Forum-selection Clauses and Their Impact on the Construction Industry

Upon completion of the Fort Hood project, AMC withheld final payment to J-Crew Management, claiming J-Crew’s work was defective. J-Crew Management then filed a claim for breach of contract and a federal bond claim under the Miller Act against AMC in federal court in Texas. AMC moved to dismiss the case or, alternatively, transfer it to Norfolk, citing the forum-selection clause. J-Crew Management strategically dismissed its federal Miller Act claim, hoping that by eliminating all federal claims from the suit, the court would have only state-based claims to consider and would therefore apply Texas law and disregard the forum-selection clause.

Ultimately, however, the court held that even though the project was located in Texas, federal law applied to the case because it was a federal project. The court therefore enforced the forum-selection clause and ruled in AMC’s favor, holding that the case would have to be heard in Virginia.

IMPLICATIONS OF THE AMC RULING

Federal courts must now dismiss or transfer suits brought by one contractor against another if the parties previously signed a contract limiting litigation to a particular site that is different from where the suit was brought. The decision is limited to cases in federal court. However, it has the potential to impact any construction cases that could be brought in federal court. Even if a contractor sues in state court, if federal jurisdiction exists, a defendant can remove cases brought in state court to federal court, where the AMC ruling would control. Federal jurisdiction exists when a federal law, such as the federal bond statute, is at issue or when the parties are residents of two different states and the amount in controversy is $75,000 or more. (Miller Act claims are generally filed in the state where a project is located; the ruling did not specify whether a forum-selection clause overrides this rule.)

Additionally, the AMC decision suggests this could happen if a case involves a federal contract. Therefore, any party to a contract with a forum-selection clause should assume the clause will one day control the site of potential litigation, regardless of state law. In these cases, the party fighting against enforcement of the forum-selection clause bears the burden
of proving public interests override the other party’s choice of forum.

IMPLICATIONS FOR CONTRACTORS

Forum-selection clauses typically favor contractors who have a national presence. The AMC decision will likely make it more difficult for subcontractors to succeed as plaintiffs in litigation involving general contractors with forum-selection clauses. Locating counsel and prosecuting a suit outside of one’s home state—and in a different state from where the project site, witnesses and evidence are located—is more time-consuming and costly than filing suit locally. Therefore, it seems likely the number of lawsuits against contractors who work in multiple states and include these clauses in their contracts will decrease.

In light of the AMC decision, subcontractors should educate themselves about forum-selection clauses and carefully review contracts before signing them. The risk of costly litigation will always be present in the construction industry, but subcontractors can position themselves for success by knowing how these kinds of laws affect and benefit their business. When presented with a forum-selection clause that sets potential litigation in a state other than the state where a contractor is located or where the project is located, contractors should attempt to strike them out or negotiate with the opposing party to make such provisions more equitable for both sides. It is always a good idea for contractors to have their legal counsel review contracts before signing them.