While centralizing litigation or arbitration in one state may be desirable, forum-selection and choice of law clauses specifying a location or state law other than that where the project is located may conflict with so-called construction home-court statutes. An increasing number of states have enacted home-court statutes that generally declare void any contract term requiring that disputes relating to a construction project be litigated or arbitrated in a state other than where the project is located. Many of these statutes also make void choice of law clauses specifying the governing law to be that of a state other than that of the state where the project is located.
States have adopted these statutes frequently in response to intense lobbying efforts by the subcontractor community, which maintains that local subcontractors should not be required to incur the inconvenience and expense of traveling outside of the project-state to litigate disputes under a different state’s law. Those advocating for the adoption of such statutes maintain that forum-selection clauses requiring local contractors to litigate or arbitrate claims outside the state in which the project is located impose significant burdens that can render pursuit of legitimate claims uneconomical and impractical and create unfair leverage, causing subcontractors to abandon or settle otherwise meritorious claims at heavily discounted amounts.
This article highlights some of the issues project participants and their counsel should consider when drafting forum-selection or choice of law clauses that may conflict with construction home-court statutes and options to deal with such conflicts after a dispute arises, when there is such a conflict.
There are potentially two paths to avoiding the risk of a home-court statute overriding a contractually selected forum. First, if federal jurisdiction can be established, a federal court is far more likely to enforce a forum-selection clause that conflicts with a home-court statute and transfer a case to a federal court in a state specified in the forum-selection clause than a state court. A second way to avoid the operation of a home-court statute is for the parties to agree to arbitration and expressly indicate in the agreement that the Federal Arbitration Act (FAA) applies. Several courts have held that the FAA preempts any conflicting home-court statute that would otherwise void the chosen arbitral forum or choice of law.
This article is divided into four parts. Part I provides a general overview of the construction home-court statutes and highlights certain similarities and differences among them. Part II summarizes some of the more prominent exceptions to these home-court statutes. Part III discusses how federal courts have applied these statutes and Part IV discusses how state courts have applied these statutes. Finally, Part V summarizes selected cases holding that, when parties agree to arbitrate their dispute and the FAA applies to the arbitration clause, a number of federal courts have held that the FAA preempts conflicting home-court statutes.
Given the significant variation of these statutes and cases from state to state, project participants and their counsel are well advised to analyze applicable home-court statutes and related caselaw when drafting or seeking to enforce a forum-selection or choice of law clause different from the state where the project is located. And, importantly, when there is a conflict between a home-court statute and a forum-selection clause, specifying arbitration under the FAA may afford greater assurance of avoiding such conflict.
I. Overview of Construction Home-Court Statutes
A. Thirty-Two States Have Some Form of a Construction Home-Court Statute
Thirty-two states have enacted home-court statutes applicable to construction contracts. At the end of this article, at Appendix A., is a map of the United States showing the states that have enacted these statutes, as well as a table listing the statutes, at Appendix B. Construction home-court statutes differ in some significant respects but generally declare as unenforceable any provision in a construction contract that requires litigation or arbitration in a state and/or under the law of a state other than the state where the construction project is located. In this regard, these statutes limit the freedom of contract parties typically enjoy when agreeing to forum-selection and choice-of-law provisions, which, as noted below, are presumptively enforceable save for arguments that a state statute or other state public policy precludes enforcement; the provision was induced by fraud; enforcing the provision is unconscionable, unreasonable, or unjust under the circumstances; and other limited arguments.
Before summarizing the scope of the construction home-court statutes, it is important to recognize that there are a variety of home-court statutes that have been adopted in addition to those that apply to construction contracts. Most notably, many states, such as California and Connecticut, have enacted statutes declaring forum-selection clauses in franchise agreements void under certain circumstances, relying on the same type of justification as those for construction home-court statutes. Numerous states have enacted similar statutes applicable to consumer leases, consumer credit agreements, student loan agreements, and other contracts. Finally, some states have enacted general home-court statutes that preclude the enforcement of outbound forum-selection clauses in virtually all contracts, not just those in construction contracts.
B. Terminology: Outbound v. Inbound
Legal scholars have used various terms to refer to home-court statutes and how they operate in relation to forum-selection clauses. One set of nomenclature refers to outbound and inbound forum-selection clauses. “An outbound forum selection clause is a contractual provision stipulating that any litigation between the parties must occur in a forum other than the one in which the suit was filed.” In contrast, “[a]n inbound forum selection clause … is a contractual provision stipulating that any litigation must occur in the court where the suit was filed.” Under this nomenclature, the same forum-selection clause can operate either as an “inbound” or “outbound” clause, depending on where the litigation is filed.
If, for example, the forum-selection clause provides that a dispute over a project in Texas must be adjudicated in California and a lawsuit is filed in Texas, a motion to dismiss the case (or transfer, if the case is in federal court) would result in the clause operating as an outbound clause because a party would be seeking to defensively push the case out of the state where it was filed. If the situation was reversed and the plaintiff had filed the case in California as provided by the forum-selection clause and the defendant sought to have the case dismissed for lack of personal jurisdiction, the clause would then operate as an inbound clause because it is used offensively to initiate and keep the case in the court in the state specified in the clause. Where there is a home-court statute, the question becomes how that statute operates in relation to the forum-selection clause and whether it conflicts with the forum specified in the forum-selection clause.
C. Typical Construction Home-Court Statute
The Illinois construction home-court statute, which voids and makes unenforceable provisions in a construction contract requiring that disputes be resolved in a state other than where the project is located or under another state’s law, is fairly typical of these types of statutes and provides:
A provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration, or dispute resolution to take place in another state is against public policy. Such a provision is void and unenforceable.
While the Illinois statute applies to both forum-selection and choice of law clauses, the home-court statutes of five states apply to one type of clause or the other, but not both. Four of these states—Florida, South Carolina, Utah, and Virginia—have construction home-court statutes that apply to forum-selection clauses but not choice of law clauses. Colorado stands alone as the only state with a construction home-court statute that applies to choice of law provisions but not forum-selection clauses. With the exception of these five states, every construction home-court statute applies to both forum-selection and choice of law clauses similar to the Illinois statute quoted above.
