Where Can Contractors File Suit? Forum-Selection Clause Issues Resolved by US Supreme Court

Construction projects often involve a prime contractor located in one state and sub-contractors located in one or more other states.  The construction project itself may be located in another state entirely. But when there is a falling out between the parties, where can or should the lawsuit be filed?  Some contractors, in a position to leverage the award of the job to a subcontractor, will insist that the contract between the prime and the sub include a “forum selection” clause limiting where the subcontractor can file suit.  For some out-of-state subcontractors, this could mean travelling thousands of miles to collect a debt or litigate an issue with the prime contractor.  This has been a thorny issue that has created serious problems with risk assessment (pre-contract) for both sides as well as for savvy project leaders. When disputes arise, the question of venue or forum (the legally proper or convenient place where a party to an agreement should file a lawsuit) becomes a serious one for players in the design and construction business.

There are currently 22 states that have passed laws restricting or voiding forum-selection clauses in the interest of equity (fairness) and as against just plain public policy. The purpose of a forum-selection clause is to establish venue at the outset of the contract; when the parties are still playing nice in the sand box. Often times, this allows larger companies to leverage their subcontract with smaller companies in other states and essentially lock down the venue in advance; regardless of hassles to the other party. On the other hand, absent inserting this clause into the agreement opens the door to smaller contractors “forum shopping” (cherry picking the most convenient location). Prior to this issue being addressed by the Supreme Court, venue was established – and the law that would control the litigation – was based on the location of the actual initial filing. This deprives the prime contractor of the benefit of the contractual agreement with the subcontractor and or gives the advantage to the party that files first. This “forum-shopping” basically creates a race to the courthouse.

Background

Forum selection clauses seek to nullify the general rule that venue resides where suit is filed by inserting a forum restricting clause in the contract. Until last October, however, the power to enforce these clauses depended heavily upon the original venue.   In the case before the court, J-Crew Management Inc. alleged that Atlantic Marine Construction Inc., owed J-Crew $160,000 for  work J.-Crew performed at a child development center near Killeen, Texas. When a dispute arose, J-Crew filed suit in the Western District of Texas, a clear violation of the foreign-selection clause. Instead of suing in Virginia which J-Crew’s contract required, J-Crew chose to sue in its home state. The original contract included a forum-selection clause establishing venue in Virginia. The U. S. District Court for the Western District of Texas held that J-spell Crew could pursue its claim in the Texas federal court. Atlantic Marine argued in its brief to the Supreme Court against the courts interfering with the contract terms between the parties. Atlantic Marine Construction Co. Inc. v. U.S. District Court for the Western District of Texas, 701 F. 3d 736.

On October 9, 2013, the Supreme Court ruled on the issue, settling the difference between the three most conservative Circuits in the United States and the rest of the country, and their ruling can be both complex and simple, depending on your viewpoint.

Summary:

There are several inferences that can be drawn from the Court’s decision last year. First of all, while this is now settled law, there are several caveats that deserve mention. The court agreed that if the forum-selection process, or the contract foundation upon which it is built, is a product of fraud, it is invalid. Secondly, the court held when considering a motion to transfer the court should only consider public interest factors; to the exclusion of travel costs, convenience etc.

The important thing to remember here is that subcontractors are usually much smaller than prime contractors and consequently have far less resources. This makes it vitally important that subcontractors consider very carefully before agreeing to a forum-selection clause or, at the very least, insist that venue be local. Less clear are individual “if-you-build-it-here-you-need-to-file-suit-here state laws. However, the Supreme Court decision left little wiggle room for parties to argue for a transfer of venue absent a very strong public interest. In other words, the court held that simply arguing that it’s inconvenient (travel time and costs) to litigate out of state won’t be enough.

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Tom Conzelman is President of Apex Project Consulting, Inc., a full spectrum project development and construction management consulting firm for commercial, industrial, healthcare and specialized-environment projects; both locally and across the United  States. Mr. Conzelman is a licensed electrical contractor and general contractor (www.apexpjm.com). In addition to various project management credentials, Mr. Conzelman graduated from Western State University, College of Law and has taught Contracts-for-Contractors at the college level. This is not an offer or attempt to provide legal advice.

 

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