Christopher N. Thatch, Kevin O’Brien and Daniel D. McMillan | Jones Day
The Situation: A growing number of states have enacted “home-court” laws of varying scope that require construction disputes to be litigated or arbitrated in the state where the project is built, and under the governing law of that state.
The Result: While these statutes differ in some respects, most of them declare unenforceable any provision in a construction contract that requires litigation or arbitration in a state other than the home state or under another state’s law.
Looking Ahead: Construction industry participants should know where home-court statutes exist and how the rules might impact their construction contracts. Because several federal courts have held that the Federal Arbitration Act (“FAA”) preempts home-court statutes, the most predictable way to guard against a home-court statute nullifying a forum-selection clause is to specify in the contract that the parties’ agreement involves interstate commerce and that all disputes will be arbitrated pursuant to the FAA.
Home-Court Statutes Continue to Spread. Forum-selection and choice-of-law provisions are meant to give contracting parties control over where a potential dispute between them will be litigated, and what law will govern their dispute. In the case of construction contracts, “home-court” statutes limit that control by mandating that disputes arising out of contracts to build in-state projects must be litigated or arbitrated in the home state under that state’s governing law. Most home-court statutes expressly declare that any contract provision requiring litigation or arbitration in another state under another state’s law will be considered void and unenforceable as a matter of public policy. In some states, the home-court statutes also invalidate contract provisions that require that mediation or other settlement processes take place outside the home state. In large part, states have enacted home-court statutes in response to advocacy by the subcontracting community, who maintain that requiring a local subcontractor to litigate or arbitrate a dispute in another state would increase the subcontractor’s costs and make pursuing relief impractical.
As we described eight years ago in our original Commentary, several states have adopted home-court rules for disputes that stem from construction contracts to build in-state projects. There are now 31 states with home-court laws on the books that apply specifically to in-state projects: Arkansas, Arizona, California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Virginia, Wisconsin, and Wyoming. Most of these states’ laws require that litigation occur in the home state and that the laws of the home state govern the parties’ disputes. Four states (Florida, South Carolina, Utah, and Virginia) control the forum for the litigation but not the governing law. One state (Colorado) controls the governing law but not the forum.
The end of this Commentary links to a map that shows which states have enacted home-court rules applicable to construction contracts, as well as a list of the statutes and relevant excerpts from each. Each statute must be carefully considered to determine its scope and applicability.
Exceptions to Enforceability and Applicability. Of course, for every rule there is usually an exception. In our original Commentary, we described several scenarios in which construction-specific, home-court rules may not apply.
For instance, where a construction project is located within a federal enclave, the state’s home-court statute likely will not render a contractual forum-selection clause void and unenforceable. See, e.g., United States ex rel. J-Crew Mgmt. v. Atlantic Marine Constr. Co., 2012 U.S. Dist. LEXIS 182375 (W.D. Tex. Aug. 6, 2012) (Fort Hood, Texas); United States ex rel. Milestone Contractors, L.P. v. Toltest, Inc., 2009 U.S. Dist. LEXIS 44382 (S.D. Ind. May 27, 2009) (Camp Atterbury, Edinburg, Indiana).
Also, some courts have held that the scope of the home-court statute does not extend to certain services or project participants and therefore cannot be enforced. Compare Landform Eng’g Co. v. Am. Prop. Dev., Inc., 2007 U.S. Dist. LEXIS 47183 (D. Minn. June 28, 2007) (holding that Arizona statute was inapplicable to “preliminary engineering services” contract for improvement to real property) and Cashman Equip Corp. v. Kimmins Contracting Corp., 2004 U.S. Dist. LEXIS 44 (D. Mass. Jan. 5, 2004) (“Florida venue provision statute is simply irrelevant, because the Charter selected Massachusetts law to govern the dispute,” while also noting the statute’s inapplicability given that the Charter was not “a contract for improvement to real property.”) with Vita Planning & Landscape Architecture, Inc. v. HKS Architects, Inc., 240 Cal. App. 4th 763 (2015) (extending California home-court statute to dispute between architect and landscape design sub-consultant even though statute applies to “contract between the contractor and subcontractor”).
Similarly, where a lawsuit originates outside the home court but in the state that is identified as the proper forum in the parties’ contract, and that state has jurisdiction over the claims, courts may look past the home-court statute and refuse to apply it. See, e.g., Walbridge Aldinger Co. v. Angelo Iafrate Constr. Co.,2013 Mich. App. LEXIS 1287 (Mich. Ct. App. July 25, 2013) (“[The] mere fact that an Indiana statute voids a choice of law provision under Indiana law does not preclude Michigan courts from properly exercising the jurisdiction provided under Michigan law.”).
Finally, if neither party objects to resolving their dispute pursuant to the forum-selection and choice-of-law clause in the contract, then they will have no reason to fight over whether the home-court rule should determine jurisdiction, and the question may never come up at all.
Unfortunately these exceptions are difficult to plan for and cannot always be controlled.