D. Parties and Contracts Subject to Construction Home-Court Statutes
The Illinois construction home-court statute, like most others, generally applies to construction contracts without any qualification as to the specific type of construction contract or role of the contracting parties. Some construction home-court statutes, however, limit their application to certain project participants or types of contracts—for example, only to construction contracts between contractors and subcontractors. This section summarizes some of the more notable differences among the construction home-court statutes with respect to the project participants and types of contracts covered.
1. Owners/Contractors/Subcontractors
Some construction home-court statutes explicitly apply to only construction contracts between contractors and subcontractors. The California construction home-court statute is structured this way and makes clear in its introductory sentence that its scope is limited to contracts between contractors and subcontractors: “The following provisions of a contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state, shall be void and unenforceable… .” On its face, the California statute does not apply to a construction contract with an owner, thereby affording owners greater freedom in choosing their desired forum and law. Other construction home-court statutes also only apply to construction contracts between contractors and subcontractors. Of course, those statutes that simply apply to construction contracts in general would apply to contracts between owners and contractors.
2. Architects, Engineers, and Other Design Professionals
Most construction home-court statutes do not expressly reference whether they apply to claims by or against design professionals. There is scant caselaw on this point.
An interesting case for design professionals working on construction projects in California is Vita Planning & Landscape Architecture, Inc. v. HKS Architects, Inc. This case involved the design and construction of a luxury hotel in California. HKS, the architectural firm, entered into an agreement with a landscape architect, Vita Planning, with a forum-selection clause providing that all disputes were to be litigated in Texas. When Vita Planning sued HKS in California state court, HKS moved to dismiss, arguing the case must be litigated in Texas in accordance with the forum-selection clause. Vita Planning argued that it was a subcontractor to HKS and HKS effectively served as the general contractor; thus, the forum-selection clause was unenforceable under the California home-court statute. HKS countered that the statute did not apply because it and Vita were both “design professionals”—not a “contractor and a subcontractor” within the meaning of the statute—and their contract was a design services contract—not one for “construction of a public or private work of improvement” as required under the statute. The trial court agreed with Vita that the home-court statute did not apply and dismissed the case, only for it to be reversed on appeal.
Because the California statute did not define “contractor” or “subcontractor,” the appellate court applied the definitions in Black’s Law Dictionary and found that HKS was a contractor and Vita was a subcontractor.The court also rejected HKS’s argument that the California Legislature did not intend the statute to apply to design professionals because in other California statutes contractors, subcontractors, and design professionals are listed separately. The court reasoned that the fact “‘design professional’ is listed in [another statute] does not mean architects and design professionals cannot also be contractors or subcontractors under” the home-court statute. In reaching its conclusion, the court highlighted the policy underlying the statute: “This case presents the very situation section 410.42 was designed to prevent: one where a California subcontractor performs work in California but is forced to litigate its dispute out of state, in a forum with laws unfavorable to the subcontractor.”
As the above discussion demonstrates, there are many differences among the home-court statutes. The issues above are the most notable, but others exist. Project participants and their counsel should carefully analyze any applicable cases and statutes both when drafting construction contracts and when disputes arise.
3. Residency Requirements in Some Home-Court Statutes
There are other differences among the statutes as to contracting-party status. For instance, a few home-court statutes only apply if one or both of the contracting parties are based in-state. The California statute only applies to “a contract between the contractor and a subcontractor with principal offices in this state.” Statutes with this limitation generally allow out-of-state litigation or arbitration where both parties are out-of-state entities. Hence, if a contractor has its principal offices in New York and hires an Arizona subcontractor on a project in California, the California statute would not invalidate a forum-selection clause requiring resolution of disputes in New York under New York law. In contrast, other construction home-court statutes apply even if both contracting parties are not residents of the state where the project is located.
4. Types of Contracts: Supply and Other Agreements
Another notable difference among the home-court statutes is the types of contracts to which they apply. Some home-court statutes refer generally to a “construction contract” or “a contract for improvement to real property,” which includes a construction contract. Other home-court statutes explicitly apply to contracts and agreements “collateral to or affecting a construction contract,” which may void forum-selection clauses that are incorporated into subcontracts, supplier agreements, or other contracts from another construction contract through flow-down provisions or other terms. And still other home-court statutes refer to contracts that are excluded from their reach like the New York statute that excludes material suppliers. These and other differences in scope among home-court statutes are discussed further below.
E. Applicability to Mediation
Unlike the Illinois statute quoted above, which refers to “litigation, arbitration, or dispute resolution” but makes no specific mention of mediation, a few home-court statutes explicitly apply to “mediation.” Some practitioners may find this surprising because mediation is usually voluntary and does not result in binding decisions on the merits. Arizona’s construction home-court statute, for one, expressly applies to mediation: “Any mediation, arbitration or other dispute resolution proceeding arising from a construction contract for work performed in this state shall be conducted in this state.” A small number of home-court statutes only apply to litigation or arbitration, not mediation or other forms of dispute resolution.
F. Effect of Statute: Void v. Voidable
Whatever the scope of the statute, most home-court statutes, like the Illinois statute, explicitly declare void and/or unenforceable any contrary contract provision. Some statutes, however, just make the clause “voidable” at the option of one or both of the parties. The Texas construction home-court statute provides that the party obligated to perform the work has the option to void the offending clause, rather than automatically voiding the clause:
If a construction contract or an agreement collateral to or affecting the construction contract contains a provision making the contract or agreement or any conflict arising under the contract or agreement subject to another state’s law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by a party obligated by the contract or agreement to perform the work that is the subject of the construction contract.
