Guest Editorial by E. Colette Nelson, Chief Advocacy Officer, American Subcontractors Association, Inc.
The American Subcontractors Association, Inc. (ASA) will file a brief before the U.S. Supreme Court in August concerning a case that will determine whether construction disputes should be resolved in a local forum or, instead, subcontractors can be forced to take their claims to a far off jurisdiction. North Carolina is one of 22 states that have enacted laws that void forum-selection clauses in construction contracts that attempt to require litigation outside the state where the work was performed.
In the construction industry, out-of-state general contractors commonly require their subcontractors to sign forum-selection and choice-of-law clauses, arguing that it’s more convenient and less expensive for them to resolve disputes in a 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. Thus, 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.
In Atlantic Marine Constr. Co. v. J-Crew Management, Inc., the U.S. Supreme 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 venue is proper. 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.
North Carolina law voids forum-selection clauses in contracts, subcontracts or purchase orders with the purpose of improving real property that require adjudication outside of North Carolina. ASA of the Carolinas pursued this venue law in order to assure that North Carolina subcontractors can take full advantage of their rights and remedies under the state’s strong subcontractor protection laws.
This case arises from a construction project to build a child care facility at a military base in Fort Hood, Texas. The general contractor, Atlantic Marine Construction Company, hired Subcontractor J-Crew Management, Inc. to work on the project. The subcontract contained a forum-selection clause requiring that all disputes “shall 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.”
Subcontractor J-Crew Management 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 the subcontract work was performed in Texas. When the project was over, almost $160,000 remained unpaid to J-Crew Management even though it had timely completed its work. Ignoring the forum-selection clause, J-Crew Management sued in Texas, in the federal district where the project was located.
GC Atlantic Marine Construction 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 Management 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.” That is, J-Crew asserted that the trial court had to consider 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.”
In this case, the project, the subcontractor, the subcontractor’s office, project records, personnel and all 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. In addition to the expense and inconvenience of it, 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. Moreover, because project records were in Texas, there were cost and other 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 subcontractor J-Crew Management and refused to dismiss the case or transfer venue to Virginia. GC Atlantic Marine called on the Fifth Circuit Court of Appeals to enforce the forum-selection clause, but the Fifth Circuit agreed with the trial court’s reasoning supporting venue in Texas. Atlantic Marine then appealed to the Supreme Court, which has granted review. ASA will file its “friend of the court” brief with the U.S. Supreme Court on August 23, 2013. Read More.