When is Forum Selection in a Construction Contract Enforceable?

Christopher G. Hill | Construction Law Musings

If there is one mantra that is repeated often here at Construction Law Musings, it is that your construction contract will be strictly construed and Virginia Courts will enforce the provisions as written.  This rule includes forum selection clauses.  For those that aren’t attorneys, this means that absent a statute to the contrary, the parties can pick the location of any litigation or arbitration by contract.  However, the timing of signing that contract makes a difference as a relatively recent Eastern District of Virginia case points out.

Marathon Res. Mgmt Grp v. C. Cornell, Inc. examined what happens when work is performed by one party to the contract prior to the execution of the written contract that contains the forum selection provision.  In this case, the defendant C. Cornell, Inc. obtained a default judgment in Texas for non-payment by Marathon for painting and cleaning of rooms at Texas A & M University for work invoiced on August 22, 2017, and September 11, 2017.  Upon receipt of the garnishment from the Texas Court, Marathon sued C. Cornell in Virginia state court and the defendant removed the case to federal court.  Marathon alleged two separate breaches of contract, the first was that C. Cornell violated the forum selection clause of a Master Services Agreement (“MSA”) executed on September 23, 2017.  The second was a violation of another clause of the MSA that barred direct communication with any of Marathon’s customers.  The second breach was alleged to be by virtue of the garnishment summons to one of Marathon’s customers.

In response, C. Cornell filed a motion to dismiss the Complaint and argued that the MSA was not applicable to the invoices and work performed prior to its execution and that therefore the forum selection clause did not apply.  The Court agreed, concluding that the MSA was only applicable to future work and not the work performed prior to its execution.  The Court summarized its reasoning as follows:

The plain language of the MSA unambiguously demonstrates that the Parties did not intend its terms to cover past work or contractual dealings between them. Marathon relies heavily on the language of the MSA to support its claim that Certa Pro breached the MSA’s forum selection clause when it filed the Texas Lawsuit to collect on the Painting and Cleaning Contracts. But a plain reading of the contractual terms shows that the MSA applies only to future work. The Court rests this finding on three observations. First, the MSA’s repeated use of the word “shall” (and not the past tense “shall have”) demonstrates the Parties’ intention for the MSA to apply to future work. Second, the Court observes that the MSA, although it explicitly incorporated other outside documents, did not incorporate the then extant Painting and Cleaning Contracts, leading to the reasonable inference that the MSA did not supersede or alter the Painting and Cleaning Contracts. Third, the wording and structure of the insurance provision in the MSA also evinces the Parties’ intention that the MSA apply to future, not past, work.

Because the terms of the MSA did not apply to past work, neither the non-communication nor the forum selection clause applied to the work underlying the Texas judgment so the Court dismissed the Complaint.

This is yet another case that shows that timing can be key.  The Court showed it was ready, willing, and able to enforce these provisions had the language of the MSA been different.  However, it could not apply the advantageous clauses retroactively because other provisions of the MSA precluded such an application.  The Court did what Virginia courts always do and enforced the terms of the contract as written.  So, in this case, the answer to the title of this post is after the applicable written contract is executed.

Cases such as this one that turn on small variations in language emphasize the need to obtain the counsel of an experienced construction attorney when drafting your construction contracts and determining what actions to take once those contracts are in place.  As always I both encourage you to read the case for yourself and let me know if you have other insights from it in the comments.

How Forum-Selection and Choice-of-Law Provisions in Insurance Policies Can Affect Coverage

Jeffrey Mikoni and Matthew Putorti | Policyholder Pulse

Location matters. Some states are more protective of policyholder or consumer interests than others. And so, where the case is ultimately litigated, and what law applies, can have profound implications for a policyholder’s recovery.

In an effort to secure the application of a body of jurisprudence they perceive to be more favorable to them, insurance companies will sometimes include provisions in policies mandating either that cases arising under the policy be filed in a certain court or conducted under a specified state’s laws. We have previously noted the limits of such choice-of-law provisions, especially when the selected state’s laws conflict with the fundamental public policy of the state in which a coverage suit is filed. Now, a recent decision from a New York State court illuminates the limits of forum-selection clauses in an insurance policy.

The case is North American Elite Insurance Company v. Space Needle, LLC, currently playing out before both a state court in New York and a federal court in Washington State. At issue is a $160 million insurance policy that the company that owns the Space Needle, Seattle’s notable landmark, purchased from North American Elite Insurance Company. Even though the Space Needle policy was issued in Washington to a Washington company to insure property in Washington—the Space Needle itself—North American Elite included a Governing Law and Jurisdiction provision that purported to submit the parties “to the exclusive jurisdiction of the Courts of the State of New York,” while waiving “all right to challenge or otherwise limit such jurisdiction.” It also provided that the laws of the State of New York would “govern the construction and interpretation” of the policy. North American Elite did this despite a Washington statute that prohibits the insertion of forum-selection and choice-of-law provisions into policies issued in Washington.