A few other home-court statutes contain similar voidable language, which provides one or more of the parties with more freedom to agree where their disputes will be litigated or arbitrated and under what law.In the recent case of In re MVP Terminalling, LLC, the owner and operator of a marine terminal located in Texas sued the general contractor in Oklahoma state court alleging that the contractor was liable for certain additional costs. The general contractor and its subcontractor argued that the case should be dismissed on the basis of the Texas home-court statute. The court relied on the voidable nature of the Texas statute in holding that the parties were required to litigate in Oklahoma based on their forum-selection clause, which the court essentially viewed as a contractual waiver of the right to rely on the home-court statute. In reaching this conclusion, the court found that home-court statutes in other states were not analogous “because those statutes expressly deem forum-selection and choice-of-law clauses in construction contracts as ‘against public policy’ and/or ‘void’ and/or ‘unenforceable’ rather than merely ‘voidable.’”
II. Notable Home-Court Statutes Exceptions
Seemingly every rule has an exception, as do most construction home-court statutes. This Part II highlights a few of the exceptions that have been applied to these statutes. As the discussion below demonstrates, these cases largely turn on the specific language of the statute or the context in which they are invoked. Consequently, project participants should closely examine the statute and the caselaw in the relevant jurisdiction so that any potential exceptions can be assessed. The discussion below highlights just some of the many cases applying exceptions to, or limitations on the applicability of, construction home-court statutes.
A. Construction Projects in a “Federal Enclave”
A home-court statute may not apply if the construction project is located in a “federal enclave.” For example, in United States ex rel. J-Crew Management, Inc. v. Atlantic Marine Construction. Co., the court found that the Texas home-court statute did not apply because the project was within a “federal enclave” (Fort Hood, Texas), and based on this fact was not a construction project “located in this state” within the meaning of the statute. The court reasoned that “[t]he construction project at issue in this case is located in a federal enclave, though geographically situated within the state of Texas, outside of its legislative jurisdiction. Accordingly, the parties’ subcontract agreement was not a construction contract for the improvement of specific real property in this state. …” Other courts have similarly refused to apply home-court statutes to construction projects located in federal enclaves like military camps.
At least one court, however, has considered, in part, a home-court statute in declining to honor a forum-selection clause in a contract on a federal project. In Sears Contract, Inc. v. Sauer Inc., Sears entered into a subcontract with Sauer, the general contractor who contracted with the US Army Corps of Engineers, to provide labor and materials for the construction of an elementary school at Fort Bragg in North Carolina. The subcontract required Sears to file any claim against Sauer relating to the project in a state or federal court located in Florida. When Sears sued Sauer in federal court in North Carolina, Sauer argued the case should be tried in Florida pursuant to the subcontract. The court rejected this argument, relying, in part, on the North Carolina home-court statute, which evidenced “North Carolina’s strong public policy,” and the Miller Act, which “itself expresses a federal public policy in favor of venue at the place of the federal construction project. …”
B. Scope of Home-Court Statutes: Equipment/Supply Agreements, Etc.
Some cases address whether a home-court statute extends to a particular type of contract or project participant. The case of J. Lilly, LLC v. Clearspan Fabric Structures, International, Inc. is one example. There, the defendant argued that the Oregon construction home-court statute did not apply because the forum-selection clause was in an Equipment Capital Lease Agreement (ECLA) that was not a “construction contract” as defined under the statute. The court disagreed and invalidated the forum-selection clause, in part, based on the construction home-court statute. The court found that although the construction agreement and the ECLA were “separate agreements,” they were “interrelated and both relate to the creation or making of a building or structure”—specifically, the ECLA addressed the purchase and installation of the greenhouse that was the subject of the construction contract and incorporated other terms.
Courts have addressed similar issues, including express exceptions to certain home-court statutes. For instance, in University Hospitals Health System, Inc. v. Pohl Inc. of America, the court held that a proposal for the supplier to provide materials was a construction contract for purposes of the Ohio home-court statute because it “was made a part of a construction contract” by incorporating the construction contract specifications. In Rite Aid Hdqtrs Corp. v. Crayton Landscaping & Building Maintenance, Inc., the court held that the Ohio home-court statute did not apply to a snow removal services agreement because the agreement was not a contract for an improvement to real estate. Courts also have decided whether construction home-court statutes apply to certain project participants. In LMC Industrial Contractors, Inc. v. Dominion Energy Transmission, Inc., the court held that the plaintiff did not fall within the “material supplier” exception to the New York home-court statute “because, in addition to providing supplies and materials, its role in the Virginia Contracts includes providing labor and services. …”
C. Other Notable Considerations and Exceptions
When a lawsuit is filed outside the home court but in the state specified in the forum-selection clause, and the state court has jurisdiction over the claims, the state court may be less inclined to enforce another state’s home-court statute. This was the case in Walbridge Aldinger Co. v. Angelo Iafrate Construction Co. There, Moorehead Electric Company, an Indiana company and the defendant subcontractor on a project in Indiana, argued that the Michigan trial court erred in denying its motion for summary judgment that jurisdiction was improper in Michigan. Among other arguments, Moorehead Electric argued the Indiana home-court statute rendered unenforceable a subcontract provision designating Michigan law as the operable law and Michigan as the litigation forum, and therefore any litigation concerning the project should take place in Indiana. The Michigan appellate court rejected this argument because “[t]he 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.”
Finally, if neither party objects to resolving their dispute consistent with the terms of the forum-selection and choice-of-law clauses in the contract, the question of whether the home-court statute applies will likely never surface and the case will proceed as the parties contractually agreed.
III. Federal Cases Applying Construction Home-Court Statutes
There is some variability in how federal courts apply home-court statutes. Where the home-court statute conflicts with the FAA, federal courts often hold that the FAA preempts the statute, as discussed in Part V. Outside of the context of the FAA, however, federal courts tend to view home-court statutes as one factor among many in deciding whether to enforce the forum-selection clause. Some federal courts cite home-court statutes as evidence of a strong state public policy against applying a conflicting forum-selection clause. Yet other federal courts hold that home-court statutes do not reflect a strong public policy of the state and do not warrant special consideration. Still other federal courts hold that these laws should be disregarded in favor of federal procedural law and should not be considered in deciding whether to enforce a forum-selection clause. Representative exemplars of each of these types of cases are discussed below.
