Earlier this year, I posted about a case on its way to the U.S. Supreme Court concerning the enforceability of a forum selection clause in a construction contract. The case involved a general contractor from Virginia that entered a subcontract agreement with a subcontractor from Texas to perform work on a federal military base in Texas. The agreement contained a forum selection clause, requiring that all disputes between the parties must be litigated in Virginia. When a dispute over payment arose, the subcontractor ignored the forum selection clause and filed suit in Texas. The general contractor petitioned the federal court in Texas, and the federal appeals court, to have the case transferred to Virginia. Both courts rejected the general contractor’s position, finding it would be more convenient to litigate the case in Texas notwithstanding the existence of the forum selection clause.
On December 3, 2013, the Supreme Court issued a decision reversing the lower courts. In Atlantic Marine Construction Co., Inc. v. U.S. District Court, the Supreme Court held that a forum selection clause must be given controlling weight in all but the most exceptional circumstances, of which there were none in this case:
When parties have contracted in advance to litigate disputes in a particular forum, courts should not unnecessarily disrupt the parties’ settled expectations. A forum selection clause, after all, may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.
The Supreme Court’s finding (admittedly against our prediction that it would affirm the lower courts!) is a stark reminder that even the most seemingly innocuous contract terms can substantially affect the rights of contractors, owners, and suppliers in the construction industry. It is always worthwhile devoting appropriate time and attention up front to ensure that you are familiar and comfortable with your contractual arrangements.
