Are Your Construction Contracts' Forum-Selection and Choice-of-Law Clauses Enforceable?
While typically relegated to the last pages of a construction contract, forum-selection and choice-of-law clauses control every aspect of the parties' respective obligations and liabilities undertaken on a project. Issues like payment, suspension of work and termination, good faith and fair dealing, indemnification, limitations of liability, third-party and extra-contractual liabilities, recovery of fees and cost shifting, and statutes of limitations all can be substantively affected by these negotiated terms. Given the complex risk allocation set forth in the contract documents, you understandably expect that the parties' agreement to submit whatever disputes may arise to a specific venue, applying a specific state's laws, will be honored—or enforced.
Recent United States Supreme Court opinion might reinforce this notion that the forum-selection and choice-of-law clauses in your construction contracts are enforceable. Decided December 3, 2013, Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas, 571 U.S. ____, confirmed by what procedural device a forum-selection clause must be enforced in the context of a Texas subcontractor's agreement, with a Virginia general contractor, for a construction project in Fort Hood, Texas. The subcontract required that all disputes be litigated in Virginia. The subcontractor, however, filed its claims against the general contractor in Texas. In Atlantic Marine, the Supreme Court held that—barring any overwhelming "public interest factors"—the home-state court where the subcontractor initiated suit was to transfer the claims for resolution in the agreed forum, to Virginia. While Atlantic Marine has been touted since its issuance as a sweeping pronouncement in favor of forum-selection clauses, its holding is not quite so definitive in regard to construction contracts, particularly.
Here's why: in Atlantic Marine, the construction project was located on a federal enclave and so, pursuant to a lower court ruling that was not appealed, not subject to state law. United States ex rel. J-Crew Mgmt. v. Atlantic Marine Construction Co., 2012 U.S. Dist. LEXIS 182375, *4-9 (W.D. Tex. Aug. 6, 2012). As a result, in Atlantic Marine, the Supreme Court did not address the Texas statute, which provides as follows:
If a contract [that is principally for the construction or repair of an improvement to real property located in this state] contains a provision making the contract or any conflict arising under the contract subject to another state's law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by the party obligated by the contract to perform the construction or repair.
Tex. Bus. & Com. Code Ann. § 272.001.
By its terms, the Texas statute explicitly empowers contractors and subcontractors to void their prior agreements to litigate disputes outside of Texas, or subject to another state's law. In effect, the Texas statute could require that all disputes arising out of Texas construction projects be litigated in Texas, applying Texas law, regardless of the parties' negotiated terms. Not before the Supreme Court in Atlantic Marine was whether such a state law may operate to void an otherwise valid forum-selection clause.
Texas is not the only state to have enacted home-court rules specific to home-state construction projects. By recent count, laws in 25 other states also mandate home-court rules specific to disputes arising out of contracts to build in-state projects: in Arizona, California, Connecticut, Florida, Illinois, Indiana, Kansas, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Utah, Virginia, and Wisconsin. Although the language and reach of such statutes somewhat vary, most cite public policy reasons for deeming void any provision in a contract to improve real property within the state that requires related litigation in, or subject to the laws of, another state.
The attached United States map shows which states have enacted some version of home-court rule applicable to construction contracts, and a state-by-state chart of citations includes excerpts of those construction-specific home-court rules.
What if your construction contracts designate a foreign forum or foreign choice of law for resolving disputes arising out of a construction project in one of the 26 home-court-rule states? Those negotiated clauses still might be enforced under any of the following circumstances.
If the Parties Agreed to Arbitrate Their Disputes
The Federal Arbitration Act ("FAA") may be deemed to preempt any otherwise applicable state home-court rules, and the locale and governing law specified in the parties' construction contract might be deemed part of a binding agreement to arbitrate, even if different from the jurisdiction in which the project is located. Section 2 of the FAA declares that a "written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. According to the Supreme Court, this "primary substantive provision" of the FAA "is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary." Moses H. Cone Mem'l Hosp. v. Mercury Construction Corp., 460 U.S. 1, 24 (1983).