A. Legal Framework Regarding Enforceability of Forum-Selection and Choice of Law Clauses Under Federal Law: Stewart and Atlantic Marine
Before addressing federal cases considering construction home-court statutes, it is important to understand the general legal framework concerning the enforceability of forum-selection clauses and how courts apply those clauses in deciding a motion to transfer. In M/S Bremen v. Zapata Off-Shore Company, the US Supreme Court held that forum-selection clauses “are prima facie valid and should be enforced unless enforcement is shown by the resisting party to be ‘unreasonable’ under the circumstances.” A party seeking to avoid such a clause must make “a strong showing that: (1) the clause is invalid due to ‘fraud or overreaching,’ (2) ‘enforcement would contravene a strong public policy of the forum in which suit is brought, whether declared by statute or by judicial decision,’ or (3) ‘trial in the contractual forum will be so gravely difficult and inconvenient that [the litigant] will for all practical purposes be deprived of his day in court.’”
The Supreme Court has repeatedly explained that good reasons exist for enforcing forum-selection clauses. As Justice Kennedy wrote in his concurring opinion in Stewart Organization Inc. v. Ricoh Corp., the “authority and prerogative of the federal courts . . . should be exercised so that a valid forum-selection clause is given controlling weight in all but the most exceptional cases.” “[E]nforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice system.” Likewise, in Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, the Supreme Court explained that “[a] forum selection clause . . . may, in fact, have been a critical factor in their agreement to do business together in the first place. In all but the most unusual cases, therefore, ‘the interest of justice’ is served by holding parties to their bargain.”
The Atlantic Marine case involved a construction dispute. Atlantic Marine Construction Company, the general contractor, contracted with the US Army Corps of Engineers to build a child development center at the Fort Hood Army Base in Texas. Atlantic Marine and J-Management entered into a subcontract with a forum-selection clause providing that all disputes would be litigated in Virginia. After Atlantic Marine sued J-Management in federal court in Texas, J-Management moved to dismiss or transfer the case to Virginia based on the parties’ forum-selection clause. The Fifth Circuit agreed with the trial court in denying J-Management’s motion to transfer the case based on the convenience of the parties, but the Supreme Court reversed. Applying the factors for transfer under 28 U.S.C. § 1404(a), the Court echoed Justice Kennedy’s concurring opinion in Stewart in holding that “[o]nly under extraordinary circumstances unrelated to the convenience of the parties should a § 1404(a) motion be denied.” The Court noted, however, that presumptively valid forum-selection clauses “exist[] within the confines of statutory limitations.” In so ruling, the Court did not address home-court construction statutes, leaving it to lower federal courts to determine how those statutes influence the transfer analysis (and the antecedent question of the enforceability of an otherwise applicable forum-selection clause), which has led to mixed results, as discussed below.
Atlantic Marine is fundamentally a transfer case under 28 U.S.C. § 1404(a), as the Supreme Court assumed the enforceability of the forum-selection clause and addressed the factors to be considered when transfer is sought in such a scenario. In contrast, the Supreme Court’s Bremen decision is the seminal case on the enforceability of forum-selection clauses, holding that one way a party can avoid a forum-selection clause is through a strong showing that enforcing the clause would contravene a strong public policy. If a court finds the forum-selection clause enforceable, then the court should conduct a transfer analysis under Atlantic Marine and determine whether public interest considerations prevail over the parties’ contractually chosen forum. Some courts and commentators, however, gloss over this two-step analysis (enforceability of the forum-selection clause followed by assessment of the factors pertinent to a transfer analysis, which differs depending upon whether there is an enforceable forum-selection clause). Similarly, some cases addressing construction home-court statutes consider them in the context of a Bremen enforceability analysis while others consider them as a public interest factor weighing against transfer. This article does not attempt to reconcile these seemingly divergent approaches.
B. Home-Court Statute as One Factor in Multifactor Test
Numerous federal courts pre- and post-Atlantic Marine have held that home-court statutes are just one factor in determining the enforceability of a forum-selection clause and are not by themselves outcome determinative. In Brand Energy Servs., LLC v. Enerfab Power & Indus., Inc., the defendant contractor successfully argued in an outbound case for transfer from the Tennessee district court where it had been filed to Ohio as the parties agreed in their forum-selection clause. The court rejected the argument that the Tennessee home-court statute rendered the forum-selection clause unenforceable and found the clause enforceable under federal law. In doing so, the court considered Brand Energy’s position that the forum-selection clause was invalid under the Tennessee home-court statute as a pertinent factor. In granting the motion to transfer, the court held that the plaintiff had not met its burden that public interest factors weighed against transfer, thus the court gave the valid forum selection clause “controlling weight” under Atlantic Marine in its transfer analysis and transferred the case.
Similarly, in Cable-La, Inc. v. Williams Communications, Inc., a pre–Atlantic Marine case, the court enforced the parties’ forum-selection clause and transferred the case to the Northern District of Oklahoma despite the North Carolina construction home-court statute. The contractor plaintiff argued that the statute “reflect[ed] [a] strong public policy interest[] … authoriz[ing] the court to deny enforcement of the forum-selection clause.” The court disagreed that “such a policy renders a clause at issue per se unreasonable and thus unenforceable.” Rather than give the home-court policy “dispositive weight,” the court “incorporate[d] the public policy concerns of North Carolina … into the multi-factor [transfer] analysis.” Applying “the traditional convenience factors,” the court held that the contractor “failed to persuade the court that it should not enforce the forum-selection clause.” Other courts similarly view the applicable construction home-court statute as just one factor in the multifactor enforceability test.
C. Home-Court Statute Controls Where It Reflects a Strong State Public Policy
Some federal courts view home-court statutes as evidence of a strong public policy that justifies invalidating a conflicting forum-selection clause. For example, in Continental Glass Sales & Investment Corp. v. First Finish, LLC, the court denied a motion to dismiss based on a forum-selection clause, which the court interpreted as a motion to transfer venue under 28 U.S.C. § 1404(a), consistent with Atlantic Marine. The court summarily concluded that the Illinois home-court statute “applies to the Subcontract and renders paragraph 14.11’s choice of Maryland law ‘void and unenforceable’ as violative of Illinois’s public policy” as well as the forum-selection clause “to the extent it requires the parties to litigate outside of Illinois.” Because the court found the forum-selection clause unenforceable under the home-court statute, the court could not give the clause controlling weight under Atlantic Marine in a transfer analysis.
