January 22, 2014

Supreme Court Endorses Forum Selection Clauses

Holland & Knight Government Contracts Blog
Thomas M. Brownell

The Supreme Court has strongly endorsed forum selection clauses in government subcontracts. In Atlantic Marine Construction Company, Inc. v. U. S. Dist. Court, 234 S.Ct. 568 (U.S. December 3, 2013), Atlantic Marine, a Virginia-based company, was the prime contractor on a U.S. Army contract to build a child development center at Ft. Hood, Texas. It hired a local Texas subcontractor, J-Crew, and inserted a clause in the subcontract requiring that all disputes between the parties be litigated in Virginia state or federal courts. When J-Crew sued in Texas, the district court denied Atlantic Marine's motion to transfer the case to Virginia or dismiss for forum non-conveniens and Atlantic Marine appealed. The Supreme Court reversed both the district court and the court of appeals, which had allowed the case to proceed in Texas, reasoning that it was improper to dismiss or transfer because the case arose in Texas and all of J-Crew's witnesses were located there. 

Much of the Court's opinion deals with the technicalities of the federal venue statutes, but it is clear that government contractors and their subcontractors should expect that mandatory forum selection clauses in their subcontracts or purchase orders will be enforced, according to their terms, except in the most extraordinary of circumstances. While a court in considering a motion to dismiss or transfer for improper venue normally balances various public and private interests in determining which court is the proper venue or place to try a case, the presence of a forum selection clause: (a) takes away the usual presumption that the plaintiff is entitled to its choice of forum; (b) cancels out any consideration of the "private interests" of the parties (since they have already agreed, by contract, on the proper forum); and (c) forfeits the benefit of the original forum's choice of law rules, since the plaintiff has, in effect, breached the contract by bringing the case in the wrong forum.

A forum selection clause is indeed a powerful tool for a contractor with enough bargaining power to write its own contract or subcontract. But is that always the right choice?

To begin with, forum selection clauses come in two varieties - "permissive" and "mandatory." A "permissive" clause typically provides that the parties consent to jurisdiction and agree to venue in the selected court, which can be either state or federal. These clauses have the benefit of taking away objections that the defendant might have to being sued in a particular forum, but they do not require either party to sue there. Thus, for example, if a materials supplier is concerned about collecting debts from customers in multiple jurisdictions, a permissive clause may make it easy for the company to bring all of its collection cases in its home court, where its finance employees can easily be available to testify about unpaid invoices, at a minimum of time and expense. Permissive clauses may also be a way to get multiple defendants together in the same court, where jurisdiction or venue might otherwise be doubtful as to some of them.

"Mandatory" clauses are potentially much more powerful. As the Supreme Court noted in Atlantic Marine, such clauses can be used to force a plaintiff to sue in a court that is potentially favorable to the defendant or, conversely, to prevent the plaintiff from suing in a plaintiff-friendly forum. They can also make it easier for a large company to control its litigation costs by requiring potential plaintiffs to come to the large company’s home territory to resolve disputes. Moreover, there is no benefit to being the first to sue, because the plaintiff's choice of the forum is no longer entitled to any weight. Finally, in international contracting, the mandatory choice of a U.S. forum may be a good way to ensure that you don't end up litigating in a third-world court or in a court with a strange or unfamiliar set of laws or procedural rules.

There are many good reasons to use a mandatory forum selection clause, but there are also significant pitfalls. Even though your company may have drafted the clause, you may not want to follow its terms when it actually comes time to file a lawsuit. For example, if your company needs third-party witnesses (including your former employees) to tell its story, it might be much more expensive - or even prejudicial - to bring the case in the mandatory forum (witnesses usually cannot be compelled to cross state lines to testify). Similarly, if you have a mandatory forum selection clause in a non-compete agreement with your employee, you may not be able to sue both her and her new employer in the same case if she goes to work for a competitor in another state and the competitor has no connection to the mandatory forum.

Companies will find in most cases that it makes good sense to maximize their flexibility through the use of permissive forum selection clauses. If you act first, you can force your opponent to litigate in a particular forum, but you also have the option of suing elsewhere if that is what makes sense. If you do choose to go with a mandatory clause, your lawyers should attempt to give your company the option to sue in another forum, should that be necessary. You might also consider a forum selection clause that requires either party (the plaintiff) to sue in the courts of the jurisdiction where the other contracting party, i.e., the defendant, is located. Such a clause discourages the hasty filing of suit because the filing party gets no advantage, and may even be at a disadvantage, by being the first to file.

Related Insights