December 10, 2013

Last Tuesday, the Supreme Court of the United States issued a decision that could have broad effects on policyholders, and by extension on liability insurers, by determining where litigation between parties to contracts takes place.  Atlantic Marine Const. Co. v. U.S. Dist. Court for the Western District of Texas, No. 12-929, --- S. Ct.--- (Dec. 3, 2013) involved a dispute over a construction contract in Texas.  The contract specified that all disputes would be litigated in the general contractor’s home state, Virginia.  The Texas subcontractor filed suit in the Western District of Texas, a venue that was proper except for the contractual agreement to litigate all disputes in Virginia.  The general contractor moved to dismiss for improper venue, or in the alternative, to transfer venue to a Virginia federal court.  District Judge Lee Yeakel denied the motion, and the Fifth Circuit denied mandamus.

However, the Supreme Court accepted a writ of certiorari and reversed in an opinion authored by Justice Alito.  The court held the general contractor was entitled to enforcement of its contractual forum-selection clause, and the suit should be transferred to Virginia.  Although a contractual forum-selection clause cannot force outright dismissal of a case filed in an otherwise proper venue, it can force transfer to the contractually agreed forum via a motion to transfer venue to another federal district under 28 U.S.C.  § 1404.  While the usual analysis of a motion to transfer venue weighs both private and public interests, the presence of a contractual forum-selection clause trumps all other private interests because it is the manifestation of the parties’ agreement.

This holding is consistent with the long-cherished Texas principles of freedom to contract and enforcement of unambiguous contract terms.  The Supreme Court made clear a clear statement that if a business contractually chooses to waive its right of access to courts in its home state, that decision will be enforced in federal courts.  This outcome may lead to more certainty for policyholders involved in litigation about where that litigation will take place, because it allows for greater confidence that a contractual forum-selection clause can be meaningfully enforced in federal courts.