Choice-of-forum clauses (i.e., choice of law, venue, and forum-selection) are common examples of preemptive problem-solving. Though parties to construction contracts do not generally expect disputes from the outset, the specter of potential litigation forces project participants to consider in advance how disputes will be resolved.
Conceptually, choice-of-forum clauses are easy to understand. Multi-state contractors naturally face the risk of litigation in different jurisdictions, based on project location, and the need to travel to different parts of the country for depositions, hearings, or other trial necessities can greatly inflate costs. To combat this risk, many contractors include language in their contracts to establish, in advance, a convenient location for dispute resolution. By limiting litigation to a particular forum, such contractors can feel more confident about engaging in out-of-state projects.
There are three types of forum-selection clauses. The first type, also known as a venue clause, identifies a particular court in a jurisdiction where disputes must be resolved (e.g., a county or district court located in a specific state or city). The second type of clause pinpoints the type of dispute resolution process that the parties have selected. For example, the parties might agree to have all disputes resolved by arbitration. The third type of forum-selection clause is really just a combination of the first two, resolving both the location and arbiter of future disputes in a single provision. Such a clause might read:
“All disputes shall be referred to mediation pursuant to the American Arbitration Association Construction Industry Rules & Mediation Procedures. Any dispute not resolved by mediation shall be subject to the exclusive jurisdiction of the state and/or federal courts of the State of New York, and each party hereby submits to the exclusive jurisdiction of those courts for the purposes of any proceeding.”
In cases where parties to a construction contract are located in different states, it may be unclear which law applies to disputes that arise on the project. Laws impacting construction professionals vary from state to state, and the parties may wish to ensure that particular laws are used to resolve any disputes. To accomplish this goal, most contractors also include a “choice of law” provision in their contracts.
A choice of law provision is usually very simple, often no more than a single sentence. For example: “This agreement and all disputes arising from it are governed by the laws of the State of Texas.” Frequently, this language is appended to the forum-selection clause, creating a single provision that dispenses with all questions regarding location, method, and governing law.
RECEPTION IN THE COURTS
The power to specify venue, forum, and choice of law for construction disputes is not absolute. In some cases, states have enacted statutes that prevent contractors from enforcing forum-selection clauses. Texas is one example, making voidable any construction contract provision that renders the contract subject to another state’s laws or litigation in another state. Twenty-one other states feature similar statutes.
Depending on how they are drafted, choice-of-forum clauses may also meet resistance in federal courts. Following the U.S. Supreme Court’s 1972 decision in The Bremin v. Zapata Off-Shore Co.,1 a case involving a venue clause that mandated litigation in London, federal courts in the United States strictly enforced forum-selection clauses as long as they were mandatory and sufficiently broad enough to cover the dispute. However, in 1988, the U.S. Supreme Court seemed to adopt a more subjective, deferential approach to enforcement of such clauses, requiring district court judges to consider private and public interest convenience factors when deciding whether to enforce contractual forum selection.2
Since that time, there has been a split in the federal circuit courts, with the majority favoring strict enforcement of forum-selection clauses, and the minority taking the view that enforcement should be discretionary. Fortunately, the U.S. Supreme Court recently granted review of a 5th Circuit Court of Appeals decision,3 originating out of a Texas construction project, and is expected to resolve the circuit split sometime in 2014. Until that time, however, contractors must be careful in the way they draft forum-selection clauses. The only time that all federal circuits agree on strict enforcement is when the clause requires litigation in a state or arbitral forum. If the clause also permits a suit in federal court, enforcement is not certain.
CONCLUSION
Forum-selection and choice of law provisions are useful tools to reduce the risks inherent in interstate construction activities. General contractors seeking to limit their obligation to appear or defend lawsuits in multiple jurisdictions should utilize such contract language to achieve that goal. Likewise, subcontractors dealing with an out-of-state general contractor should be aware of the existence and impact of such language in the contract and determine prior to signing the agreement whether the choice of forum is acceptable. Forum-selection clauses may not always be strictly enforced, but it is safer to rely upon a satisfactory clause than to hope for the invalidation of a clause that is too onerous. ■
1 407 U.S. 1 (1972).
2 Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (U.S. 1988).
3 In re Atl. Marine Constr. Co., 701 F.3d 736, 743 (5th Cir. Tex. 2012).
About the Author:
David L. Tolin, Jr. is a construction attorney in the Houston office of Ford Nassen (www.fordnassen.com), which is nationally recognized in the industry and is one of the largest construction law firms in Texas. His practice focuses on all aspects of the construction process. He can be reached at dltolin@fordnassen.com or 281.953.7704.
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Modern Contractor Solutions, November 2013
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