A Brief Note on the Forum Selection Clause: It Is What It Is – At Least In Federal Courts

While the choice of forum in contract disputes between the government and its prime subcontractor is relatively straight forward under the Contract Disputes Act (either one of the Boards of Contract Appeals or the Court of Federal Claims), such clarity is lacking in contracts between a prime contractor and its subcontractors.  Forum selection clauses dictate the forum for disputes, litigation, and mediation, the result of which is that these clauses, particularly among contractors who work outside their respective states, are often subject to heated negotiations between the parties.  Each party wants forums partial to it, for such reasons as familiarity with the local law, advantageous precedent, simple location of the business and witnesses, or the location of its legal assets, to mention a few.   The prime is often victorious in these battles, usually because of its superior bargaining position – if one subcontractor does not accept the clause, another one will.  To be sure, there are occasions where the subcontractor, by virtue of its unique products, skills, and abilities for example, may have leverage over the prime contractor, and exercise such by dictating the forum location.   A recent US Supreme Court decision, Atlantic Marine Constr. V. U.S.D.C. West. Dist. Texas,[i] has provided a great deal of clarity in this area, and it behooves both prime contractors and subcontractors to be aware thereof.

A forum selection clause allows the parties to determine where a lawsuit, mediation, or dispute will be adjudicated.  Typically, a prime contractor has one or more forums included in its subcontract boilerplate, such as “all litigation will be conducted in New York[PP2] ”.  Twenty-two states, however, not too keen to having contracts that are performed within their borders be removed to another state for adjudication, have enacted laws making out-of-state forum selection clauses unenforceable, generally for public policy reasons.[ii]  Thus, what the parties agreed to regarding forum selection may be inconsequential when a dispute arises in these jurisdictions.   This environment creates uncertainty for both parties when negotiating the forum selection clause, and also requires counsel, primarily in-house counsel, to be familiar with states’ forum selection laws.

The Atlantic decision, at least with respect to specified federal forum selection clauses, provides the parties a degree of predictability and consistency when negotiating forum selection clauses.  The prime contractor, located in Virginia, was awarded a contract by the Army Corps of Engineers to build a child development center at Fort Hood, Texas.  The prime subcontracted some of the work to a small-business local subcontractor near the installation.  The subcontract’s dispute resolution clause dictated the state or federal courts in Norfolk, Virginia, as the forum.  The prime withheld funds from the subcontractor after contract completion for defective work.  The subcontractor sought to recover the funds withheld by filing suit in federal district court in Texas.  The prime then moved to dismiss the complaint or transfer it to Virginia.  In denying the prime’s motion, the court, in finding that it had the statutory discretion to keep the lawsuit in Texas, among other things, denied the prime’s motion.  The case worked its way up to the U.S. Supreme Court where it found that, in remanding the case down for a public policy issue, in the context of construction contracts, federal courts must dismiss or transfer any subcontractor lawsuit filed in a forum other than that specified in the forum selection clause, absent exceptional circumstances.[iii]

Thus, primes and subcontractors can now be assured that their forum selection, at least with respect to federal courts, will be enforced.   While the decision provides clarity in one area, it did not address forum selection where only state forums are specified.  Nevertheless, in-house counsel and contract managers need to understand the impact of the decision and tailor their forum selections clauses accordingly.

[i] Decided December 3, 2013.  The decision is obviously more complex than presented here, and the reader is advised to review the decision for completeness if necessary.

[ii] U.S. Supreme Court May Strongly Enforce Forum Selection Clauses:  Many Businesses Will Breathe a Sigh of Relief While Smaller Contractors Might Brace for Impact, Legal Alert, Spencer, Eric, H., Legal, Snell & Wilmer, October 31, 2013.

[iii] Atlantic Marine Constr. V. U.S.D.C. West. Dist. Texas.

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