A similar conclusion was reached in Gem Mechanical Services, Inc. v. DV II, LLC, a pre–Atlantic Marine case. There, Walmart retained Cleveland Construction to construct a Walmart Supercenter in Rhode Island. Cleveland Construction then hired GEM Mechanical Services (GEM) to perform the mechanical and plumbing work. The subcontract contained a forum-selection clause stating that the “Agreement shall be governed by the laws of the State of Ohio. Any claims, actions or causes of action arising out of or relating to this Agreement shall be brought in Lake County, Ohio. …” GEM filed suit against Cleveland Construction and others in Rhode Island state court for failing to pay for work performed, which the defendants removed to federal court. Cleveland Construction then filed a motion to dismiss and/or transfer the case to the Northern District of Ohio pursuant to the parties’ forum-selection clause.
The court denied the motion on the basis that the “forum selection clause in the Agreement violates the fourth ground [in the enforceability analysis] as it ‘contravene[s] a strong public policy’ in the forum state, Rhode Island.” This state public policy was “the protection of contractors performing construction in Rhode Island by requiring actions to be brought in this state under R.I. law.” “Here, because GEM is the party that contracted to perform the construction, GEM is the party the General Assembly intended to protect. Thus, finding the forum selection clause enforceable would go against Rhode Island public policy, violating federal common law.”
Other federal courts have similarly applied home-court statutes to invalidate forum-selection and choice of law provisions. For instance, in Evoqua Water Techs., LLC v. AFAM Concept Inc., the court invalidated a contractual forum-selection clause designating any state or federal court in Pittsburgh as the forum because enforcing it “would violate Illinois public policy … favoring application of Illinois law to contracts for construction that occurs in the state of Illinois.”
D. Home-Court Statute Not a Strong Public Policy
A number of federal courts have found that construction home-court statutes do not evidence a “strong public policy” sufficient to invalidate a forum-selection clause. For example, in Brahma Group., Inc. v. Benham Constructors, LLC, a pre–Atlantic Marine case, the court enforced the parties’ forum-selection clause in granting the general contractor’s motion to dismiss. The plaintiff subcontractor argued that the forum-selection clause was unenforceable because the Utah home-court statute embodied a “strong public policy against enforcement of the forum-selection clause.” The court disagreed, holding that the Utah home-court statute was not “sufficient to qualify as ‘strong’ public polic[y] against abiding by the express wishes of the parties and enforcing the forum selection clause.” The court reasoned that “the requirement of a ‘strong’ public policy must require more than a state’s understandable desire to provide a judicial haven for businesses domiciled in the state.”
Several post–Atlantic Marine cases have likewise held that home-court statutes do not constitute a sufficiently strong state public policy to invalidate a forum-selection clause. By way of illustration, in Audeamus Inc. v. Baxter Construction Co., Inc., the court applied Atlantic Marine in holding that the agreed-upon forum should control despite the California home-court statute. There, the subcontractor, Audeamus, entered into a subcontract with Baxter Construction that contained a forum-selection clause designating Iowa as the forum to resolve disputes despite the project being located in California. When Audeamus sued Baxter in a California federal court for unpaid services, Baxter moved to transfer the case to the Southern District of Iowa pursuant to the forum-selection clause. In response, Audeamus argued that the California home-court statute “renders the parties’ forum selection clause unenforceable.” The court rejected this argument, finding that “[u]nder both Supreme Court and Ninth Circuit precedent, the Court is not precluded by Section 410.42 from enforcing the forum selection clause.”
Other federal courts have relied on Atlantic Marine to enforce a forum-selection clause that would otherwise violate a home-court statute. In KNL Construction, Inc. v. Killian Construction Co., the general contractor moved to dismiss a lawsuit brought by a subcontractor on the grounds that the parties agreed in their forum-selection clause to litigate any project disputes in Missouri. The subcontractor argued that because the work was performed in Pennsylvania, the Pennsylvania home-court statute required the parties to litigate in Pennsylvania. The court found that “Atlantic Marine speaks directly to the situation in this case by providing that a forum selection clause may be annulled only when compelling public-interest considerations are present” and held that the Pennsylvania home-court statute did not “amount[] to a public-interest factor of overwhelming magnitude” as to prevail over “federal procedural law.” In a similar vein, several cases have found that home-court statutes do not advance a strong state public policy sufficient to invalidate an otherwise-enforceable forum-selection clause, relying in part on the Supreme Court’s pronouncements concerning the presumptive validity of those clauses absent compelling circumstances.
In the recent case of United States ex rel. Hamer Electric, Inc. v. Wu & Associates, Inc.,a district court enforced the parties’ forum-selection clause despite a contrary home-court statute. There, the defendant general contractor executed a subcontract with the plaintiff subcontractor to perform electrical and other work on a federal building located at the Portland International Airport. The general contractor was incorporated in Pennsylvania with its principal place of business in New Jersey, while the subcontractor was incorporated and had its principal place of business in Washington. The subcontractor filed suit against the general contractor and its insurer in federal district in Oregon alleging claims under the Miller Act, breach of contract, breach of the covenant of good faith and fair dealing, and quantum meruit. The defendants moved to transfer the case to the federal district court in Camden, New Jersey, the forum in which the parties agreed in their subcontract to bring any Miller Act claims.
The court granted the motion to transfer and rejected the subcontractor’s argument that the Oregon home-court evidenced a strong public policy requiring the case to be tried in Oregon where the project was located. The court rejected this argument because the subcontractor “is not a local company” and “has provided no other evidence or argument to demonstrate why Oregon would have a strong public policy in favor of protecting out-of-state entities.” The court concluded that “even if ORS § 701.640 evinces a strong public policy, plaintiff is not an entity that the legislature intended to protect via that policy.” The court reached this conclusion even though the Oregon home-court statute did not contain any residency requirement like certain other home-court statues. This case is a good illustration of how federal courts post-Atlantic Marine can be reluctant to allow a home-court statue to overcome a valid contractual forum-selection clause or find it to be unenforceable.
