The Current State of Forum Selection Clauses and Possible Changes on the Horizon
by: Monica L. Freeman, Woods & Aitken LLP
Most proprietary construction contracts, subcontracts and purchase orders contain forum selection clauses in which the parties agree that if a dispute arises on the project, litigation or arbitration will occur in a specified location. An example is below:
Choice of Forum. Both Parties hereby submit to the exclusive jurisdiction of the courts of the State of [Nebraska] and each Party submits to the personal jurisdiction of such courts, waives any objection to the commencement and conduct of any such action or proceeding in such courts, and waives any objection that such courts are an inconvenient forum or do not have jurisdiction over it.
These clauses generally specify a forum that is most convenient to the upstream party but not necessarily as convenient to downstream parties. The motivation for including these clauses may be based on a desire by the upstream party to reduce litigation costs and potentially also to deter downstream parties that are located outside the forum from pursuing costly litigation.
In 2010, Nebraska enacted legislation to curtail the use of forum selection clauses in construction contracts. Specifically, Nebraska law provides that “in any contract or subcontract for construction work performed within the State of Nebraska” . . . “[a] provision that purports to require that venue for a court or arbitration hearing be held at any location outside of the state” is void and unenforceable. Neb. Rev. Stat. § 45-1209(3). Prior to this specific legislation, Nebraska law limited the applicability of forum selection clauses where “the plaintiff cannot secure effective relief in the other state”, “the other state would be a substantially less convenient place for the trial of the action than this state”, if agreement to the forum selection clause was obtained by misrepresentation, duress, abuse of power, or other unconscionable means, or “it would for some other reason be unfair or unreasonable to enforce the agreement.” Neb. Rev. Stat. § 25-415. It is important to note, however that if the contract contains an arbitration clause governed by the Federal Arbitration Act and if the matter at issue concerns enforcement of the arbitration clause, Nebraska law would be preempted by federal law.
Recently, litigation between a federal contractor and one of its subcontractors placed issues relating to the enforceability of forum selection clauses in the lap of the United States Supreme Court. In In re Atlantic Marine Construction Co.1, a subcontractor, J-Crew Management Inc., brought suit in its home state of Texas to recover a final payment of $159,000 from the general contractor, Atlantic Marine Construction Inc., for work performed on a day care at Fort Hood. The subcontract at issue contained a forum selection clause that required litigation to be brought in Virginia, Atlantic Marine’s home state. Atlantic Marine brought a motion, in part, to transfer venue to Virginia pursuant to 28 U.S.C. § 1404(a). The district court and Fifth Circuit Court of Appeals both upheld J-Crew’s right to sue in Texas. In reaching their respective decisions the lower courts found that the enforceability of forum selection clauses should be based upon a discretionary, balancing of conveniences analysis. Under that analysis, the forum selection clause in the parties’ agreement would be only one of several factors the court would examine to determine whether enforcement of the clause was appropriate.
On December 3, 2013, the Supreme Court issued a unanimous opinion reversing the Fifth Circuit and remanding the case back to the district court for further analysis.2 Relevant to the forum selection issue, the Supreme Court found that while the Fifth Circuit “correctly identified § 1404(a) as the appropriate provision to enforce the forum-selection clause”3 it improperly applied § 1404(a) in the presence of a valid forum selection clause. In particular, the Supreme Court found that when a valid forum selection clause is present in the parties’ contract, three adjustments must be made to the § 1404(a) analysis: (1) the plaintiff’s choice of forum is given no weight and the plaintiff bears the burden to establish that transfer to the contractually-agreed forum is unwarranted; (2) the balancing of interests can only consider public-interest factors and cannot consider private-interest factors (e.g. ease of access to sources of proof, cost of obtaining attendance of willing witnesses, possibility of view of premises, etc.) in the presence of a valid forum selection clause, as the court “must deem the private-interest factors to weigh entirely in favor of the preselected forum”4 ; and (3) when a party files suit in a forum other than specified in the contract, the transferee court is not required to apply the original court’s choice of law rules, which ultimately may decrease the impact of public-interest factors in the overall analysis. Simply stated, the Supreme Court found that as a “practical result . . . forum selection clauses should control except in unusual cases.”5
It will take some time to determine the ultimate impact of the Supreme Court’s decision on negotiating strategies of parties concerning forum selection clauses in contracts. What is clear, however, is that valid forum selection clauses have been given a seal of approval by the Court and will nearly always be enforced. What is less clear is whether Nebraska’s recent statute deeming out-of-state clauses “void and unenforceable” will remain effective following the Court’s ruling. Practically, in light of the Supreme Court’s decision, if you are faced with an inconvenient out-of-state forum selection clause, it would be prudent to attempt to negotiate a more convenient forum and not assume that the Nebraska statute will render the out-of-state clause void and unenforceable.
1701 F.3d 736 (5th Cir. 2012), cert. granted, No. 12-929, 2013 U.S. LEXIS 2601 (Apr. 1, 2013)
2Atlantic Marine Constr. Co v. United States Dist. Court for Western Dist. of Tex. et al, 571 U.S. _____, No. 12-929 (Dec. 3, 2013).