Large businesses operating in multiple states received the green light to litigate their civil disputes in their home jurisdiction regardless of where the construction project is located. This decision could likewise serve as a serious threat to mom-and-pop subcontractors that provide most of the labor and materials for a project but typically lack any negotiating leverage to reject an unfavorable forum-selection clause. Many state laws prohibit the practice of choosing remote locations to resolve construction disputes as contrary to public policy. It might be difficult, however, to undo the damage imposed by the Supreme Court in holding that the freedom of contract to choose where disputes should be resolved trumps most all other considerations.
In a unanimous decision, the Court in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, No. 12‑929 2013 WL 6231157 at *4 (U.S. Dec. 3, 2013), upheld a general contractor’s ability to require its subcontractors to litigate disputes in the state or federal court of its choosing. By agreeing to the forum in the contract, a court will no longer consider where the key witnesses or evidence is located, the fact that all the subcontractors are locally based, or the fact that a state’s public policy prohibits enforcement of any clause in a construction contract that requires litigation elsewhere—in all but exceptional circumstances. It remains to be seen whether the public-interest exception will have any sway with courts applying this new rule.
By way of background, Atlantic Marine Construction was a large multistate contractor located in Virginia and entered into a contract with J‑Crew Management, a subcontractor that called Texas home. Contrary to Texas law, the contract stated that all disputes had to be resolved in the state or federal court in Norfolk, Virginia, rather than Texas, where the project was being built. Figuring that the law was in its favor, J‑Crew filed a lawsuit against Atlantic Marine in federal court in Texas to recover unpaid sums due—a very common problem for many contractors. Atlantic Marine cited its clause requiring disputes to be resolved in Virginia and sought to dismiss or transfer the case under 28 U.S.C. Section 1406(a), or else to transfer under Section 1404(a). The district court refused to allow the transfer, concluding that Section 1406(a) did not apply because venue in Texas was proper despite the forum-selection clause, and that the balance of public and private interests weighed against a discretionary transfer under Section 1404(a). The Fifth Circuit Court of Appeals refused to interfere and denied Atlantic Marine’s petition for a writ of mandamus to consider the issue.
The Supreme Court decided to resolve, once and for all, whether forum-selection clauses should be rigorously enforced like most other types of contract clauses, such as arbitration clauses, or whether federal courts should balance certain factors in deciding whether to enforce a forum-selection clause under the circumstances (and if so, which factors should be considered).
The answers to these questions would have a particularly profound impact on the construction industry because most contracts follow the traditional notion that construction claims should be resolved where the project is being built. The parties did not argue, or at least the Supreme Court did not seek to address, the realities of the construction industry regarding illusory equal bargaining power in the bidding process.
Justice Alito wrote the decision for a surprisingly unanimous Supreme Court. In most all respects, it came down strongly on the general contractors’ side of the argument: Forum-selection clauses must be given full force and effect in all but the most exceptional circumstances. One small glimmer of hope for the subcontractor remained if it could prove that public interests under state law could override the parties’ choice of forum. On the merits, the Supreme Court opined that “no public-interest factors that might support the denial of Atlantic Marine’s motion to transfer are apparent,” but nonetheless remanded the case to the lower courts to resolve that question. Slip op. at 17.
In a nutshell, the Supreme Court held that the lower courts had correctly identified Section 1404(a) as the appropriate procedural mechanism, but that they had applied the incorrect standard as to how Section 1404(a) motions should be evaluated. In other words, Atlantic Marine likely would have prevailed on its transfer motion if the district court had applied the correct standard under Section 1404(a).
The Atlantic Marine decision brings some clarity to the enforceability of forum-selection clauses, yet numerous important issues still remain.
The Atlantic Marine decision applies only in federal courts. What happens if the subcontractor files its lawsuit in state court first? State courts might view their state law much more favorably than the balance struck in the federal courts. Thus, for those subcontractors determined to ignore a forum-selection clause, they can be expected to file suit in state court rather than federal court and block the effort to remove the case to federal court through artful pleading. On the other hand, if the lawsuit concerns a payment dispute on a federal project, the subcontractor or supplier could be placed in the difficult position of forgoing its Miller Act payment-bond claim. On the flip side, general contractors can be expected to attempt to remove those state lawsuits to federal court if possible under federal law.
It is also interesting to note that two prominent business interests filed opposite briefs before oral argument. The U.S. Chamber of Commerce filed an amicus brief emphasizing the importance of upholding businesses’ contractual expectations, while the American Subcontractors Association (“ASA”) argued that construction subcontracts are not necessarily freely negotiated instruments entered into among parties with equal bargaining power. The Supreme Court never even acknowledged ASA’s arguments, yet expressly relied on the Chamber’s position. As a result, argument urging a federal court to treat a construction contract differently from other types of contracts might fall on deaf ears. Stay tuned for further updates.
It is also important to note that the role of state public policy was not at issue before the Supreme Court. The district court had dismissed J‑Crew’s public-policy argument, and J‑Crew did not appeal that aspect of the district court’s order. Furthermore, the Supreme Court left the door open for future courts to potentially consider state public policy. Namely, district courts must consider the “[p]ublic-interest factors” in deciding whether to refuse transfer, one of which is “‘the local interest in having localized controversies decided at home.’” Atl. Marine, slip op. at 12 n.6 (quoting Piper Aircraft Co. v. Reyno, 454 U.S. 235, 241 n.6 (1981) (internal quotation marks and citation in Piper Aircraft omitted)). This is the potential hook on which to hang a state public-policy argument.
These are some of the many issues to consider in light of the Atlantic Marine decision. From a big-picture perspective, if subcontractors wish to reverse this fundamental shift in favor of general contractors, their hope lies with Congress, not the state legislatures. They should start a conversation with their industry associations on the type of federal legislation that has already been successful at the state level.
For your business, this case serves as a reminder to take another look at your own forum-selection clauses in your standard contracts, and give closer scrutiny to any forum-selection clauses in future contracts that you are asked to sign. And if your business does not regularly use a forum-selection clause, ask yourself whether you need one in light of the uncertainty that could otherwise result. In either case, asking a knowledgeable construction attorney to assess these concerns in your business contracts is great way to start the new year.