The U.S. Supreme Court Clarifies Law Applicable to Forum-Selection Clauses in Commercial Contracts

January 24, 2014

A contract is an agreement between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. Contracts are widely used in commercial law and form the legal foundations for countless business transactions around the world. Common examples include construction contracts, purchasing contracts, employment contracts, merchandise supply contracts, as well as software licensing contracts. One of the most common provisions in a commercial contract is a forum-selection clause, or choice of law or forum clause. A forum-selection clause is a contractual provision that specifies where the parties to a contract will fight out any disputes that arise between them. The clause may refer to a particular court in a jurisdiction agreed upon by the parties; a particular kind of dispute resolution, i.e., arbitration, mediation; or, it may refer to both.

On December 3rd, 2013, the United States Supreme Court decided Atlantic Marine Construction Co., Inc. v. United States District Court for the Western District of Texas, et al., 571 U.S. ____ (2013), which concerned the interpretation of a forum-selection clause in a commercial contract, and will have important ramifications for all commercial contracts. In Atlantic Marine, the Court reversed the Fifth Circuit Court of Appeal's refusal to enforce a forum-selection clause in a commercial contract, holding that a forum-selection clause may be enforced by a motion to transfer under 28 U.S.C. § 1404(a), which provides that "[f]or 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 to any district or division to which all parties have consented." The Court further held that when a defendant files a § 1404(a) motion to transfer, a district court should transfer the case unless "extraordinary circumstances unrelated to the convenience of the parties" support denial of the motion to transfer.

In the case, Atlantic Marine Construction, a Virginia company, under contract with the United States Corps of Engineers to build a child-development center, entered into a construction and labor subcontract with J-Crew Management, Inc., a Texas corporation. The subcontract included a forum-selection clause, providing that any disputes arising under the subcontract would 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. When a dispute arose, J-Crew filed suit in the Western District of Texas. Atlantic filed a motion to dismiss. The court denied the motion, holding that 28 U.S.C. § 1404(a) is the exclusive mechanism for enforcing a forum-selection clause, and that the burden was on Atlantic to establish that a transfer was warranted, by establishing public and private interests. Atlantic then appealed to the Fifth Circuit for a writ of mandamus. The Fifth Circuit denied the writ and directed the District Court to dismiss the case or transfer it to Virginia. The Fifth Circuit held that the proper vehicle for enforcing a forum-selection clause is a motion to transfer under § 1404(a), not a motion to dismiss, and that the District Court improperly placed the burden on Atlantic to prove that transfer was appropriate where the contract specifically provided a forum-selection clause. The Supreme Court reversed, essentially holding that a forum-selection clause be given "controlling weight in all but the most exceptional cases." The Court also clarified the proper procedural route when a party is seeking dismissal or transfer of a case filed in a court different than the one provided in the parties' contract.

As a practical matter, the Court's decision means that forum-selection clauses will generally be upheld except in unusual cases. The decision also helps practitioners better understand the procedure for seeking dismissal or transfer of an "improperly" filed case. Drafting and enforcing commercial contracts requires the services of an experienced Sacramento business attorney. The Law Office of Kristina M. Reed can help you craft the commercial contracts necessary for your business, review your existing commercial contracts, and, if necessary, help you navigate the waters of commercial contract litigation. Please contact us.