A party seeking to enforce agreed forum-selection and choice-of-law clauses can cite to the decisions of lower courts that have deemed preempted a state's construction-specific home-court rules as applied to an agreement to arbitrate subject to the FAA. See, e.g., Millenium 3 Techs. v. ARINC, Inc., 2008 U.S. Dist. LEXIS 111350 (D. Ariz. Oct. 28, 2008) (declining to decide whether Arizona home-court statute applied as question properly within the jurisdiction of the out-of-state arbitrator); R.A. Bright Construction, Inc. v. Weis Builders, Inc., 930 N.E.2d 565 (Ill. App. Ct. 3d Dist. 2010); LaSalle Group, Inc. v. Electromation of Del. County, Inc., 880 N.E.2d 330 (Ind. Ct. App. 2008); Lodgeworks, L.P. v. C.F. Jordan Construction, LLC, 2012 U.S. Dist. LEXIS 24592 (D. Kan. Feb. 27, 2012); M.A. Mortenson/The Meyne Co. v. Edward E. Gillen Co., 2003 U.S. Dist. LEXIS 23175 (D. Minn. Dec. 17, 2003); Aspen Spa Props., LLC v. Int'l Design Concepts, 527 F. Supp.2d 469 (E.D.N.C. 2007); GEM Mech. Servs. v. DV II, LLC, 2012 U.S. Dist. LEXIS 133591 (D.R.I. Sept. 17, 2012); Ope Int'l LP v. Chet Morrison Contractors, 258 F.3d 443 (5th Cir. Tex. 2001); Cleveland Construction, Inc. v. Levco Construction, Inc., 359 S.W.3d 843 (Tex. App. Houston 1st Dist. 2012).
If the Construction Project Is Located Within a Federal Enclave
The construction-specific home-court-rules likely may have no effect given that state law may not apply to federal enclaves, like federal military installations. See, e.g., United States ex rel. Milestone Contractors, L.P. v. Toltest, Inc., 2009 U.S. Dist. LEXIS 44382 (S.D. Ind. May 27, 2009) (Camp Atterbury, in Edinburg, Indiana); United States ex rel. J-Crew Mgmt. v. Atlantic Marine Construction Co., 2012 U.S. Dist. LEXIS 182375 (W.D. Tex. Aug. 6, 2012) (Fort Hood, Texas).
If the Suit Is Filed in an Unsympathetic Forum
Other states' legislative declarations that public policy warrants home-court rule may not be viewed as controlling in a foreign-designated forum (in Massachusetts, Michigan, or Minnesota, for example). See, e.g., Cashman Equip. Corp. v. Kimmins Contracting Corp., 2004 U.S. Dist. LEXIS 44 (D. Mass. Jan. 5, 2004) (concluding that the "Florida venue provision statute is simply irrelevant, because the Charter selected Massachusetts law to govern the dispute," while also noting the statute's inapplicability given that the Charter was not "a contract for improvement to real property"); Walbridge Aldinger Co. v. Angelo Iafrate Construction Co., 2013 Mich. App. LEXIS 1287 (Mich. Ct. App. July 25, 2013) (observing that the "mere fact that an Indiana statute voids a choice of law provision under Indiana law does not preclude Michigan courts from properly exercising the jurisdiction provided under Michigan law"); Landform Engineering Co. v. Am. Prop. Dev., Inc., 2007 U.S. Dist. LEXIS 47183 (D. Minn. June 28, 2007) (holding Arizona statute inapplicable to "preliminary engineering services" contract for improvement to real property).
If Neither Party to the Construction Contract Objects to Resolving Disputes Pursuant to the Agreed Forum-Selection and Choice-of-Law Clauses
Litigation might proceed as though the applicable home-court-rule statute did not exist at all.
In the meantime, be aware of the fact that the terms in your construction contract might be subject to a different regime than you negotiated. Determine what your available and best responses to an enforceability challenge might be. Perhaps given the issues now in dispute on the project, you might even prefer a venue or governing law different from what's been specified in your construction contract.
For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com.
Kent W. Lindsay
Daniel D. McMillan
Andrew D. Ness
Stephen V. O'Neal
Roy A. Powell
Elizabeth M. Walsh
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