Supreme Court Enforces Contract Provisions Directing Where Litigation Must Take Place, Bolsters the Ability of Business to Better Manage Litigation
Litigation can be fraught with risk and uncertainty that frustrates business decision-making. Over the past several years, the United States Supreme Court has issued a series of decisions that allow business to employ careful contract drafting to exercise some control over the litigation process and mitigate risks.
The Supreme Court has enforced contract provisions that limit the timeframe to file Employee Retirement Income Security Act (ERISA) claims, require parties to resolve their disputes through arbitration rather than through the courts, and waive class arbitrations. Most recently, in a case known as Atlantic Marine Construction, Inc. v. United States District Court, the Supreme Court enforced a contract provision that requires a lawsuit to be heard in a particular location and has instructed lower courts that the agreement on location of litigation must be honored in all except “extraordinary circumstances.” In this case, a local Texas subcontractor sued the general contractor, Atlantic Marine, which was based in Virginia. The Texas subcontractor filed the lawsuit in Texas even though the subcontract stated that all disputes must be filed in Virginia. The Texas District Court and the Federal Court of Appeals refused to enforce the agreement because Virginia was not a convenient location for the litigation.
The United States Supreme Court reversed and decided that unless there were “extraordinary circumstances,” the parties’ agreement in the subcontract to have all disputes decided in Virginia must be enforced even though it would be inconvenient for the local Texas subcontractor. This is important because in the usual dispute over whether a case should be transferred to a different court, the court weighs a variety of factors, such as the convenience of parties and location of witnesses and evidence.
The Supreme Court has now changed this rule. If the parties agree to a contract that properly provides that disputes must be heard in a particular location (note here that the provision must be properly drafted based on existing law), that agreement must be enforced regardless of where the lawsuit is initially filed and whether the agreed location is convenient, barring extraordinary circumstances.
Since the location of litigation can influence the outcome of the dispute, this decision provides business with the ability to mitigate risks by including valid provisions in contracts that will control where any litigation must be filed.