Article Date: 08/02/2013


What Impact Will the Supreme Court’s Decision in the Big Forum-Selection-Clause Case Have on the U.S. Construction Industry?


By Steve Rizer

 

Just how much of an impact will the U.S. Supreme Court’s decision in Atlantic Marine Construction Company, Inc. (AMC) v. J-Crew Management, Inc. (No. 12-929) -- a case addressing the thorny issue of whether a construction dispute can be resolved in a local forum even if specified otherwise in a contract -- have on the nation’s construction industry?

 

In search of an answer, ConstructionPro Week (CPW) asked American Subcontractors Association Inc. (ASA) Chief Advocacy Officer E. Colette Nelson, “What statistics, if any, can you provide regarding the frequency with which such a clause is included in a contractor-subcontractor contract? About how many subcontractors will take their claims to remote jurisdictions in a given year, and, on average, about how much money can they lose as a result of such a clause being enforced? In a nutshell, what information can you share that quantifies the overall and/or typical impact of such clauses?”

 

In response to these questions, Nelson reported that “about 50 percent of the subcontracts that I see have forum-selection clauses. Anecdotally, that would hold true when the GC is domiciled outside of the state where the project is located. I don’t think your question is really answerable: As with any claim, an individual subcontractor would have to evaluate a claim for the potential loss [versus] the cost of pursuing the claim (e.g., attorney fees, management time, etc.). The extra cost of pursuing a claim in a forum at a distant location could be significant and could quickly overtake the return on a legitimate claim. Indeed, see this case. Note that both AIA [the American Institute of Architects] and ConsensusDocs documents require that dispute resolution take place in the location of the project.”

 

Nelson’s organization later this month will file an amicus curiae brief in the case, oral arguments for which are scheduled for Oct. 9. A decision is expected between then and the end of June.

 

In the case, the country’s highest court will determine whether federal courts are required to enforce contractual forum-selection clauses or whether judges have the right to consider other factors, such as the overall convenience of the parties and witnesses and the interests of justice when deciding if the venue is proper.

 

In the construction industry, out-of-state general contractors commonly require their subcontractors to sign forum-selection and choice-of-law clauses because it can be more convenient and less expensive for them to resolve disputes in the jurisdiction of their choice.

 

“The general contractor’s expediency comes at the detriment of its subcontractors, whose places of business, records, and personnel generally are close to the location of the construction project,” Nelson asserted. “Forum-selection clauses can chill a subcontractor’s ability to recover claims by imposing significant and unnecessary impediments and financial costs to the recovery of amounts due.”

 

ASA is concerned that if the Supreme Court were to require strict enforcement of such clauses, it would undermine subcontractors’ ability to point to state law voiding or making voidable forum-selection clauses in construction contracts that mandate litigation or arbitration in a state other than the state where the project is located.

 

“Twenty-two states have enacted laws that void, or make voidable, forum-selection clauses in construction contracts that attempt to require litigation outside the state where the work was performed,” Nelson noted.

 

In an email interview with CPW, Christopher Solop, chairperson of Biggs, Ingram, Solop & Carlson PLLC’s Construction Litigation and Government Contracts sections, and Lynn Thompson, a partner in the firm, made this joint prediction about the decision’s likely impact: “Because many prime contractors do business in their ‘home’ state, the impact of this decision will likely be felt only among primes who perform work in multiple states. As to those primes, to the extent they continue to use arbitration or forum-selection clauses requiring jurisdiction exclusively in state court, any significant impact on their operations seems unlikely. Further, forum-selection clauses have been in construction contracts for years. We therefore believe the construction industry expects forum-selection clauses not to be enforced in all cases and has already accounted for any ‘cost impact’ associated with that.”

 

The Case

 

In the underlying case, the general contractor, AMC, hired J-Crew as a subcontractor to work on a construction project to build a child-care facility at a military base in Fort Hood, Texas. The subcontract contained a forum-selection clause requiring that all disputes “be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk division.”

 

J-Crew subcontracted much of its work to predominantly local subcontractors and suppliers, almost all of which were located in the Western District of Texas in or around Killeen, Texas, and near the project. All of the subcontract work was performed in Texas. When the project was completed, about $160,000 remained unpaid to J-Crew even though the work was claimed to have been completed in a timely manner.

 

J-Crew ignored the forum-selection clause and sued in Texas, in the federal district where the project was located. AMC moved to dismiss or transfer the case to federal court in the Eastern District of Virginia, relying on the forum-selection clause in the subcontract. J-Crew argued that the U.S. Code provides that if a lawsuit is filed in a proper venue, the court may transfer it to another venue “for the convenience of the parties and witnesses, in the interest of justice.” J-Crew asserted that the trial court had to consider the interests of justice and the convenience of the parties and witnesses when resolving disputes over venue, and cited case law that courts must weigh in the decision to transfer “according to the individualized, case-by-case consideration for convenience and fairness.”

 

The project, the subcontractor, the subcontractor’s office, project records, personnel, and all of the second-tier subcontractors and non-party witnesses who performed the work were located in Texas. J-Crew argued that convenience and fairness supported litigation in Texas instead of Virginia and that there were at least seven non-party witnesses who were beyond the subpoena power of the Virginia court and could not be compelled to testify in Virginia. J-Crew also reported that because project records were in Texas, there were costs and efficiencies from having discovery in the state where the project and principal witnesses were located.

 

Finally, J-Crew argued that litigating the dispute in the Western District of Texas was important from a policy standpoint, citing Texas law making voidable any forum-selection clause in a construction contract that provided for venue outside of the state.

 

The trial court agreed with J-Crew and refused to dismiss the case or transfer venue to Virginia. AMC called on the 5th Circuit Court of Appeals to enforce the forum-selection clause, but the appeals court agreed with the trial court’s reasoning. AMC then appealed to the U.S. Supreme Court, which granted review.

 

The ConstructionPro Network member version of this article: outlines the stance that AMC has taken in this matter; reports additional comments that Nelson, Solop, and Thompson made to CPW; and provides links to eight key documents filed in the case. To sign up for a membership, click here.

 



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