Over the years we have had clients from time to time question the time and effort it takes our attorneys to prepare a clear, enforceable contract. Some of them belittle the provisions as nothing more than “boilerplate” that they could have found searching legal form on the Internet. Not only does it take quite a bit of experience and skill to prepare a good contract, that could protect your company from a lawsuit, but frequently some of the most important provisions, like forum selection clause, that some would consider mere “boilerplate.”
The devil, as they say, is in the details, and frequently the details reside in the boilerplate.
A recent United States Supreme Court decision confirms the importance of the boilerplate forum selection clause in a contract, and has clearly indicated that federal courts are more likely to enforce in the future forum selection clauses found in contract. A forum selection clause is a contract provision – most frequently found in the general provision section of a contract (i.e., the boilerplate) – that requires the plaintiff to file its case in a particular state or federal court. While the use of such clauses is not new, the Supreme Court has clarified how these clauses will be evaluated and enforced in federal courts. The decision suggests that these types of clauses will be enforced more and more often to hold the parties to the bargain they struck on forum selection when they negotiated and entered into the contract. This is important because the forum in which the parties agree to litigate and resolve disputes that arise under the contract will have an enormous impact on the outcome of a case, if for no other reason than cost.
In Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 134 S. Ct. 568 (2013), a contractor and subcontractor entered into a contract with a forum selection clause that required any lawsuits commenced under the contract be filed in Virginia. Despite the clause, the subcontractor sued the contractor in federal district court in Texas. In response, the contractor sought to enforce the forum-selection clause by filing a motion to dismiss the lawsuit in Texas or, alternatively, transfer the matter to federal court in Virginia.
The district court held that dismissal was improper and decided not to transfer the case because the contractor failed to meet its burden to show that transferring the case would be “in the interest of justice or increase the convenience to the parties and their witnesses.” The court also noted that a Texas court would be more familiar with the application of Texas law under the Texas choice-of-law rules, which would have to be applied even if the case was transferred to Virginia. The Fifth Circuit Court of Appeals affirmed.
The Supreme Court reversed the lower courts’ decisions and clarified the process courts must use when the parties’ contract contains a forum selection clause. Justice Alito – who is generally considered a member of the conservative wing of the court and a huge Philadelphia Phillies fan – wrote for a unanimous court. The court held that when a party challenges the plaintiff’s choice of forum based on a forum selection clause, the correct procedure is to bring a motion to transfer under U.S.C. section 1404(a).
Normally, the district court would consider a variety of public and private factors in deciding a motion to transfer. However, when the parties’ contract contains a valid forum selection clause three things change.
First, a court may not give any weight to the plaintiff’s choice of forum that violates the contract. The burden is on the plaintiff who defies the forum selection clause to show why transferring the matter to the forum the parties agreed upon is unwarranted.
Second, the court may not consider the private interests of the parties outside of the forum selection clause. It may consider only public interest factors, which usually will not defeat a forum selection clause.
Finally, the party that ignores a forum selection clause – usually the plaintiff as the first party to file – cannot take advantage of the chosen forum’s “choice-of-law” rules so the court that receives the transferred case is not required to apply the choice-of-law rules of the state where the plaintiff originally filed the action in defiance of the contract’s forum selection clause.
So what’s it all about Alfie? I’m glad you asked. The bottom line is that it will be difficult to avoid a valid forum selection clause in a contract, at least where it requires filing in federal court. The Supreme Court stated that when a party makes a motion to transfer a case to the forum agreed upon in a contract, “a district court should transfer the case unless extraordinary circumstances unrelated to the convenience of the parties clearly disfavor a transfer.” That’s a big burden to overcome. The Atlantic Marine decision may discourage a “forum shopping” plaintiff from violating the forum selection clause in a contract by filing suit in a jurisdiction it believes, for whatever reason, will view its claims more favorably.
In light of Atlantic Marine, it may be a good time to review your contracts to see if they include, or should include, new or revised forum selection clauses.