Like so many other businesses in the past year, Space Needle sustained losses related to the pandemic, leading it to submit to North American Elite a business interruption claim for the “millions of dollars in lost revenues [it sustained] in connection with the Covid-19 pandemic and government orders issued after its outbreak.”

North American Elite reserved its rights under the policy and brought a declaratory judgment action in New York state court, asking the court to declare that the policy did not provide coverage. A week later, Space Needle sued North American Elite in the United States District Court for the Western District of Washington and argued that Washington law applied to the dispute and that it could litigate in Washington, notwithstanding the Governing Law and Jurisdiction provision.

North American Elite then filed a motion for preliminary injunction in the New York case, seeking to enjoin Space Needle from continuing its lawsuit in Washington. A New York judge denied that motion and ruled in favor of Space Needle, refusing to block the federal suit in Washington.

Recognizing that insurance is an industry regulated by the states, the New York court took note of a Washington statute, dating back to 1947, that prohibits any insurance policy issued in the state from “requiring it be construed according to the laws of any other state” or “depriving the courts of [Washington] of the jurisdiction of action against the insurer.” By seeking permission to sell insurance in Washington, North American Elite agreed to abide by Washington law, including this statute prohibiting forum-selection clauses in policies and depriving Washington courts of jurisdiction. The forum-selection clause in the Space Needle policy, therefore, violated Washington law, and the New York court declined to enjoin Space Needle from continuing its Washington lawsuit.

The court reached this conclusion even though it found that New York is a freedom-of-contract state, forum-selection clauses are prima facie valid, the parties are “sophisticated,” and the policy language is unambiguous. But none of these considerations permitted North American Elite to sidestep the requirements of Washington state law, applicable to the policy at the time it was issued in Washington.

This decision may have major implications for Space Needle. As North American Elite argued in the New York action, if the case proceeds in Washington, Space Needle can claim that it is entitled to punitive and bad faith damages—damages that might be more difficult to obtain in New York. But the decision also has important lessons for policyholders everywhere:

  • First, it is important to understand the restrictions and modifications state law may impose upon the terms of an insurance policy.
  • Second, forum-selection clauses might not be valid, and filing first in the preferred forum (so long as there is a reasonable basis to do so) may offer substantive and procedural benefits.
  • Finally, location matters—both in real estate and in insurance litigation.

Knowledgeable policyholder counsel can offer guidance in each of these areas and can help evaluate current policies and determine how to best protect future interests, including how to best leverage the critical factor of location, location, location.

Is This a Forum Selection Clause, or Not?

Stanley A. Martin | Commonsense Construction Law | November 6, 2019

Forum selection clauses have become commonplace in construction contracts. Most general contractors take steps to ensure that they can bring their subs into the same forum as the owner, should there be an owner dispute that involves the sub’s work. One contractor has just been reminded that its subcontract has a joinder clause, which is not the same as a forum selection clause.

A forum selection clause will read something like this:

Contractor and Subcontractor agree that all disputes arising under this Subcontract shall be decided by litigation brought in the Suffolk Superior Court in Massachusetts or in the federal District Court serving Suffolk County.

Forum selection clauses are routinely enforced, except when a court finds that one party has a compelling interest (usually based on a particular state law) that can only be addressed in another forum.

A federal court in Pennsylvania has just reminded a general contractor, though, that it does not have a forum selection clause in its subcontract. The clause at issue read, in part:

Subcontractor agrees . . . Contractor shall have the exclusive right to join Subcontractor in any dispute resolution procedure (including without limitation ADR procedures, binding arbitration or other judicial or non-judicial proceeding) in which Contractor may be involved arising out of or in connection with the Project.

When the sub filed suit against the general, and the general was later sued by the project owner, the general sought to dismiss the sub’s lawsuit and compel the sub to join in the owner-filed lawsuit. But the court denied the general’s motion. It held that the second joinder clause noted above “does not ‘mandate litigation in any particular forum’ nor dies it ‘restrict [the sub’s] right to bring its own claims’ in any jurisdiction.”

The subcontract clause was not a forum selection clause. The contractor may be able to bring the sub into the owner lawsuit, but will not be able to halt, or shift, the sub’s lawsuit. So the general will be faced with fighting on two fronts, with potential inconsistent outcomes. The case is Madison Constr. Co. v. Turner Constr. Co., 2019 U.S. Dist. LEXIS 191602 (Nov. 5, 2019) (subscription required).

Is Your Forum Selection Clause Mandatory or Permissive: How to Know the Difference and Why you Should

Cheryl D. Shoun | Nexsen Pruet | May 8, 2018

Drafting an agreement that includes a forum selection clause? Preparing to litigate an agreement that includes a forum selection clause and wondering how to argue?

