“Industry Insight” articles like this one below are submitted to NASBP by those knowledgeable of important industry topics who are providing their insight for the benefit of NASBP members, affiliates, and associates. 

The Rules of the Road: Will a Contractual Forum-Selection Clause Bring You Back Home Again?

A well-drafted construction contract will often include a provision which calls for any disputes to be resolved in a particular place or a particular court, sometimes also requiring the application of a particular state’s law to the interpretation of the agreement. Known to lawyers as forum-selection clauses and choice-of-law clauses, respectively, such clauses may add strength to the risk-management aspects of the contract by offering the opportunity for more consistent—and, therefore, more predictable—outcomes to disputes. Perhaps more importantly, the forum-selection clause usually calls for any disputes to be resolved in the jurisdiction where the contractor’s headquarters are located. From a strategic standpoint, this can help the contractor control its dispute resolution costs, and may simultaneously increase those costs for its adversary.

However, as a contractor’s geographic reach spreads, it is more likely to encounter state laws which limit or even forbid a contractor from requiring dispute resolution outside the state where the project is located. Nearly half of the states in the continental United States have laws on the books which limit the enforceability of such clauses. Those laws are somewhat at odds with United States Supreme Court precedent, which has held that forum-selection clauses should generally be upheld.

This fall, the United States Supreme Court will hear a case which could impact how forum-selection clauses are handled by federal courts. The case, called In re Atlantic Marine Construction Company, Inc., took a somewhat unusual route to the highest court in the land, but it started when a Virginia-based contractor, Atlantic Marine, got into a tussle with one of its subcontractors, J-Crew Management, Inc., on a federal construction project.  The project was located at Fort Hood, Texas and was managed by the U.S. Army Corps of Engineers.

J-Crew filed its lawsuit in the Western District of Texas, in which Fort Hood is located. Atlantic Marine immediately challenged J-Crew’s lawsuit, saying that the lawsuit had been filed in the wrong court, and should have instead been filed in Atlantic Marine’s home state of Virginia. The basis of Atlantic Marine’s challenge was that its subcontract required that all disputes arising from the subcontract “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division.” Atlantic Marine’s subcontract did not include a choice-of-law provision.

The United States District Court for the Western District of Texas ruled that Atlantic Marine’s challenge was not valid and that the case would be litigated in Texas. Although such decisions are not normally subject to an immediate appeal, Atlantic Marine’s lawyers employed a procedure by which it asked the United States Circuit Court of Appeals for the Fifth Circuit to instruct the District Court to enforce the forum-selection clause and either dismiss the case, or to transfer to the federal court in Virginia.

Adding to the unusual nature of the procedural vehicle by which this case arrived at the Fifth Circuit, one of the three judges deciding the case filed a concurring opinion.  While such opinions are not unusual in and of themselves, this case was different in that the concurring judge agreed with his fellow judges that federal appellate courts across the country have treated this issue differently.  He then took the uncommon step of recommending that the parties seek guidance from the United States Supreme Court.

Since the odds of getting the Supreme Court to accept a case approaches the reader’s chances of winning the PowerBall, the lawyers on both sides were probably surprised that the high court agreed to hear the case. As framed by Atlantic Marine’s lawyers, the issue to be decided is this:

In layperson’s terms, the issue presented to the Supreme Court is this: when a contract requires the parties to resolve any disputes arising under the contract in a particular court, should the court consider whether that court is inconvenient? Inconvenience usually means inconvenience to those people who are not employed by either party but may be expected to testify in the case, but can also include consideration of the convenience of the parties themselves, and the distance between the location of the physical evidence, including documents, and the courthouse where the case will be heard.

It is difficult to predict how the Supreme Court will rule on this case and how that ruling could impact the future of forum-selection clauses. But construction contract lawyers will no doubt read the decision with great interest, because the Supreme Court’s decision is very likely to impact the effectiveness of forum-selection clauses in past, present, and future contracts.

The author of this article is Theodore M. Baum, who is a partner in the Rochester, New York office of Goldberg Segalla LLP, where he concentrates his practice in construction and surety law. A trial and appellate practice attorney, Baum regularly represents contractors, sureties, subcontractors, suppliers, and municipal owners in connection with litigation, arbitration, and mediation arising from construction projects of virtually every size and type. He may be reached at tbaum@goldbergsegalla.com.

This article is provided to NASBP members, affiliates, and associates solely for educational and informational purposes. It is not to be considered the rendering of legal advice in specific cases or to create a lawyer-client relationship. Readers are responsible for obtaining legal advice from their own counsels, and should not act upon any information contained in this article without such advice.