Forum-selection clauses are found in virtually every contract these days, yet very few attorneys put much thought into how they should be drafted. Most of us simply cut and paste the clause from another contract form and assume it will do the job. While that strategy may have worked in the past, a case currently pending before the U.S. Supreme Court may change the way all lawyers draft and litigate forum-selection clauses in the future.
The U.S. Supreme Court recently granted review of the 5th Circuit Court of Appeal’s opinion in In re Atlantic Marine Construction Co., which involved a Texas construction project with a subcontract that required litigation to be venued in the state or federal courts of Virginia. Despite the fact that the subcontract’s forum-selection clause was clear and otherwise enforceable, the 5th Circuit affirmed the district court judge’s decision not to enforce the forum-selection clause on convenience grounds. The district court believed enforcing the clause would have been too unfair to one of the parties and the majority of the witnesses. In making this ruling, the 5th Circuit joined the minority of federal courts on how forum-selection clauses should be enforced.
Since the 1970s, most federal and state courts have strictly enforced contractual forum-selection clauses, following the U.S. Supreme Court’s landmark forum-selection clause decision in 1972, The Bremen v. Zapata Off-Shore Co. In The Bremen, the U.S. Supreme Court established the rule that forum-selection clauses should be considered “prima facie valid” and should not be set aside “absent a strong showing” that enforcement would be “unreasonable and unjust, or that the clause was invalid for such reasons as fraud or overreaching.” This rule eroded in 1988 after the U.S. Supreme Court’s decision in Stewart Organization, Inc. v. Ricoh Corp., which appeared to endorse a more subjective, deferential approach to enforcing forum-selection clauses under 28 U.S.C. § 1404(a), the federal venue transfer standard. The Stewart approach requires the district court judge to consider several private and public interest convenience factors and exercise his or her discretion in deciding whether to enforce the clause. Under this deferential approach, the existence of the forum-selection clause is only one factor in deciding whether it should be enforced.
As a result of these two seemingly inconsistent U.S. Supreme Court opinions, a division began to grow in the federal courts in the 1990s as to the proper standard for enforcing such clauses. Currently, the majority of federal courts (including those in the 2nd, 4th, 7th, 8th, 9th, 10th and 11th circuits) strictly enforce forum-selection clauses without questioning convenience of the parties and witnesses, while the minority of federal courts (including the 3rd, 5th and 6th circuits), use the multi-factor balancing test under 28 U.S.C. § 1404(a) that makes their enforcement discretionary to the district court judge and unpredictable. So, if you’re in one of the majority circuits, you can be assured that your forum-selection clause will be enforced. If you are in one of the minority circuits, your odds of enforcement decrease. The only exception where both sides agree: If the designated forum in the clause does not include a federal forum option and instead requires litigation be in a state, arbitral, or foreign forum. With such a forum-selection clause, both views agree the forum-selection clause must be enforced and the case be dismissed.
The U.S. Supreme Court granted review of In re Atlantic Marine Construction Co. to resolve this circuit split and decide which test should govern. The decision is expected to be issued sometime in 2014 and could have a huge impact on how forum-selection clauses will be enforced in future cases. If the U.S. Supreme Court adopts the majority approach, parties and their lawyers will have more assurance that the forum-selection clauses they insert in their contracts will be enforced; even if they are boilerplate clauses used from old forms. But, if the Court takes the minority view, attorneys who draft forum-selection clauses must be more careful in how they draft them. If the clause designates another federal court, a federal district court using the minority approach will have discretion under the 28 U.S.C. § 1404(a) balancing factors to decide whether the clause will be enforced. To take this discretion out of the federal district court judge’s hands, a drafter will need to specify a non-federal forum in the clause. This is because forum-selection clauses that specify another state or arbitral forum will always be enforced absent fraud or some other drastic overreaching. While this solution may not be possible for some contracts that must be litigated in federal court due to their subject matter, it is a sensible solution for the majority of business disputes.