Forum selection clauses in contracts are important terms which govern where a certain dispute will be litigated. For example, parties to a contract which provides for performance in one state may agree that all disputes will be litigated in another state. Forum selection clauses are not to be confused with choice of law provisions in contracts, which dictate which state’s law will apply. State and federal courts, as well as state legislatures have provided a patchwork of decisions and rules which have affected the enforceability of these forum selection clauses, which can lead to uncertainty when negotiating contracts, as well as litigation costs regarding disputes over the locale where the lawsuit will be.
The United States Supreme Court clarified forum selection rules in a recent decision, the Atlantic Marine case. In that case, a general contractor based in Virginia was hired to build a child development center in Fort Hood, Texas. The general contractor contracted with a Texas subcontractor, and that contract provided that any dispute related to the subcontract must be brought in Virginia. The subcontractor subsequently brought a claim for payment in Texas Federal Court. The subcontractor, who opposed the forum selection clause, successfully persuaded the trial judge that forcing its small company to litigate this dispute in Virginia, despite that the project was in Texas, would inhibit its ability to prosecute its case. For example, the subcontractor was concerned about its inability to compel necessary witnesses as well as the expense of litigation in Virginia. The Supreme Court’s reversed the trial court, holding that the increased expense and convenience of the parties was not sufficient excuse to disregard the forum selection clause that required the case to be brought in Virginia.
The Supreme Court also pre-emptively negated arguments about unfairness to companies with less bargaining power by noting that the negotiation of the forum selection cause “may have figured centrally in the parties’ negotiations and may have affected how they set monetary and other contractual terms; it may, in fact, have been a critical factor in their agreement to do business together in the first place.” The Court concluded that the interest of justice is served by holding parties to their bargain. In fact, the only way to defeat a forum selection clause based on this recent ruling, is if the trial court finds that there are extraordinary circumstances unrelated to the convenience of the parties. The Court does not give examples of what those circumstances may be.
When contracting, companies should be cognizant of the issues that may arise by agreeing to litigate outside of the company’s “home” state, including such considerations as increased expenses. Based on this recent ruling by the Supreme Court, it will be much more difficult to overcome a forum selection clause that is unfavorable if you end up litigating in Federal Court.