Watch Out for Forum-Selection Clauses
In my construction practice, I am frequently asked to review construction contracts. Parties to these contracts largely focus on what they believe are the “essential terms” (scope of work, price, etc.) and may overlook what are commonly referred to as the “boilerplate” provisions. Nevertheless, these provisions can have a significant impact on the contractual relationship between the parties and cannot be ignored. This article focuses on one of these provisions, the forum-selection clause, and its potential impact.
Forum-selection clauses attempt to govern where a dispute will be litigated and are often found in combination with choice-of-law provisions attempting to govern which state’s laws will apply to the contract. If allowed (see below), these provisions can have significant implications. For example, forum-selection clauses may require a party to litigate in a venue far away from its place of business and from where the construction project is located while at the same time allowing the other party to litigate close to home. This can give one party at least a perceived “home field advantage” in the litigation. If the selected venue is at a great distance from the project’s “home,” it may become difficult (and at least more expensive) to get essential witnesses and evidence to that faraway forum. And, a party that has to travel outside of the local venue to litigate may have to hire counsel with whom it is unfamiliar. To the contrary, for the party that will be litigating in its “home field,” it will be able to use its trusted counsel that is familiar with the law, the courts, and the jury pool. For these reasons, the most onerous forum-selection clauses require subcontractors to litigate in the state where large general contractors have their principal place of business even though the project is located in the subcontractor’s state.
Given the potential unfairness discussed above, many states have enacted laws making forum-selection clauses void or voidable on public policy grounds. For example, in Utah, where I practice, forum-selection clauses in construction contracts performed in Utah are “void and unenforceable as against the public policy” if they require disputes to be resolved outside the state and one of the parties is domiciled in Utah. See Utah Code Ann. § 13-8-3. Similarly, in Oregon, any provision that subjects a construction contract to the laws of another state or that requires any litigation, arbitration, or other dispute resolution proceeding arising from the construction contract to be conducted in another state is void and unenforceable. See Or. Rev. Stat. § 701.640. Hence, subject to the discussion of the Atlantic Marine case below, a contractor in Utah or Oregon (as well as many other states) can generally rest easy knowing that onerous forum-selection provisions will not be enforced and, therefore, those contractors can commence a lawsuit in their home state regardless of the forum selected in the contract. If, however, a contractor does work in multiple states, it should consult the state statutes regarding these types of contract provisions. For a state-by-state listing related to forum-selection clauses, see http://asaonline.com/eweb/upload/2015%20Anti-Forum%20Selection%20Clauses.pdf.
Consulting the state statutes relating forum-selection clauses, however, does not end the inquiry. Some states have not enacted laws addressing these provisions and, depending on the location of the construction project, a state law voiding these provisions may not even apply. This issue arose in the U.S. Supreme Court case Atlantic Marine Construction Co. v. U.S. District Court, 134 S. Ct. 568 (2013). There, a Texas subcontractor working on a project in Texas was subject to a forum-selection clause requiring litigation in Virginia. When a dispute arose, the subcontractor commenced a lawsuit in the Texas federal court and the general contractor immediately asked the court to dismiss the lawsuit or at least move it to Virginia pursuant to the forum-selection clause. Interestingly, similar to the laws in Utah and Oregon, Texas state law made forum-selection clauses in construction contracts voidable at the option of the obligated party. See Tex. Bus. & Com. Code Ann. § 272.001. But, because the project was located entirely on federal property (a “federal enclave”), a lower court found that state law did not apply. As a result, the subcontractor could not rely on the Texas statute to avoid the forum-selection clause. The U.S. Supreme Court held that, while a forum-selection clause does not, by itself, control in determining the proper forum, freely negotiated forum-selection clauses will be enforced by federal courts except in exceptional cases. The Court reasoned that “enforcement of valid forum selection clauses, bargained for by the parties, protects their legitimate expectations and further vital interests of the justice system.”
The takeaway from Atlantic Marine is that, if the construction project is located on property that is not subject to state law or if the state law is silent on the validity of such clauses, courts will likely require the parties to litigate in the forum they chose—even if that forum is inconvenient to one of the parties. If, however, state law does apply, and if the state law invalidates such provisions, the forum-selection and will not be enforceable. Hence, it is incumbent on contractors and their attorneys to make these determinations when deciding whether to insert a forum-selection clause into a contract or agree to such a clause.
"Watch Out for Forum-Selection Clauses" was originally published by the Daily Journal of Commerce on May 20, 2016.