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:
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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.