Finally, in another post–Atlantic Marine case, a federal district court did not opine on whether the Louisiana home-court statute reflected a strong public policy, but indirectly enforced the dictates of the home-court statute because the parties’ forum-selection clause itself provided that if the court found that a law other than the chosen law (i.e., Georgia law) applied, and “such law requires that the forum for resolution of such disputes be within that state, all such litigation shall be conducted in the state or federal courts for the location of the Project.” Based on the wording of this clause, the court found that the Louisiana home-court statute applied because the contractor “is domiciled in Louisiana and the contract at issue in this case is a construction contract for a project located in Louisiana.” For that reason, the court granted the owner’s motion to transfer the contractor’s case from a federal court in the Middle District of Louisiana to one in the Eastern District of Louisiana, which is “within th[e] area” where the project was located.
E. Construction Home-Court Statute as a Procedural Rule
Several federal courts, including in cases decided after Atlantic Marine, have declined to apply a home-court statute, in part, by characterizing the statute as procedural in nature rather than substantive. In Covenant Services, Inc. v. Jones-Blair Co., a roofing contractor incorporated in Florida entered into a contract with Jones-Blair Company, through which Jones-Blair would sell its roofing products to Florida property owners and the roofing contractor would install and maintain the roofing systems. The forum-selection clause in the contract identified Dallas County, Texas, as the exclusive venue for claims between the parties. After the roofing contractor filed suit in federal court in Florida, Jones-Blair moved to transfer venue to Texas pursuant to Section 1404(a) based on the forum-selection clause. The roofing contractor argued, in part, that the clause was unenforceable under Florida’s home-court statute.
The district court rejected this argument and enforced the forum-selection clause. The court noted that “when addressing a motion to transfer under section 1404(a) in a case premised upon diversity jurisdiction, such as the case at bar, the enforceability of a forum-selection clause is a matter of federal procedural law.” The court found the Florida home-court statute to be a “procedural state statute [that] … will not render a forum selection clause unenforceable where federal law would lead to a different result.” While the Florida statute “may give voice to a public interest in having local construction controversies decided in-state … by tribunals familiar [with] the substance of [Florida] law,” the court found this interest did not require the case to be tried in Florida, in part, because there was no basis to conclude that “litigating this action in a federal court in Texas would lead to an unjust or even different result than were the case heard in Florida.” As the Covenant court observed, other federal courts have concluded that home-court statutes are procedural in nature and, thus, “the simple existence of such a statute does not render a forum-selection clause unenforceable in federal court.”
State courts have reached different conclusions as to whether construction home-court statutes are procedural or substantive in the context of deciding whether the statutes should be applied retroactively to contracts entered prior to adoption of the statute. Some state courts have found that these statutes are procedural, and as such can be applied retroactively to void a forum-selection or choice of law clause. Other state courts have reached the opposite result, finding that the statutes are substantive, at least for purposes of the retroactivity analysis.
IV. State Court Cases Enforcing Home-Court Statutes
This Part IV summarizes state court cases applying construction home-court statutes in deciding motions to transfer or dismiss litigation. Many of these state decisions involve whether the statute applies to a particular factual situation or entity, like those highlighted above in Part II. Most state courts will typically enforce their own construction home-court statute if they conclude that the language of the statute applies to the factual scenario before them. Unlike many federal courts, in the inbound forum-selection clause scenarios most state courts assume that their statutes promote an important state public policy designed to protect contractors and/or subcontractors from having to litigate outside their home state and the state in which the construction project is located and should generally be enforced absent compelling circumstances. As discussed below, parties typically have a better chance of enforcing a forum-selection clause in federal court where the contractually specified forum conflicts with a home-court statute. However, a basis for federal subject matter jurisdiction (e.g., diversity or federal question) is necessary to open the door to the federal courthouse.
In Michels Corp. v. Rockies Express Pipeline, L.L.C., the Ohio Court of Appeals found that the Ohio construction home-court statute invalidated the parties’ choice of law provision designating Kentucky law as the applicable law and their forum-selection clause providing that any dispute shall be brought in a state or federal court located in Kentucky. The court explained that “our state’s public policy was explicitly identified by the legislature and placed into a statutory prohibition: foreign forum selection and choice of law clauses in construction contracts for improvements to Ohio land are void and unenforceable as against public policy.” In support of its decision, the court cited the statement in Atlantic Marine that while forum-selection clauses are presumptively valid, they “exist[] within the confines of statutory limitations.” The court ultimately determined that Atlantic Marine did not preclude enforcement of the home-court statute.
While state courts generally enforce their own construction home-court statutes, state courts have refused attempts to extend them beyond their intended scope. In Jacobsen Construction Co. v. Teton Builders, the plaintiff general contractor, Jacobsen Construction, based in Utah, filed suit in a Utah state court against its subcontractor, Teton Builders, and its president, relating to a hotel project located in Wyoming. The subcontractor defendants moved to dismiss, arguing the court did not have personal jurisdiction because they were residents of Wyoming and the contract was performed in Wyoming. Jacobsen countered that the court had jurisdiction because the parties agreed in a forum-selection clause that “[a]ll arbitration proceedings and litigation shall take place within Salt Lake County, State of Utah.” The trial court denied defendants’ motion, finding the forum-selection clause was enforceable.