The United States District Court, relying on a recent Fourth Circuit opinion offered some help to your analysis in Allstate Crane Rental, Inc. v. Paramount Equipment, LLC 2018 WL 2048361 (May 2, 2018).

Generally, a defendant seeking to enforce a forum selection clause should move to dismiss pursuant to the forum non conveniens doctrine. In such an instance, the defendant’s burden is substantial – the defendant must prove that an alternative forum is available, adequate and more convenient than the plaintiff’s chosen forum. That burden shifts, however, with a mandatory forum selection clause; one that requires litigation to be held in a specific forum, expressly to the exclusion of others. A mandatory clause that includes the requisite exclusion language reverses the presumptions favoring a plaintiff’s forum choice. When facing a mandatory forum selection agreement, the plaintiff has the significant burden of establishing why the agreement should not be enforced, made more challenging against the backdrop of a strong federal public policy in support of the enforcement of such clauses.

A forum selection clause is permissive if it permits litigation to occur in a particular forum but does not foreclose the possibility of the litigation occurring elsewhere. Such a clause does not support dismissal on the basis that plaintiff filed in a forum other than the one designated in the clause. Rather, a defendant arguing against the plaintiff’s choice of forum must undertake the substantial burden of showing the chosen forum is highly inconvenient and that there exists an equally acceptable forum, more convenient in light of public and private interests involved in the litigation.

When drafting, interpreting or advocating for or against forum selection clauses, the threshold consideration should be whether the clause is mandatory or permissive. Be aware – in determining whether the clause is mandatory or permissive, the court is going to look carefully at the specific language. For example, if the clause includes language indicating the chosen forum is the “only” or the “exclusive” forum, or if it provides the chosen forum is the “sole” forum, the court will conclude the provision is mandatory. If this critical analysis results in the determination the clause is mandatory, requiring litigation in a particular forum to the exclusion of others, there is assurance the court will presume the clause is enforceable, and the plaintiff must overcome a substantial burden. If, however, the clause is permissive, the court will apply the traditional forum non conveniens test, requiring the defendant to labor under that burden.

First Department Finds Forum Selection Clause in Earlier Agreement Valid Despite Later Agreement Providing for Arbitration

Peter J.W. Sherwin and Alyse F. Stach | Proskauer Rose LLP | May 4, 2016

In a 3-2 split decision, a New York appellate court determined that a forum selection clause providing for litigation in New York courts had not been explicitly terminated and thus trumped agreements to submit to arbitration in London provided in later contracts that cancelled the previous one. Thus, the appellate panel for the First Department in New York reversed a lower court decision and directed the parties in Garthon Business, Inc., et al. v. Stein, et al., to proceed with their claims in court as opposed to arbitration in London.

Garthon Business, Inc. (“Garthon”) sued Kirill Ace Stein (“Stein”) in December 2014 in New York County Supreme Court alleging that in 2009, Stein, who had several consulting agreements with Garthon spanning several years, had advised it to make unsecured loans to Youseff Hares so that Hares Engineering could complete construction of a steel plant for SBS Steel in Kazakhstan. Garthon accepted the advice and extended interest-free loans to Youssef Hares totaling $16 million, which were never repaid. Garthon claimed that Stein breached fiduciary duties and promises made under certain consulting agreements.

In April 2015, the Supreme Court granted Stein’s motion to compel arbitration in London, as required by a majority of the consulting agreements from later in the relationship between Garthon and Stein. Garthon appealed, asserting that the claims it had alleged related to consulting services under a separate, earlier agreement that provided for disputes to be litigated in a New York court. Stein countered that the earlier agreement had been terminated by the later agreements. The majority of the First Department panel agreed with Garthon, finding that the New York forum clause itself was not explicitly terminated by the later agreements and so it remained in effect. “At best, this language indicates that the parties intended only to arbitrate disputes that arose after July 1, 2009, the effective date of those agreements,” the majority held. “It does not indicate a clear manifestation that the forum selection clause in the [earlier agreement] had been abandoned.” The First Department further stated:

Although this court does not appear to have directly addressed the issue, the other Departments have held that, where some of a group of claims are covered by an arbitration agreement, it is appropriate to litigate the entire group in court if all of the claims were already asserted in court and the claims not subject to arbitration would be “inextricably bound together” with the claims that are subject to arbitration . . . Here, one could argue that all of the claims in the complaint arose under the Quennington Agreement, since, notwithstanding that two of the loan agreements with Hares were executed after the termination of that agreement, plaintiffs allege that Stein first advised them to loan money to Hares personally in spring 2009, when that agreement was unquestionably in effect. In any case, even if some of the claims could be said to arise out of the Quennington Agreement, and others out of the Second Aurdeley Agreement, they are cut from the same cloth, and are, unquestionably, inextricably bound together and therefore should be litigated in court.

A dissenting opinion noted that jurisdictional issues – namely, whether the dispute should be heard in arbitration or in court – should be decided by…

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