Many subcontracts, though performed in one state, contain a dispute resolution clause called a “Forum Selection” clause, which requires arbitration or litigation in an unrelated state where the general contractor has its home office.[i] For example a California general contractor may be doing business in Seattle, but the subcontract’s disputes clause requires that all litigation or arbitration take place in the general contractor’s home state of California. Out-of-state general contractors may prefer to litigate where their home office is located for a variety of reasons, most of which pertain to cost. By litigating in a court near its home base, the prime contractor can save on travel costs for its key personnel, have its case tried in a court familiar to its legal counsel, and make the adversary come to it, substantially increasing the adversary’s costs. This can be a giant advantage for the out-of-state contractor. For companies that conduct business over a broad geographic area, a “forum selection clause” allows the general contractor to anticipate costs better by avoiding litigation in multiple geographic locations.
That said, a recent U.S. Court of Appeals case decided by the Fifth Circuit has telegraphed that forum selection clauses may not be as ironclad as they appear and, in some circumstances, may be entirely ignored. Because this view constitutes the minority view of a “Circuit Split,” however, in early April, the United States Supreme Court announced that it will review the Fifth Circuit’s decision.
The case, In Re Atlantic Marine Construction Company, Inc.,[ii] involves a contract between the U.S. Army Corps of Engineers (“COE”) and Atlantic Marine Construction Company, Inc. (“Atlantic”) for construction of a child development center at Fort Hood, located in the Western District of Texas. Incident to its contract with the COE, Atlantic entered into a subcontract with J-Crew Management, Inc. The subcontract contained a forum selection clause providing that all disputes “shall be litigated in the Circuit Court for the city of Norfolk Virginia, or in the U.S. District Court for the Eastern District of Virginia, Norfolk Division.” Thus, the subcontract provided that, even though the project took place in Texas, any disputes were to be litigated in Virginia.
Despite the clear language in the contract that identified a specific federal court in Virginia to resolve any disputes, the Fifth Circuit ruled that the subcontractor (plaintiff) could file suit in Texas where the project and witnesses were located, reasoning that the forum selection clause represented only one of the factors to consider when determining where the contract could be enforced. This decision follows the conclusions in several other circuit courts, but it remains the minority position among federal circuit courts. In contrast, the majority of U.S. circuit courts will enforce forum selection clauses unless there is fraud or the chosen forum is unreasonable. As noted above, the U.S. Supreme Court has accepted review of Atlantic Marine and will likely resolve the current split among the federal circuits.
Comment: This case is a federal court case. Although state courts typically have less of an issue enforcing the forum selection clause, recent arbitration decisions have held that requiring a party to resolve a dispute in an out-of-state locale is one of the tests for determining whether the arbitration clause is unconscionable. Further, the Fifth Circuit suggested ways that a contractor could draft a forum selection clause to improve its likelihood of being enforced in federal court, including identifying only state courts or arbitration tribunals as opposed to a federal court as the appropriate forum. The U.S. Supreme court will provide guidance as to the enforceability of these contract provisions in the future.
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[i] This blog topic came to us from the “Federal Construction Blog” (4/9/13), an excellent resource for U.S. government contract news.
[ii] Atlantic Marine Construction Company, Inc., 701 F.3d 736 (5th Cir. 2012); cert. granted (April 1, 2013).