The Supreme Court of Utah affirmed. The court applied Wyoming law as specified by the choice of law clause and concluded that neither the policy of Wyoming nor that of Utah precluded litigation in Utah in compliance with the forum-selection clause. The subcontractor defendants argued that Utah’s construction home-court statute should be read more generally to effectively imply that Wyoming policy would somehow require litigation over a project constructed in Wyoming to be brought in Wyoming even though the Wyoming statute may not technically apply. The court rejected this argument that the Utah home-court statute “codifies a more general Utah public policy declaring that construction disputes should be litigated in the state in which the project is located.” The Utah Supreme Court found that the “primary purpose” of its statute, consistent with its language, “is to prohibit out-of-state contractors, construction managers, or suppliers from haling a Utah resident into a foreign state’s court when the work by the Utah resident is performed within the State of Utah. The statute furthers Utah’s policy interest in providing its residents with a forum in which they can pursue their legal claims.” For this reason, the court determined that “contrary to Teton’s assertions, the policy expressed by [Utah’s construction home-court statute] would be best served by enforcing the forum-selection clause at issue in this case and allowing Jacobsen to litigate its claims in its home state” of Utah.
V. Federal Arbitration Act Preemption of Home-Court Statutes
When parties agree to arbitrate their disputes and the FAA applies, they have greater freedom in choosing the location for their arbitration regardless of whether that location is consistent with a home-court statute. As discussed below, courts have applied the FAA and held that where the parties have agreed to arbitrate a construction dispute in a state other than where the project is located, construction home-court statutes cannot void the parties’ agreement to arbitrate in their chosen forum. Thus, where the FAA applies, the location of the arbitration is generally preserved despite any conflict with a home-court statute, though the agreement remains open to attack through defenses applicable to any contract, like unconscionability, duress, or fraud. Before addressing some of the cases applying the FAA to preempt home-court statutes, the general rules for determining whether the FAA even applies to the arbitration agreement are briefly summarized below.
A. General Scope of the FAA and Protecting the Chosen Forum
Section 2 of the FAA provides 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.” This section of the FAA has been held to preempt any state statute or law purporting to treat the enforceability of arbitration agreements differently than other private agreements. As the Supreme Court explained in Volt Information Sciences, Inc. v. Board of Trustees of the Leland Stanford Junior University, “[t]he FAA contains no express pre-emptive provision, nor does it reflect a congressional intent to occupy the entire field of arbitration,” but a “state law may nonetheless be pre-empted to the extent that it actually conflicts with federal law.” In this regard, the FAA generally preempts substantive state law that disfavors or attempts to limit arbitration.
While the FAA embodies a “liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary,” “a court may not devise novel rules to favor arbitration over litigation.… The federal policy is about treating arbitration contracts like all others, not about fostering arbitration.” The FAA “does not require parties to arbitrate when they have not agreed to do so.” Despite the federal policy favoring arbitration, the preemptive reach of Section 2 of the FAA (i) does not extend to the small universe of contracts that do not affect interstate commerce and (ii) does not necessarily preclude parties from agreeing to have state rather than federal arbitration procedure apply to the arbitration.
As to the first point, by its terms, the FAA (and therefore its preemptive force) only extends to arbitration agreements in a “contract evidencing a transaction involving commerce.” But the Supreme Court has interpreted the phrase “involving commerce” in Section 2 of the FAA to be “broad and … the functional equivalent of ‘affecting’” so that the FAA’s “reach [is] expansive[] [and] coincid[es] with that of the Commerce Clause.” For this reason, litigants seldom dispute whether the FAA applies to complex construction projects, which regularly involve participants like material suppliers from multiple states.
As to the second point, parties can choose to have their arbitration process governed by state procedural law, which generally is not preempted by the FAA. In Volt, the Supreme Court held that where the parties agreed in their construction contract to have their arbitration governed by California law, the FAA did not preclude a state court from staying the arbitration pursuant to Section 1281.1 of the California Code of Civil Procedure, which allows a court to stay an arbitration pending resolution of related litigation under certain circumstances. The Supreme Court rejected the argument that the FAA preempted application of Section 1281.2, finding that Section 1281.2 did not “undermine the goals and policies of the FAA.” The Court explained that “[w]here, as here, the parties have agreed to abide by state rules of arbitration, enforcing those rules according to the terms of the agreement is fully consistent with the goals of the FAA, even if the result is that arbitration is stayed where the Act would otherwise permit it to go forward.”
In view of these concepts, construction industry participants intent on not being confined in choosing their choice of forum by home-court statutes can consider whether to specify arbitration under the FAA in their contracts. As the discussion above and the cases below demonstrate, the FAA generally preempts home-court statutes, so the most effective way to guard against a home-court statute nullifying a forum-selection clause is to specify that all disputes will be arbitrated pursuant to the FAA, even if subject to state arbitral law. In doing so, parties must be willing to swap the courtroom for the arbitration conference room to achieve this end. As a matter of belts and suspenders, a clause or recital can be inserted indicating that the construction project involves interstate commerce, though such a recital will not itself bind a court. Also, specifying in the contract that the arbitration will be governed by state procedural law may enable the parties to adopt procedural aspects of state arbitration laws that differ from those under the FAA, as was the case in Volt.
B. Cases Finding FAA Preempts Home-Court Statute
The case of OPE International LP v. Chet Morrison Contractors exemplifies how courts have found that the FAA preempts a construction home-court statute. There, OPE International (OPE), a Texas limited partnership, subcontracted with Chet Morrison Contractors, a Louisiana corporation, to fabricate a deck structure for OPE to use in extracting hydrocarbons in the Gulf of Mexico off the coast of Louisiana. The parties agreed in their subcontract to arbitrate any disputes in Houston, Texas, under Texas law. Disagreements arose between the parties and OPE filed a demand for arbitration with the Houston office of the AAA. The subcontractor later filed suit in Louisiana state court, seeking a declaration that the arbitration clause and choice of law provisions were invalid under the Louisiana home-court statute. OPE then moved to compel arbitration in federal district court, which the district court granted on the basis that the FAA preempted the home-court statute.
The Fifth Circuit affirmed. Citing federal caselaw holding that the FAA preempted similar state statutes, the court held that the FAA preempted the Louisiana construction home-court statute. The Louisiana statute provided that as to construction contracts for work to be done within Louisiana, any provision that “[r]equires a suit or arbitration proceeding to be brought in a forum or jurisdiction outside of this state” is “void and unenforceable as against public policy.” The court recognized that the FAA prohibited “States from singling out arbitration provisions for suspect status” and required that the courts place arbitration provisions “upon the same footing as other contracts.” The court found “[t]he [Louisiana home-court] statute directly conflicts with § 2 of the FAA because the Louisiana statute conditions the enforceability of arbitration agreements on selection of the Louisiana forum” and that requirement was “not applicable to contracts generally,” but only construction contracts.
