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U.S. Supreme Court Considering Construction Contract Case

Posted by:  Josh Quinter  (jquinter@kaplaw.com)

It is admittedly rare for the United States Supreme Court to consider a case that implicates construction contracts directly. The Court, in its new term, has just heard oral argument on a construction contract issue that could have a far reaching impact on the construction industry though.

Thumbnail image for Helicopter in Construction.bmpThe case of Atlantic Marine Construction v. J-Crew Management, Inc., centers on the forum selection clause in the contract between the parties. Atlantic Marine included a clause in the contract which called for litigation of disputes relating to the construction of a military base in Texas in the Eastern District of Virginia. When a dispute arose between the two contractors, however, J-Crew brought suit in the Western District of Texas in contravention of the forum selection clause. The most convenient forum for the litigation was, in fact, Texas. The project was located there; and all the witnesses and almost all the evidence was also in that locale.

Texas state law contains provisions which strongly favor forum selection clauses. This seemed to weigh heavily in favor of the District Court honoring the contractual preference of the parties and moving the case to Virginia. The Court surprised the parties when it applied the familiar balancing test under Section 1404 and concluded that the case would stay in Texas. The Fifth Circuit affirmed saying that the Supreme Court's decision in Stewart Organization, Inc. v. Ricoh Corp., required that the balancing test be done under Section 1404 when considering forum selection clauses and that the test weighed in favor of venue in Texas in this case.

The Supreme Court's strong preferences in upholding arbitration clauses in more recent cases caused many to speculate they would favor enforcing the forum selection clause in this instance. However, decisions interpreting Stewart suggest repeatedly that the balancing test must be done and private choices must be kept in check by public considerations favoring efforts to make litigation easier and more efficient. Questions from the bench during argument offered little to suggest which way the Justices are leaning. On the one hand, much of the interrogation surrounded ease of litigation. On the other hand, a fair number of inquiries dealt with the long standing precedent that courts should be reluctant to overturn the decisions of private parties in a negotiated contract.

Military Base.jpgThis decision has implications for all aspects of the construction industry. In an increasingly national and international market, companies are required to go across jurisdictional lines to get work. The ability or inability to control litigation costs by dictating venue can impact a company's capacity to take a project. If they might be required to litigate in a less convenient forum, the increased risk and related expense impacts the potential cost structure of the project. This, in turn, directly influences the decision to take the work or not.

The Court's opinion on the matter is not due out for some time. An update will be provided when the case is decided.

4 Comments

Not sure how many contractors pay attention to the details of where litigation could take place and consider the impact it might have. For many MBCEA members the cost to chase payments far from home could be the deciding factor in walking away without getting paid.

Agreed. Alternative dispute and forum selection clauses are often overlooked as being inconsequential. While they can be de-emphasized on some projects, they are gaining increasing prominence because of the amount of geographical distance contractors are now willing to travel for work. This is true across the board, but it may have an even higher impact on members of the Metal Building Contractors and Erectors Association and other metal building contractors who travel distances at higher rates.

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