On Tuesday, a unanimous Supreme Court established a high barrier for contractors who find themselves unhappy with “forum selection clauses” in their contracts. Atlantic Marine Construction Co., Inc. v. United States District Court, 571 U.S. ___ (2013) (No. 12-292).
Contractors doing business with large companies in other states, such as suppliers, fabricators or general contractors, have probably already agreed to one of these clauses without much thought. It is easy to write off forum selection as legalese or boilerplate, but doing so may unwittingly subject your business to litigation or arbitration in a distant and inconvenient place, which ultimately puts you in a worse position in the unfortunate event of a contract dispute.
The Supreme Court’s decision strongly favors enforcing those agreements, and calls on contractors to pay attention to such clauses before signing a contract.
The “forum” is the institution, such as a court, where you must seek a remedy, or where you can be required to participate by another party seeking a remedy. It may also specify a venue, or location, where that remedy must be sought.
The forum and the venue will be important if there is ever a dispute. The forum can impact access to evidence, ability to subpoena witnesses, and of course, cost and convenience.
If you primarily work in South Dakota or Iowa, consider the costs and inconvenience of having to resolve your contract dispute in Florida or California! This is particularly problematic if your prime contract or subcontract requires disputes be heard in a court in the state where the project is located, and a dispute arises involving materials purchased from an out-of-state supplier whose contract specifies a forum in a different state!
What did Justice Alito say?
Without a forum selected in the contract, courts can hear parties’ concerns about how the forum impacts the parties, and consider factors such as cost and convenience.
However, if the contract designates the forum, the Supreme Court says courts should give that agreement “controlling weight in all but the most exceptional cases.” The Supreme Court determined that courts must deem all private interests (such as cost and convenience) to “weigh entirely in favor of the preselected forum.”
Justice Alito explained that enforcing contract terms, “bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system.” Therefore, courts assume that contractors bargain for all terms in the contract. Justice Alito said,
A forum-selection clause, after all, 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.
A central assumption in the Supreme Court’s analysis is that all terms in the contract were in fact bargained for by the parties, regardless of the number of pages or the size of the print.
If the U.S. Supreme Court assumes this, then contractors must assume this too. Indeed, private contracts are negotiable, and terms such as forum selection should be part of the upfront negotiations, and written to reflect the parties’ reasonable and fair expectations.
If forum selection clearly favors one party, then the dispute resolution will be easier for that party, and the other party is left with less leverage in any dispute. This becomes part of the (sometimes unforeseen) cost of entering a contract.
Nobody wants to think about disputes before entering a contract. Sometimes, however, the best way to avoid a dispute is to plan for it, including taking the time before signing your contract to ensure that it includes a fair and practical dispute resolution process, which works for both parties, and does not give an unfair or substantial advantage to either party by including a one-sided forum selection clause.
For further discussion, please see the Dallas Morning News article about the Supreme Court’s decision.
Before signing any contract, take the time to read it carefully, and to choose your contract terms, including the forum selection clause, with care!
Build it right. Keep it real.
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