Forum selection clauses in contracts are important terms that govern where a certain dispute will be litigated. For example, parties to a contract that 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. Choice of law provisions are also usually included in commercial contracts and provide for the law that will be applied in the forum selected by the contract, i.e., Texas law or California law.
State and federal courts, as well as state legislatures, have provided a patchwork of decisions and rules that have affected the enforceability of these forum selection clauses. The inconsistent treatment of forum selection clauses not only has led to uncertainty when enforcing contracts, but also to expensive litigation over where a dispute will be heard. In the Atlantic Marine case, the United States Supreme Court clarified forum selection rules for cases in federal court by enforcing a contractual clause that requires disputes to be litigated in Virginia, despite the fact that the underlying dispute was related to work in Texas.
In that case, a general contractor based in Virginia was hired to build a child development center in Fort Hood, Texas. The general contractor then contracted with a local 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, was able to persuade the trial judge that forcing its small company to litigate this dispute in Virginia, despite that the project was in Texas, would seriously 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 reversal settles the prior uncertainty created by courts who refused to enforce these forum selection clauses on the basis of expense or convenience.
Freedom of contract is an essential tenet of American business. In its decision, the United States Supreme Court decided that the freedom to contract as the parties see fit is more important than certain equitable concerns, such as expense and convenience. The 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 concludes 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.
The case does leave open questions about conflicts with existing state statutes that void certain forum selection clauses. For example, a Texas statute provides that if a contract is principally for the construction of an improvement in Texas, then any contract term that sets venue in another state is voidable. With these open questions based on choice of the law, businesses should carefully consider not only the forum for a dispute but also what law will apply. This case is a significant victory for companies who have the leverage to obtain agreements that set the location for any disputes in their home state. Usually, this leverage will be used by a larger company on a smaller company that may (like in the Atlantic Marine case) not have the resources to litigate in another state. Businesses with bargaining power should now be confident that including a forum selection clause in a contract will be enforced in federal court even if it means that litigation will be more expensive and potentially less fair than had the clause not been enforced.
John Polzer is a Partner with Cantey Hanger. His practice focuses on business litigation. He can reached by emailing email@example.com or calling 817-877-2870.