Construction Law Update: Be Informed About Contractual Forum Selection Clauses

While typically tucked away at the end of construction contracts, forum selection provisions and choice of law provisions can control significant aspects of the parties’ respective responsibilities and liabilities on a construction project.  Some of the issues that can be affected by these provisions are: payment, indemnification, limitation of liability, extra-contractual and third-party liability, prescription/peremption (statutes of limitation and repose outside of Louisiana) and dispute resolution. Thus, such provisions are important considerations in construction contracts.

The aftermath of Hurricane Katrina presented enticing opportunities to contractors and subcontractors from other states to come to New Orleans, and surrounding areas, to perform work. While forum selection and choice of law provisions are always considered important in construction contracts, they become even more prominent and significant when out-of-state contractors and subcontractors are involved. When specifically included in the construction contract, the parties should expect that these provisions will be enforceable and will govern any subsequent disputes among the parties encompassed in the provisions.

The standard language in the AIA A201, General Conditions of the Contract for Construction (“AIA General Conditions”) provides that the “law of the place where the project is located, excluding that jurisdiction’s choice of law rules” will govern the parties’ contract disputes.[1]  The AIA General Conditions standard language also states that mediations and arbitrations under the contract shall be held “in the place where the Project is located, unless another location is mutually agreed upon.”[2]  While this is the standard language in the AIA General Conditions, more often than not these requirements are changed in supplemental conditions or, electronically, in the General Conditions themselves – – particularly when disputes are to be resolved by litigation. A choice of law provision is typically straight forward.  But, a forum selection provision can be a bit trickier.  This was evidenced in a recent case decided in the United States District Court, Eastern District of Louisiana (“Eastern District”): Citadel Recovery Servs., LLC v. T.J. Sutton Enterprises, LLC, No. CV 19-12271, 2019 WL 5725055 (E.D. La. Nov. 5, 2019).

In Citadel, the plaintiff was a subcontractor performing construction recovery work on certain homes in the US Virgin Islands following catastrophic damages from Hurricanes Irma and Maria. The work was part of the Emergency Home Repair Virgins Islands (“EHRVI”) program, a recovery program funded by FEMA. The plaintiff subcontracted some of its recovery work to the defendant. The construction contract between the plaintiff and the defendant (“Subcontract”) allegedly included a “pay when paid” provision and contractual prohibitions against the defendant filing liens.  The Subcontract also included the following forum selection clause:

This agreement shall be governed by the law of the State of Louisiana. Subcontractor [defendant] submits to the venue and jurisdiction of the Eastern District Court of Louisiana.

(“Forum Selection Clause”).

After defendant allegedly provided labor, materials, and equipment valued at $159,165.95, but was not paid, defendant filed a series of construction liens against multiple repaired residential buildings in the Virgin Islands.  Defendant further allegedly “threatened” to take legal action in the Virgin Islands to foreclose on the liens.  Plaintiff strategically issued the preemptive strike, filing suit in the Eastern District.

Plaintiff’s complaint included three counts:  (I) violation of  the Virgin Islands’s lien law and the Subcontract; (II) a declaratory judgment action regarding the payment terms under the Subcontract; and, (III) an injunction to prevent the defendant from: “(1) initiating any legal action to foreclose on the construction liens, (2) bringing suit against the Bonds in place, and (3) placing additional liens on EHRVI properties for which [Plaintiff] is responsible . ..” Defendant filed a “Motion to Dismiss for Lack of Personal Jurisdiction in Improper Venue” contending that it was not subject to personal jurisdiction in Louisiana and that the Eastern District was an improper venue. The Forum Selection Clause was at the heart of the Court’s analysis.

After all briefs were filed, the court considered defendant’s motion by citing Fifth Circuit precedent that a contractual forum selection provision is prima facie valid and enforceable unless the opposing party shows that enforcement would be unreasonable. With that presumption in the forefront, the court next conducted a three-step analysis determining first, whether the Forum Selection Clause was mandatory or permissive; second, whether the Forum Selection Clause is valid and enforceable; and, finally, whether the Forum Selection Clause applied to the plaintiff’s counts in the complaint.

Is the Forum Selection Clause Permissive or Mandatory?

The court distinguished between mandatory and permissive forum selection clauses. A mandatory forum selection clause makes clear the parties’ intent that the specified jurisdiction is exclusive. In other words, the language of the forum selection clause demonstrated the parties intent to only apply the law of and bring litigation in the one specified state – – nowhere else.[3]  On the other hand, a permissive forum selection clause simply states that the law and courts of a certain jurisdiction shall be applied. Nevertheless, even if the language in a forum selection clause is permissive, it is considered a contractual waiver of personal jurisdiction and venue objections if suit is filed in the specified jurisdiction. Looking to the particular language of the Forum Selection Clause — namely, “Subcontractor submits to the venue and jurisdiction of the Eastern District Court of Louisiana” — the court found that the clause was permissive and that the defendant had waived personal jurisdiction and venue objections to the plaintiff’s suit in the Eastern District. The chosen jurisdiction and venue were held to be appropriate.

Is the Forum Selection Clause Valid and Enforceable?