FAA Preemption of Home-Court Statutes. The FAA, by contrast, gives parties a more predictable option for maintaining control over questions of jurisdiction in the face of home-court statutes applicable to construction disputes. Under Section 2 of the FAA, a “written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2; id. § 1 (with limited exceptions, commerce defined as “interstate” or “foreign” commerce). The Supreme Court has held that this “primary substantive provision” of the FAA “is a congressional declaration of a liberal federal policy favoring arbitration agreements, notwithstanding any state substantive or procedural policies to the contrary.” Moses H. Cone Mem’l Hospital v. Mercury Constr. Corp., 469 U.S. 1, 24 (1983).
Applying the FAA, courts have generally held that, where parties mutually agree to submit their construction dispute to arbitration in a state other than where the project is located, home-court jurisdiction statutes cannot void the parties’ agreement to arbitrate in their chosen location. See, e.g., OPE Int’l LP v. Chet Morrison Contractors, 258 F.3d 443, 447 (5th Cir. 2001) (holding that the FAA preempted a state statute invalidating forum-selection and choice-of-law provisions); United States ex rel. TGK Enterprises, Inc. v. Clayco, Inc., 978 F.Supp.2d 540, 548 (E.D.N.C. 2013) (holding that question of whether Arizona home court statute applied was within the jurisdiction of the out-of-state arbitrator); Millenium 3 Techs. v. ARINC, Inc., 2008 U.S. Dist. LEXIS 111350 (D. Ariz. Oct. 28, 2008) (declining to decide whether Arizona home-court statute applied as a question properly within the jurisdiction of the out-of-state arbitrator); Sachse Constr. & Dev. Corp. v. Affirmed Drywall, Corp., 251 So. 3d 1005, 1011 (Fla. Dist. Ct. App. 2018) (upholding arbitration provision in construction contract requiring arbitration in state outside of Florida on a Florida project based upon the finding that Florida law cannot require procedure inconsistent with the FAA); Cleveland Constr., Inc. v. Lecvo Constr., Inc., 359 S.W.3d 843, 855-56 (Tex. App. 2012) (holding that the FAA preempted state statute invalidating forum-selection and choice-of-law provisions in construction contracts); R.A. Bright Constr., Inc. v. Weis Builders, Inc., 930 N.E.2d 565, 571-72 (Ill. App. Ct. 2010) (holding that, if the FAA applies to the contract at issue, the FAA preempts Illinois’s home-court statute); Tritech Elec., Inc. v. Frank M. Hall & Co., 540 S.E.2d 864, 866 (S.C. Ct. App. 2000) (finding that the FAA preempted state statute invalidating forum-selection clauses in arbitration agreements).
Notably, whether the parties’ contract involves interstate commerce sufficient to trigger application of the FAA is a question that only some of these courts have addressed. For instance, in Bright, the court reasoned that the FAA applied to the parties’ transaction because materials for the project were purchased outside of the home state and because the contractor was an out-of-state corporation. R.A. Bright, 930 N.E.2d at 568-570. Likewise, in Sachse, the court disagreed that the parties’ agreement necessarily involved interstate commerce simply because their contract described the contractor as an out-of-state LLC, and it remanded the case with instructions to “address the question of interstate commerce … because the trial court did not first determine whether the contract involves interstate commerce so as to make the FAA applicable.” Sachse, 251 So. 3d at 1007. Other courts, however, have held that the FAA preempts home-court statutes without analyzing whether the contracts at issue involve interstate commerce. See, e.g., Bell Products, Inc. v. Hospital Bldg. & Equip. Co., No. 16-cv-04515, 2017 WL 282740, at *4-5 (N.D. Cal. Jan. 23, 2017); TGK Enters., 978 F.Supp.2d at 548-49; Allen v. World Inspection Network Int’l, Inc., 911 A.2d 484, 492-93 (N.J. Super. Ct. App. Div. 2006).
Against this backdrop, construction industry participants may find it wise to contemplate whether a home-court statute exists in the state where they plan to conduct their work, and the extent to which that statute might impact the participants’ choice of forum for disputes. If a home-court statute threatens to void the parties’ disputes provision, identifying arbitration as the forum for disputes in the contract and explaining in the contract that the parties’ agreement involves interstate commerce may result in preemption of the home-court statute and enforcement of the parties’ disputes provision. These steps can help contracting parties better prepare for potential construction disputes and regain control over specifying the forum where—and under what governing law—the disputes will be heard.
Three Key Takeaways:
- Parties to construction agreements should know which states have enacted home-court rules for construction disputes, and what those rules say.
- If both contracting parties are comfortable litigating disputes in the home state and under the home state’s laws, the construction agreement should identify that state as the proper forum and refer to the home-court statute in the agreement.
- If, however, the home state and its governing law are not preferrable, the parties should consider choosing arbitration pursuant to the FAA to resolve disputes, instead of litigation. The decision to arbitrate pursuant to the FAA should be clearly described in the parties’ agreement, and a recital explaining that the project involves interstate commerce can be inserted.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email email@example.com.