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Posted on Friday, January 24, 2014

Venue Selection Clauses Give Companies Leverage in Litigation

Many contracts, especially those between sophisticated parties, contain clauses specifying the state in which disputes arising out of the agreement must be litigated.  For instance, a company headquartered in Virginia would want to specify that all disputes be litigated in a predetermined county or federal court in Virginia.

While many courts have historically enforced forum selection clauses as written, others have been reluctant to enforce the provisions where doing so would compel litigation in a state that seemed extremely unfair based upon a consideration of “the convenience of parties and witnesses” and “the interest of justice.”  Resolving that circuit split, the Supreme Court of the United States recently decided the case of Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, addressing for the first time the extent to which forum selection clauses are enforceable and ultimately concluding that courts should enforce such clauses as written, in all but the rarest circumstances.

The Court’s decision alleviates an uncertainty previously faced by contracting parties.  In the wake of Atlantic Marine, parties can now confidently rely on the enforceability of the forum selection clauses contained in their agreements, and accurately predict the state in which they will litigate.  By resolving the circuit split in favor of the majority view, the Court has created an environment where parties are able to bargain over forum selection as efficiently as any other contract term; a party may, for instance, stipulate to litigating in a less convenient state in exchange for receiving a discounted contract price, or offer pay additional consideration in order to guarantee the opportunity to litigate somewhere they consider favorable.

Atlantic Marine marks an important point in High Court jurisprudence, and one that business leaders and other contracting parties should be aware of.  In addition to promoting the freedom of parties to bargain with one over contract terms going forward, this decision also provides certainty and predictability to forum selection clauses contained in existing agreements.  This predictability allows companies to keep costs down by litigating in a friendly state and being able to efficiently fend off motions to transfer venue.  “When the parties have agreed to a valid forum-selection clause,” Justice Alito writes in Atlantic Marine, “a district court should ordinarily transfer the case to the forum specified in that clause.”  Excepting “extraordinary circumstances unrelated to the convenience of the parties,” the Court’s decision allows contracting parties to place unprecedented confidence in their forum selection clauses, and maintain more control as they resolve business disputes.

Frank Gulino joined Berenzweig Leonard as an associate attorney in September 2013.  He can be reached at fgulino@berenzweiglaw.com.

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