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U.S. Supreme Court Finds that Selection Clauses in Commercial Contracts Are Presumptively Enforceable – Atlantic Marine Construction v. United States District Court for the Western District of Texas

1038828_68900425.jpgForum-selection clauses are very common provisions often contained in commercial contracts. These clauses not only make future litigation on a contract more predictable and allow parties to avoid the threat of hostile foreign laws, judges, and juries, but they also have the capacity to make litigation less expensive. This is especially the case for companies that do business outside their home state and country. Nevertheless, in some cases, despite the existence of these clauses, defendants are oftentimes still sued by plaintiffs in courts that are not the contractually selected forums. That is exactly what happened in Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District Court of Texas, a case recently brought all the way to the U.S. Supreme Court and decided on December 3, 2013.

The contract at issue was a subcontract between a general contractor, Virginia-based Atlantic Marine Construction Co. Inc. (“Atlantic”), and its subcontractor, J-Crew Management, Inc. (“J-Crew”), a material and labor supplier based in Texas, for a construction project in Texas. Like many contracts, the subcontract contained a forum-selection clause stating that all disputes under the contract would be litigated in the Circuit Court for the City of Norfolk, Virginia or the U.S. District Court for the Eastern District of Virginia, Norfolk Division. Notably, the contract did not contain a choice-of-law clause. After a payment dispute developed between the parties, J-Crew brought suit against Atlantic. However, J-Crew elected not to follow the terms of the contract and sued Atlantic in the U.S. District Court for the Western District of Texas, where the project was located.

Atlantic thereafter requested that the District Court transfer the litigation to Virginia. The Fifth Circuit performed an analysis using factors relevant to the litigation, including the existence of the forum-selection clause in the contract, to determine the proper venue for the dispute. The court determined that, while a forum-selection clause is a factor identifying the intent of the parties at the time of the contract, the final decision of the proper forum rests with the court. The court thereafter determined that the matter was properly venued in Texas and that Atlantic did not meet its burden of showing a transfer was proper.

The decision was appealed to the U.S. Supreme Court. In an unanimous decision, the U.S. Supreme Court reversed the decision of the Fifth Circuit and held that, when the parties have agreed to a forum-selection clause, a court should ordinarily transfer the case to the forum specified in the clause. The Court emphasized that the law actually requires that a valid forum-selection clause be given controlling weight in almost all cases. Finally, in cases involving forum-selection clauses, only public interest factors will be considered because the parties contracted away their right to argue that the selected forum is inconvenient. Prior to the U.S. Supreme Court’s decision in Atlantic, there was a split among the Circuits. The Ninth Circuit had previously upheld a dismissal of a claim for improper venue on the basis that a contract’s forum selection clause required suit to be brought elsewhere.

This case confirms the importance of drafting a forum-selection clause into any commercial contract. Given the recent decision by the U.S. Supreme Court, it will be highly likely that, absent extraordinary circumstances, any dispute will end up in the forum set forth in a contract. Notably, clauses will still have to be valid to be enforced–meaning the chosen forum selected in the contract should not be unconscionable or in violation of public policy. If you have any questions on the Atlantic decision and how it applies to your business, or need assistance drafting an enforceable and valid forum selection contract into a commercial contract, contact the Bay Area business and commercial lawyers at the Law Offices of James G. Schwartz today.

Sources:

Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District Court of Texas