by Eric B. Travers, Esq., Kegler, Brown, Hill and Ritter
Subcontractors working on projects with a general contractor from another state often discover, to their dismay, that they may need to go out of state if they must litigate to defend a backcharge or simply be paid for their work. Often this can mean needing to find “new” attorneys licensed in the other state, and having to travel hundreds, if not thousands, of miles from the project. The need to do so can work a tremendous hardship and burden on the subcontractor, and can greatly compromise the value of their claim or defense.
The reason this happens is something known as a “forum-selection clause.” Such clauses are often found buried in the “disputes” or “miscellaneous” section of many subcontracts and specify that subcontract disputes must be exclusively resolved in a particular place, county, or even court (the “forum” for the dispute). General contractors will often couple a forum-selection clause with a “choice-of-law” provisions that purports to dictate what state’s law will apply to disputes between the contracting parties.
In the heady days after subcontract award, many subcontractors fail to consider the financial risks and implications of these more “boilerplate” subcontract provisions. Instead, many subcontractors’ focus is limited to reviewing the subcontract sections addressing scope of work, payment and time of performance. That is a potentially costly mistake.
Neither of the main industry form subcontract agreements, the ASA-endorsed ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor, nor the AIA 401-2017, include forum-selection clauses for litigation—arbitration is generally specified to be the place of the project—but both provide choice of law provisions specifying that law governing subcontract disputes is the law at the project location. That is fine. And fair.
But most proprietary form subcontracts are different. What subcontractors will generally see in the proprietary forms is a clause that seeks to designate the general contractor’s home state as the exclusive place to resolve any subcontract dispute, regardless of that forum’s connection to the project.
General contractors, particularly those who do business in multiple states, like forum-selection clauses for several reasons. For one, they consolidate litigation at a place familiar to the general contractor. This eliminates the need for the general contractor’s employees to travel for depositions and trial. Moreover, litigating in its backyard allows the general contractor to use its own counsel. The jury pool and judges for the disputes are also far more likely to be familiar, at least at some level, with the general contractor’s name, which has benefits of its own when the other party is a more unfamiliar name.
Yet another benefit to the party drafting a forum-selection clause is that the clause provides significant negotiating leverage to the party with “home court” advantage. This is because more often than not, the subcontractors are local to the project, and likely have fewer resources than their contracting partner to handle the increased inconvenience, costs and risks of such clauses. As such, a clause that requires disputes be litigated in the general contractor’s backyard, can impact the settlement “value” of disputes to the subcontractor, who must factor in the impact of the new forum.
Finally, such clauses can actually determine the outcome of a trial. Litigation of construction disputes in a state foreign to the project site necessarily means leaving the state where the dispute arose, most of the key evidence is stored, and most of the third-party witnesses live and work. In addition, if the selected forum is over 100 miles away from the construction project, the parties may not be able to use the federal courts to subpoena necessary evidence and important witnesses. These factors can make it inefficient for the parties and the court to fairly resolve the matter.
Adding to the inequities is the reality that subcontract disputes often involve either the general contractor refusing to pay for subcontractor-performed changes, or withholding payment due to allegations of defective work. Because subcontractors generally provide their services on credit, i.e. they perform the work first and are paid later, any payment withholdings have a disproportionate impact. A forum-selection clause thus magnifies the stress on the subcontractor because it creates a situation where to get its day in court, the party likely already dealing with a financial hit now faces increased costs, expenses, inconvenience, and risk of a level much greater than what is on the larger multi-state general contractor who wrote the subcontract.
Subcontractors should know that despite these significant concerns about fairness, courts regularly enforce even the most burdensome forum-selection clauses in commercial contracts. There are many reasons courts will do this, including the certainty those clauses bring to the parties and courts’ reluctance to override the parties “freedom” to contractually “agree” where disputes will be resolved. Indeed, in December 2013, the U.S. Supreme Court held, in a case called In Re: Atlantic Marine v. the United States District Court for the Western District of Texas, that federal courts will enforce “valid” forum-selection clauses in “all but the most exceptional cases.”
With this much at stake, subcontractors must educate themselves as to the risks of forum-selection clauses and be prepared to assess the advantages and disadvantages of the clause. This assessment includes considering not only the inconvenience and costs associated with the clauses, but the impact it may have in reducing your incentive to vigorously pursue or defend a claim and increasing your incentive to settle on less favorable terms. If the risks a forum-selection presents are unacceptable, subcontractors are well-advised to consider whether they can accept the clause, can find an uneasy yet acceptable balance of interests, perhaps by including a risk premium into their price, or must draw a line in the sand and insist on removal of the clause entirely. Sometimes it is better to walk away from a job than roll the dice and hope no disputes, if a litigation would be mere virtue of where it would be resolved, impose unacceptable risks.
There is another complication to this analysis. Happily, though, this time the complication is a ray of light for subcontractors. While at first glance the Supreme Court’s decision in Atlantic Marine appears impenetrable, the court’s statement that “valid” forum-selection clause are presumptively enforceable gives an opening for subcontractors.
The dispute in Atlantic Marine involved federal law arising out of a dispute on a federal construction project exclusively located on federal property at the Ft. Hood military base in Killeen, Texas. The case, in short, was highly fact specific as to its location, and involved no question of state law.
This is important because legislatures in 25 of the 50 states have enacted legislation (often with ASA’s active encouragement and involvement) that void forum-selection clauses, or make them unenforceable, where the clause requires a construction dispute be resolved outside the state of the project. In other words, in those 25 states at least, for state or private projects within the state a forum-selection clause that attempted to pull the dispute to a foreign state would not be “valid.”
In the states that have passed those laws, the laws express a widespread and well-defined policy that forum-selection clauses in construction contracts are different from such clauses in other contracts and involve such grave legal, equitable, and policy concerns they are unenforceable. Unfortunately, though it would seem self-evident to assume that a contract provision void under state law is unenforceable, in the four-plus years since Atlantic Marine, courts seem to be splitting on the question. For example, courts in Ohio and Louisiana declined to transfer cases to forums specified in contracts, while courts in Pennsylvania and Kansas have enforced forum-selection clauses even in the face of arguments that doing so violates state law.
About the most that can be said at this time is that subcontractors in states with anti-forum selection clause statutes have a clear argument against transfer of the case, though absurdly it may not be a winning argument in some courts. On the other hand, in the states without such statutes, the tables turn. Subcontractors should presume that any forum-selection clause will be enforced unless they can show that public-interest factors overwhelmingly disfavor a transfer.
The bottom line is that the risks of forum-selection clauses are real, the law is unsettled, and general contractors will want to continue to use such clauses given the significant benefits they bring. Subcontractors must recognize the potential impact of the clause and consult legal counsel for an opinion on the enforceability of the clause in the state of the project. Prudent subcontractors should also be prepared to, on a case-by-case basis, determine whether a forum-selection clause for a particular contract is acceptable or warrants elevation to the rare air of being a “deal killer.”
Eric Travers, Esq., is a director with Kegler, Brown, Hill & Ritter, Columbus, Ohio, practicing primarily in the firm’s Construction Law area, representing subcontractors, general contractors, owners, suppliers, architects, sureties, construction managers, and others. Kegler, Brown, Hill & Ritter, serves as legal counsel for ASA. Travers can be reached at (614) 462-5473 or etravers@keglerbrown.com.
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