February 22, 2021 Articles

State Laws May Invalidate Forum Selection Clauses in Construction Contracts

Even if a construction contract contains a forum selection clause, parties to the contract must give careful consideration to the laws of the state where the project is performed.

By Whitney Judson

Many construction contracts include forum selection clauses, which represent the parties’ expectations and intentions to resolve construction contract disputes within a specific state or jurisdiction. The ability to designate a location for dispute resolution on the front end of a project can give the parties a greater sense of comfort and control in the performance of a construction contract. Generally, forum selection clauses are enforceable and respected by courts. The Supreme Court of the United States, in Atlantic Marine Construction Co., Inc. v. U.S. District Court for Western District of Texas, held that “when the parties’ contract contains a valid forum-selection clause, that clause represents their agreement as to the most proper forum . . . and should be given controlling weight in all but the most exceptional cases.” As a result, federal courts are required to enforce valid forum selection clauses in construction contracts. State courts, however, may not be bound by federal court holdings. State legislatures may therefore pose challenges to the enforcement of forum selection clauses in construction contracts through the enactment of statutes that may invalidate these contractual provisions.

Even if a construction contract contains a forum selection clause, parties to the contract must give careful consideration to the laws of the state where the project is performed. Several states have enacted statutes that overwrite these contractual provisions when the contract applies to projects performed within their jurisdiction. These statutes invalidate forum selection clauses that require dispute resolution in another state or provisions that make another state’s law apply to the resolution of a dispute. (Examples of states that have such statutes are Pennsylvania, Ohio, and Montana.) These state statutes specify that construction contract provisions requiring dispute resolution in a state other than the one where the project is performed are void and unenforceable. For example, a court in Ohio held that although a forum selection clause may be clear and unambiguous, it is unenforceable where it is against public policy, and a state may articulate its public policies through state law.

In Michels Corp. v. Rockies Express Pipeline, L.L.C., for example, Ohio’s law was relied on to allow a lawsuit to proceed in Ohio, while the construction contract required suit to be brought in Kansas. The appellant in Michels Corp. challenged the decision of an Ohio trial court that dismissed its complaint against the appellee pursuant to Kansas choice of law and forum selection clauses in the parties’ contract for the construction of an interstate gas pipeline. Furthermore, the venue provision stated that each party

irrevocably waives, to the fullest extent permitted by Applicable Law and the laws of the State of Kansas, any claim or any objection it may now or hereafter have, that venue or personal jurisdiction is not proper with respect to any such legal action, suit, or proceeding brought in such a court in Johnson County, Kansas, including any claim that such legal action, suit, or proceeding brought in such court has been brought in an inconvenient forum.

Although the contract clearly required application of Kansas law in a Kansas venue, the Ohio Court of Appeals held that section 4113.62(D) of the Ohio Revised Code, in plain and clear language, provides that a contract for the improvement of real estate in Ohio that requires any litigation, arbitration, or other dispute resolution process to be held in another state is void and unenforceable as against Ohio state public policy. “The words used clearly show the legislature’s intent to make a construction contract’s forum selection and choice of law clauses void and unenforceable as against public policy where the contract is for an improvement to land in Ohio, period.” The court also recognized that the state of Ohio has a material interest in construction projects and improvements within the jurisdictional boundaries of its borders. The ruling of the Ohio trial court dismissing the lawsuit pursuant to the forum selection clause was therefore reversed and the case was remanded to the Ohio trial court for further proceedings.

Other states have enacted statutes related to all construction projects within the state’s jurisdiction that invalidate forum selection clauses designating an alternative forum where one party to the dispute is a resident of that state. Florida’s statute reads, “Any venue provision in a contract for improvement to real property which requires legal action involving a resident contractor, subcontractor, sub-subcontractor, or materialman, . . . to be brought outside this state is void as a matter of public policy.” At least one Florida court has even applied this statute retrospectively to invalidate a forum selection clause.

In  Kerr Construction, Inc. v. Peters Contracting, Inc., the court held that a subcontract’s forum selection clause designating Kentucky as the subcontract’s dispute resolution forum was unenforceable and that the proper forum was in Orange County, Florida, even though the statute was enacted two years after the subcontract was executed. “Having concluded that section 47.025 is procedural and that procedural statutes apply retroactively, we further conclude that retroactive application of the statute in this case is appropriate. Therefore, the forum selection clause in the subcontract is void, and venue must be determined in accordance with section 47.011, Florida Statutes.” Similar statutes requiring state residency of one of the parties have been enacted in Louisiana, Virginia, and California.

State statutes, such as the ones described herein, may, in some instances, position a party to bring its claims in the state where the project was performed, rather than in the jurisdiction demanded by the contract’s forum selection clause. While an owner and general contractor may be fine with such a forum selection clause, if the general contractor has flowed down a similar forum selection clause in its subcontracts, the general contractor must consider whether it may be stuck litigating piecemeal and in multiple forums.

Whitney Judson is with McGrew, Miller, Bomar & Bageley, Atlanta, Georgia.

Entity:
Topic:

Copyright © 2021, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).