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UPDATE: United States Supreme Court Decides Construction Contract Case

12/16/2013 | Construction Blog

We previously reported that the case of Atlantic Marine Construction Company, Inc. v. United States District Court for the Western District of Texas was to be decided by the Supreme Court. This case addressed a contractual provision requiring that all litigation arising as a result of the project be brought in Norfolk, Virginia. The project was located at Ft. Hood in Texas.

supreme-court-justices-thumb-1500x1000-26307For owners and contractors, the practical question centered on the enforceability of forum selection clauses. Such clauses are common in most, if not all, construction contracts. They are particularly important on large projects where contractors from multiple states or jurisdictions are working on site. In those cases, the designated place for disputes to be decided can have significant economic consequences.

The Supreme Court’s analysis focused on whether a case filed in a locale other than that selected in the forum selection clause should be dismissed under Rule 12(b) or transferred under Rule 1404. While the distinction is little more than academic to those in the construction industry, the seemingly mundane topic impacts how forum selection clauses can be used to protect construction companies in a very real way. In short, the Supreme Court held that transferring the case to a more “convenient” forum was appropriate.

By way of background, Atlantic Marine was the general contractor for a project at Ft. Hood in Texas. Being from Virginia, it inserted a forum selection clause in its subcontract with J-Crew Management, Inc., that required all disputes between the companies to be decided in Virginia. J-Crew, however, filed suit in the federal court for the Western District of Texas when a payment dispute arose. Atlantic Marine then filed a motion to have the complaint dismissed pursuant to Rule 12(b) or transferred under Rule 1404. The trial court denied both motions.

Atlantic Marine next asked the appellate court to direct the dismissal or transfer of the case to Virginia. The appeals court refused to do so because it concluded that Atlantic Marine’s right to relief was not “clear and indisputable”. In what might be considered gratuitous commentary given the basis for its decision, the appellate court went on to say that transfer is proper when it would move the case from one federal jurisdiction to another; and dismissal is more appropriate when a transfer would send the case to any jurisdiction other than federal court. The Supreme Court disagreed.

To begin, the Supreme Court decided that there was no dispute as to the enforceability of the forum selection clause. The first issue, accordingly, was whether a case filed in federal court is in a proper venue under the rules irrespective of the forum selection clause. If the case is in a wrong or improper venue, then it should be dismissed or transferred. If the case is filed in a proper venue that conflicts with the place designated in an enforceable forum selection clause, the proper remedy is transfer.

The Supreme Court then went on to say that the standard analysis for transfer of venue applies when a party files suit in a legally proper venue. Trial courts, however, should give great weight to agreed upon forum selection clauses and ordinarily transfer the case. When a forum selection clause is superimposed over the standard evaluation, it is evident that the parties agreed what the most convenient forum would be ahead of time. In those cases, the Plaintiff’s choice of forum is given no special weight, parties’ private interests are not to be considered, and original choice of law rules don’t apply.

All of this analysis is an indirect way to communicate that forum selection clauses are enforceable in construction contracts and should be given considerable weight. If they are not honored by one of the parties, the case is properly transferred to the court the parties pre-selected generally speaking. For this reason, don’t just brush over the forum selection and choice of law provisions in your contracts. Consider whether they whether they might be a problem if a dispute ever comes up on that project.