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Fifth Circuit Enforces Forum Selection Clause in Diversity Case

Written by Judith R. Blakeway on November 22, 2016

Jonathan Barnett signed an employment contract agreeing to work for DynCorp, a private contractor that provided logistic support to the United States Army in Kuwait. The contract had a choice of law clause providing that it would be governed under the laws of Kuwait and a forum selection clause providing all disputes would be resolved only in Kuwait. After concluding his work for DynCorp in Kuwait, Barnett sued DynCorp in Texas claiming it failed to provide him all pay and benefits he was owed.

DynCorp moved to dismiss based on forum non conveniens, arguing that the forum selection clause required the action to be brought in Kuwait. Barnett responded that the clause was unenforceable under federal law and void under Texas law because under Texas law a contract that establishes a limitations period shorter than two years is void and Kuwait’s labor law had a one-year statute of repose.

The district court granted DynCorp’s motion and dismissed the case. Barnett appealed. The Fifth Circuit affirmed. Barnett v. DynCorp Int’l Inc., 2016 U.S. App. LEXIS 13618 (5th Cir. July 26, 2016).

The first issue was one that has long divided courts – “whether a federal court in a diversity case should look to federal law, state law or both when deciding whether a forum selection clause is valid.”

In the Fifth Circuit, even in diversity cases, federal law governs the “enforceability” of forum selection clauses, while the “interpretation” of forum selection clauses is determined by the forum’s choice of law rules.

Barnett argued that the “validity” of a forum selection clause – as opposed to its “enforceability” – was governed by state law. The Fifth Circuit found that approach problematic for several reasons. First, the Fifth Circuit does not draw a distinction between “validity” and “enforceability.” Second, if a forum state’s law rejects forum selection clauses, a district court should consider that in its balancing of factors under 28 USC § 1404(a), which governs transfers among federal district courts.

On the other hand, the court found allowing federal law to govern the validity of forum selection clauses in diversity cases problematic because there was no reason to except forum selection clauses from the general rule that state law governs contractual validity.

The Fifth Circuit concluded that it need not resolve the issue because under either federal law or Texas choice of law rules Barnett could prevail only if enforcing the parties’ choice of Kuwaiti law in a Kuwaiti forum would contravene a strong public policy of Texas. The court concluded that it would not.

Texas has adopted the Restatement (Second) of Conflict of Laws which provides:

1)   The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue is one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

2)   The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either

a)   the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice or

b)   application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Section 187(2)(a) did not help Barnett because Kuwait had a substantial relationship to the contract for services to be performed there. Section 187(2)(b) did not help either because enforcing the Kuwaiti choice of law clause, even given the statute of repose, would not contravene a fundamental policy of the State of Texas. The court was particularly reluctant to adopt Barnett’s novel reading of Texas law because it would create unpredictability for contracting parties.

Accordingly, without deciding whether Barnett’s validity-enforceability distinction had merit, the court concluded that his relied-upon state law neither voided the forum selection clause nor rendered its enforcement unreasonable under federal law.