Under this prong of its analysis, the court again started with the presumption that a forum selection clause is prima facie valid and enforceable unless the opposing party shows that enforcement would be unreasonable.  The court emphasized that a party resisting enforcement on “unreasonable” grounds bears a heavy burden of proof. “Unreasonableness” can be demonstrated by proof that the clause: (1) was the product of fraud or overreaching; (2) will deprive the party resisting the enforcement of its “day in court” because of grave inconvenience or unfairness; (3) will deprive the party of a remedy because of the fundamental unfairness of the chosen law; and, (4) would contravene a strong public policy of the forum state. Finding none of these elements demonstrated, and citing to the required heavy burden of proof, the court found that the Forum Selection Clause was valid and enforceable.

 

Does The Forum Selection Clause Apply To The Counts In The Complaint?

Considering its final point, the court again turned to the language of the Forum Selection Clause. Absent limiting language, a forum selection clause will be construed broadly.  Where the language of the clause does not restrict its application to contract claims, as opposed to tort claims, or apply other specific limitations, the court will consider that the clause applies to both. That’s exactly what the court did here. Focusing on the Forum Selection Clause language “[t]his Agreement” and the broad agreement to submit to the venue and jurisdiction of the Eastern District, the court found that each of the counts of the complaint emanated from the terms (primarily payment) of the Subcontract (the “Agreement” as used in the Forum Selection Clause) and would require an analysis of the Subcontract language. Thus, the court found that the Forum Selection Clause applied to the complaint’s counts and that the Eastern District was the appropriate jurisdiction and venue for the plaintiff’s action.

While the Citadel matter applied federal law, similar presumptions concerning, and analysis of, a forum selection clause may be found in Louisiana state courts.[4]  Be cautioned, however, that Louisiana law presents at least one obstacle to enforcing forum selection clauses that was not present in Citadel: when at least one party to a construction contract is domiciled in Louisiana, and the construction project is located in Louisiana, La. Rev. Stat. 9:2779 requires that Louisiana law apply and “any agreements requiring disputes arising thereunder to be resolved in a forum outside of this state … are inequitable and against the public policy of this state.” Such provisions are generally null and void – – but may stand a fighting chance in the United States District Court for the Western District of Louisiana.[5]

Conclusion

Forum selection provisions in a construction contract can have severe implications as to multiple aspects of a construction dispute.  While generally relegated to the last provisions in a construction contract, they should not be relegated to the last considerations of a review or drafting of a construction contract.  Clear forum selection language specifying whether jurisdiction and venue in a certain jurisdiction is mandatory or permissive or broad or restrictive can have resounding procedural and substantive implications and should not be considered lightly.

[1]   See ¶ 13.1 of AIA Document A201™-2017 and AIA Document A201™-2007, General Conditions of the Contract for Construction.

[2]   See ¶ 15.3.4 and ¶15.4.1 of AIA Document A201™-2017, General Conditions of the Contract for Construction concerning mediation and arbitration respectively, and ¶ 15.3.3 of AIA Document A201™-2007, General Conditions of the Contract for Construction concerning mediation. However, AIA Document A201™-2007 does not provide any venue provision concerning arbitration.

[3]   Examples of mandatory forum selection language cited by the court in other cases included variations of such terms as “only,” “exclusive,” or “sole.”

[4]   See Town of Homer v. United Healthcare of Louisiana, Inc., 41,512 (La. App. 2 Cir. 1/31/07), 948 So. 2d 1163, 1167 (“Such [forum selection] clauses are prima facie valid and should be enforced unless the resisting party clearly proves that enforcement would be unreasonable and unjust, or that the clause arises from fraud or overreaching or that enforcement would contravene a strong public policy of the forum where the suit is brought. McKoin Starter and Generator, Inc., v. Snap–On Credit Corp., 37,210 (La. App. 2d Cir. 6/25/03), 850 So.2d 924, writ denied, 03–2605 (La. 12/12/03), 860 So.2d 1156). See also Pitts, Inc. v. Ark–La Resources, L.P., 30,897 (La. App. 2d Cir. 8/19/98), 717 So. 2d 268, citing Digital Enterprises, Inc. v. Arch Telecom, Inc., 95–30 (La. App. 5th Cir. 6/28/95), 658 So. 2d 20 (one seeking to set aside a forum selection provision bears a heavy burden of proof); and, Town of Homer v. United Healthcare of Louisiana, Inc., 948 So. 2d at 1167 (initial determinations that must be made concerning forum selection clauses are whether the forum selection clause is mandatory or permissive and whether it is valid and enforceable).

[5]   360 Int’l, Inc. v. GoMex Offshore, Ltd., No. 6:19-CV-00325, 2019 WL 2852947, at *4 (W. D. La. July 1, 2019) (“one court in this district rejected the applicability of Article 2779, seeing ‘no reason why it should supersede settled law in this circuit for determining validity/enforceability of forum selection clauses.’” citing Chaney Trucking & Development, Inc. v. Asset Group, Inc., No. 2:16-cv-782, 2016 WL 6608390, at *3 (W. D. La. Nov. 8, 2016)).