining a writ of mandamus was not met in this case. One of the panel members agreed with the result, but wrote a concurring opinion. 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.
The Supreme Court. SCOTUSblog has all of the key documents and dates leading up the Supreme Court's decision. The issues on appeal were: (1) Whether the Court’s decision in Stewart Organization, Inc. v. Ricoh Corp. changed the standard for enforcement of clauses that designate an alternative federal forum, limiting review of such clauses to a discretionary, balancing-of-conveniences analysis under 28 U.S.C. § 1404(a); and (2) whether district courts should allocate the burdens of proof among parties seeking to enforce or to avoid a forum-selection clause. In the end, the Court concluded that the forum selection clause was enforceable--the Court also said the parties’ contract should be followed unless extraordinary circumstances exist. The Court found that the proper procedure for enforcement is a motion to transfer venue as opposed to a motion to dismiss.
Practical implications. While the issues in the case were not construction-specific, such as whether pay if paid clause is enforceable, the ultimate decision affects the contracting process for parties to a construction project. This case provides a little more guidance to the construction contracting process, including the following:
- Forum selection clauses will generally be enforced as written. As demonstrated in the Atlantic Marine Construction case, a court should enforce the agreement absent extraordinary circumstances.
- 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 court.
Question: Have you read the decision? What are some additional practical implications?