State Construction Forum-Selection Laws Still Standing

Kegler Brown Construction Alert

U.S. Supreme Court holds that disputes over enforceability of forum selection clauses must be resolved on the basis of public interest factors.

The U.S. Supreme Court yesterday held that while courts should ordinarily enforce "a valid forum-selection clause," courts may consider public interest arguments against enforcement of a forum-selection clause. Because 24 state legislatures have expressly determined that such clauses are unenforceable in construction contracts, the decision leaves open the right of those in the construction community to challenge void clauses and ground their challenges on public policy determinations of their particular state.

In Atlantic Marine Constr. Co. v. United States Dist. Court for the Western Dist. of Texas. No. 12-929, 571 U.S. ___ (2013), the dispute involved the attempt of a four-employee drywall subcontractor (J-Crew Management, of Killeen, Texas) to get its final ($160,000) payment for work it performed on a day care center at Fort Hood, Texas. The General Contractor for the Project was a large Virginia contractor (Atlantic Marine Construction) with $40 million in annual revenue. The General Contractor pointed to a “forum-selection clause” in the Subcontract and insisted that the Subcontractor travel to Virginia to litigate, where the Subcontractor could not subpoena third-party witnesses or documents.

The Subcontractor, though, sued in federal district court in Texas and that court, in a decision affirmed by the 5th Circuit Court of Appeals, refused to transfer the case based on a balancing-of-conveniences analysis. The district court focused on the private inconvenience to J-Crew to have to litigate 1,500 miles away, but the U.S. Supreme Court held this was error. Instead, the Supreme Court stated that while the plaintiff's initial choice of venue "deserves deference … the plaintiff must bear the burden of showing why the court should not transfer the case to the forum to which the parties agreed."

Because the record below did not reflect any public interest factors to support the Subcontractor's desire to keep the litigation close to the Project site, the Supreme Court remanded the case for the lower courts to decide whether such factors existed here. Importantly, the Supreme Court noted that its "analysis presupposes a contractually valid forum-selection clause," and in many states —including Texas, Virginia and Ohio— a forum-selection clause in a construction contract is not valid when it would require litigation outside the state where the project was located.

There are numerous reasons so many state legislatures have determined that such clauses are predatory and unenforceable. Among these are that by insisting that litigation occur in a state that may be hundreds or thousands of miles from the Project, witnesses, evidence, and documents, the more powerful contracting party (the one dictating the contract terms and generally also "holding the money") can make litigation so expensive or difficult as to effectively deny justice to the smaller party.

While the Court's decision emphasizes the importance of forum-selection clauses in commercial contracts where they will continue to be generally enforceable and "control except in unusual cases," we believe the determination of almost half the state legislatures that such clauses in construction contracts are an affront to public policy indicates that litigation involving construction contracts is widely recognized as unusual and implicates very different policy considerations than those at issue in other commercial contracts.

By leaving the door open for consideration of public policy interests, the Supreme Court decision does not invalidate the laws in the 24 states that void such clauses in construction contracts. Instead, the decision gives contractors and subcontractors, particularly in the states that have such laws, an important tool to challenge the enforceability of a forum-selection clause on public policy grounds.

Kegler, Brown, Hill + Ritter was retained by the American Subcontractors Association (ASA) to prepare and file an amicus curiae (“friend of the court”) brief in the Atlantic Marine case on behalf of ASA. ASA's brief extensively discussed the public interest issues that underlie the dispute and warrant consideration as part of the statutory analysis that the Supreme Court has now instructed the lower courts to employ to decide whether to enforce or set aside the forum-selection clause at issue.