U.S. Supreme Court Enforces Forum Selection Clause in Construction Payment Dispute

On December 3, 2013, the U.S. Supreme Court ruled that when parties have agreed to a valid forum-selection clause in a contract, a district court should ordinarily transfer the case to the forum specified, except when extraordinary circumstances exist that are unrelated to the convenience of the parties.  The enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system.  A valid forum-selection clause should be given controlling weight in all but the most exceptional cases.

In Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, subcontractor J-Crew Management Inc. (“J-Crew”) of Kileen, Texas, entered into a contract with prime contractor Atlantic Marine Construction (“AMC”) of Virginia Beach, Virginia, to construct a child development center (“the Project”) in Fort Hood, Texas.  The contract’s forum-selection clause required that all disputes between the parties be litigated in Virginia.  A dispute arose regarding payment, and J-Crew claimed AMC owed it $159,000 for work it performed in connection with the Project.  J-Crew filed suit in the Western District of Texas, invoking that court’s diversity jurisdiction, and AMC moved to dismiss the suit, arguing that the forum-selection clause rendered venue in Texas “wrong” under §1406(a), and “improper” under Federal Rule of Civil Procedure 12(b)(3).  Alternatively, AMC also moved to transfer the suit to the Eastern District of Virginia under §1404(a).  The Texas federal court denied AMC’s motion to dismiss, stating that a §1404(a) motion to transfer was the exclusive means of enforcing a forum-selection clause.  The court also denied the motion to transfer on the grounds that AMC did not satisfy its burden of proving that the transfer was appropriate.  The U.S. Court of Appeals for the Fifth Circuit affirmed.  AMC appealed to the U.S. Supreme Court, which agreed to review the case.

The Supreme Court reversed the lower courts.  The Court rejected the use of a motion to dismiss under §1406(a) or Rule 12(b)(3), concluding that whether venue is “wrong” or “improper” is evaluated only under the federal venue statute – 28 U.S.C. § 1391 – which provides that venue is proper irrespective of any forum-selection clause as long as the requirements of § 1391(b) are met.

The Court found the §1404(a) motion to transfer venue appropriate to enforce a forum-selection clause, but established a strict standard for a party opposing such a transfer.  Ordinarily, when the parties have agreed to a valid forum-selection clause, a district court should transfer the case to the forum specified in that clause absent only “extraordinary circumstances unrelated to the convenience of the parties.”  When presented with a valid forum-selection clause, lower courts must adjust their usual §1404(a) analysis in three ways:  (1) the court may not consider the plaintiff’s choice of forum; (2) courts are limited to considering public interest factors only; and (3) the court should apply the choice-of-law rules of the state in which the parties selected in their clause.  The Supreme Court remanded to determine whether any public interest factors preclude enforcement of the forum-selection clause.

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