Similarly, in Wake County Board of Education v. Dow Roofing Systems, LLC, the court held that the FAA preempted the application of the North Carolina construction home-court statute and dismissed the case so the parties could arbitrate their construction dispute in Massachusetts, as contractually agreed. The court reasoned that the North Carolina home-court statute was “not the kind of generally applicable contract defense that operates to revoke any agreement,” but instead only invalidates “contractual provisions in a narrow subset of agreements: forum selection clauses, choice of law clauses, and arbitration agreements in contracts for the improvement of real property and for the provision of materials for real property located in North Carolina.” Because “[t]he statute, in practice, singles out some but not all arbitration agreements” contrary to the FAA, “the statute cannot serve as a legal basis to revoke the parties’ arbitration agreements.”
Consistent with these cases, a number of courts before Atlantic Marine have held that when parties agree to submit their construction dispute to arbitration in a state other than where the project is located and the FAA applies, home-court construction statutes cannot nullify the parties’ chosen location for the arbitration.
Notably, in declaring home-court statutes preempted by the FAA, only some courts have addressed whether the parties’ contract sufficiently involves interstate commerce to trigger the statute. For instance, in R.A. Bright Construction, Inc. v. Weis Builders, Inc., the court determined that the FAA applied and preempted the Illinois home-court statute because a significant amount of materials for the project were purchased outside of the home state from an out-of-state corporation and one of the contracting parties was also an out-of-state corporation. Likewise, in S & G Electric, Inc. v. Normant Security Group, Inc., the court held that the FAA preempted the Pennsylvania home-court statute and rejected the argument that the FAA did not apply because the project was in Pennsylvania, the defendant contractor was a citizen of Alabama and Maryland, the subcontractor was a Pennsylvania corporation, and the parties corresponded and regularly engaged across state lines. In contrast, in Sachse Construction & Development Corp. v. Affirmed Drywall, Corp., the court disagreed that the parties’ agreement necessarily involved interstate commerce simply because their contract described the contractor as an out-of-state LLC, and remanded the case with instructions to “address the question of interstate commerce … because the trial court did not first determine whether the contract involves interstate commerce so as to make the FAA applicable.”
Other courts, however, have simply held that the FAA preempts home-court statutes without specifying whether the contract involves interstate commerce. In Global Industrial Contractors, LLC v. Red Eagle Pipeline, LLC, the contractor filed suit in a federal district court in Texas against its subcontractor who it had hired to build a concrete box structure on a project in Texas, asserting claims under Texas law for breach of contract, professional negligence, breach of warranty, and fraudulent lien. A few days later, the contractor moved to compel arbitration based on an arbitration clause in the subcontract agreement. The subcontractor responded that arbitration was proper but asserted that the Texas construction home-court statute voided the clause specifying that arbitration occur in Louisiana under Louisiana law. The contractor replied that the FAA applied to preempt the home-court statute.
The court agreed with the contractor, granted the contractor’s motion to compel, and ordered the parties to arbitrate their dispute in Louisiana under Louisiana law. The court discussed the rationale in OPE Internationaland Cleveland Construction and found those cases to be “dispositive.” The court reasoned that applying the Texas home-court statute “would impermissibly condition arbitration on a Texas venue and Texas choice of law—“a requirement not applicable to contracts generally. … That, in turn, would undermine the FAA’s directive to enforce arbitration agreements as written.” The court, however, did not explicitly analyze whether the contract involved interstate commerce, as other courts also have failed to do when ruling that the FAA preempts a construction home-court statute.
Courts have ruled that the FAA preempts not just construction home-court statutes, but franchise home-court statutes where the FAA governs the parties’ agreement to arbitrate. The key lesson is that when a construction contract has an arbitration clause that specifies arbitration in a state other than the state in which the project is located, the FAA, if it applies, may preempt and effectively override a home-court statute. This provides a means by which contracting parties may escape the forum location limitations otherwise imposed by a home-court statute.
For those parties looking to have an enforceable forum-selection clause despite a conflicting home-court statute, specifying resolution in the preferred forum via arbitration rather than litigation in court is more likely to achieve the desired result. If federal court subject matter jurisdiction exists, a defendant can remove a case filed in state court to federal court, which, as discussed above, is likely to transfer the case to the federal court specified in the forum-selection clause. Federal question jurisdiction seldom exists unless a federal contract is involved, or a federal claim is asserted, and diversity jurisdiction is not always assured and cannot always be maintained. Therefore, if a lawsuit that cannot be removed to federal court is instituted in a state court in the same state as the project, it is far more likely that a state court judge will enforce the home-court statute and not dismiss the lawsuit simply because the venue conflicts with the forum-selection clause. As the discussion of the cases indicates, both state and federal courts, at least to this point, more consistently find that the FAA preempts state home-court statutes. For this reason, parties seeking to have an enforceable forum selection that conflicts with a home-court statute might consider arbitration rather than litigation where the FAA applies.
VI. Conclusion
Construction participants typically enjoy freedom of contract like any contracting party, but there are limits, including construction home-court statutes in an increasing number of states. There are, however, options for parties desiring to avoid the application of these statutes and have their disputes resolved in a state other than where the project is located. If a party can establish federal jurisdiction, there is a much greater chance that a federal court will respect the parties’ chosen forum and law than a state court, which will typically view a home-court statute as an important state public policy that controls over the parties’ agreed forum and law. Another option is to agree to arbitrate all disputes concerning the project where the FAA applies, which will likely preempt any conflicting construction home-court statute, allowing the parties to proceed in the state and under the law they desire. To avoid unpleasant surprises, construction participants and their counsel are well advised to consult construction home-court statutes and related caselaw—both at the front end when drafting a construction contract and at the back end when a dispute arises.