On October 9, 2013 the United States Supreme Court heard oral arguments in Atl. Marine Const. Co., Inc. v. U.S. Dist. Court for W. Dist. of Texas, Docket No. 12-929. This case deals with the enforceability of forum selection clauses in construction contracts and, in particular, how federal courts procedurally handle the enforcement of forum selection clauses. Briefing available here.
This case arises out of a payment dispute between a contractor and subcontractor working on a construction project on a military base in Texas. In particular, J-Crew Management, Inc. (“J-Crew”), a subcontractor located in Killeen, Texas entered into a subcontract to provide labor and materials to Atlantic Marine Construction Company, Inc. (“Atlantic Marine”) a Virginia-based general contractor on a construction project located on Fort Hood in Killeen, Texas. The subcontract states all disputes shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk Division. This type of contract clause is called a “forum selection” clause.
Atlantic Marine did not fully pay J-Crew. J-Crew filed suit against Atlantic Marine in the United States District Court for the Western District of Texas, Austin Division, which is the federal district in which Fort Hood is located. Atlantic Marine moved to have the Court either dismiss or transfer the matter to United States District Court for the Eastern District of Virginia, Norfolk Division pursuant to the forum selection clause in the subcontract.
J-Crew, in response, asked the court to reject the Atlantic Marine’s request for among other reasons, the forum selection clause was unenforceable pursuant to Texas law (§272.001 of the Texas Business and Commerce Code).
§272.001 states as follows:
(a) This section applies only to a contract that is principally for the construction or repair of an improvement to real property located in this state.
(b) If a contract contains a provision making the contract or any conflict arising under the contract subject to another state’s law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by the party obligated by the contract to perform the construction or repair.
However, the Court decided that §272.001 of the Tex Bus. & Comm. Code does not apply in this matter because the land on which Fort Hood sits is a “federal enclave” over which the United States, not Texas, has exclusive jurisdiction.
But, that was not the end of the Court’s analysis. Ultimately, the court rejected the Atlantic Marine’s request to transfer the case to Virginia. The court’s decision was based upon its interpretation of 28 U.S.C. §1391(b)(2), entitled Venue generally and 28 U.S.C.A. §1404(a), entitled Change of Venue. In short, the Court determined that the forum selection clause did not control in which federal district court venue was proper, that venue was proper in the Western District of Texas under §1391 (b)(2) because the project was located in it and that transferring the matter to the Eastern District of Virginia under §1404(a) would not be for the convenience of the parties and witnesses and not be in the interest of justice.
28 U.S.C.A. §1391 (b)(2) states as follows:
A civil action may be brought in a judicial district in which a substantial part of the events or omissions giving rise to the claim occurred, or a substantial part of property that is the subject of the action is situated.
28 U.S.C.A. §1404(a) states as follows:
For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought or to any district or division to which all parties have consented.
As could be expected, Atlantic Marine disagreed with the ruling and appealed to the United States Court of Appeals for the 5th Circuit. The 5th Circuit agreed with the District Court, so Atlantic Marine has appealed to the United States Supreme Court and asserted that there is disagreement between the Circuits on the issues raised in this matter.
Currently, the Supreme Court is in the process of preparing its ruling. The key issue to be decided by the Supreme Court is whether a forum selection clause can dictate in which forum venue is proper and prevent a federal judge from conducting the venue analysis’ mandated and exercising the discretion authorized by Congress.
While the construction industry and their attorneys are waiting to see how the Supreme Court will rule, contractors and construction attorneys, whether reviewing proposed contracts or deciding where to file suit, should consider the following:
- That a forum selection contract clause may well force a contractor to be required to assert its rights in a court of a distant and inconvenient location instead of the place where the project and all of the witnesses are located.
- State laws that make forum selection clauses unenforceable likely will not apply to contracts for construction work on military bases or other installations determined to be federal enclaves.
- The fact that a federal enclave or base construction project is located in Texas (or some other state) may not preclude the possibility that a federal district court in another state could be a proper venue for a dispute arising out of the project.