“What does the contract say?” This question commonly serves as a seasoned attorney’s answer to his or her younger colleagues’ questions about contract disputes. While this seems simple, the reality is that we live in a world where even former presidents say things like, “It depends on what the meaning of the word ‘is’ is.” It is therefore understandable that disputing parties (and their attorneys) frequently overlook or ignore clear, unambiguous terms in their contract documents. The U.S. District Court for the District of Maryland’s decision in Main Line Mechanical of Virginia, Inc. v. Herman/Stewart Construction & Development, Inc., RWT 11CV203, 2011 WL 3880462(2011) is a good reminder to always review the contract’s disputes resolution provisions before engaging in expensive litigation over basic procedural issues, like the court in which a lawsuit will proceed.
In 2010, a general contractor, Herman/Stewart, entered into a subcontract with Main Line Mechanical to provide labor, materials and equipment for construction of a Washington, D.C. hotel project. The subcontract contained a forum selection clause requiring that: “Any and all litigation between the parties to the Subcontract shall only be filed in the Circuit Court and/or District Courts of Maryland located in Montgomery County, Maryland.” In 2011, the parties got into a dispute over project payments and the quality of Main Line’s performance. When Main Line ceased work on the Project, Herman/Stewart filed a Complaint in the Circuit Court for Montgomery County (State Court) alleging breach of the subcontract, among other allegations. Main Line removed the suit to the U.S. District Court, located in Baltimore County, Maryland (Federal Court).
Absent a contract provision to the contrary, federal law permits the removal of a case to federal court when the two parties reside in different states and have a dispute value exceeding $75,000.00. On the basis of the forum selection clause in the subcontract, Herman/Stewart filed a motion to remand the case back to State Court. In essence, the Federal Court had to resolve a dispute between the parties over forum court selection before it ever heard the first argument about the underlying dispute over the D.C. hotel project.
The Federal Court cited a U.S. Supreme Court holding that forum selection clauses, like the one in the parties’ subcontract, are “prima facie” valid and should be enforced unless enforcement is shown by the resisting party to be unreasonable under the circumstances. A multi-pronged test is employed to determine the enforceability of such clauses. First, the court must determine whether the clause was mandatory. Next, it must decide whether the claims fall within the scope of the clause. If the court finds that claims fall within the clause’s scope, it must presume that no claim may be heard by any court(s) other than those designated by the clause. This presumption may be overcome if a party opposing the forum selection clause proves that enforcement would be unreasonable.
The Federal Court determined that the parties’ execution of a Subcontract containing the phrase “any and all litigation … shall only be filed” in Montgomery County evidenced a clear intent to designate a dispute forum for all issues arising from the subcontract. The court stated that the “use of the word ‘shall’ [in forum selection clauses] generally indicates a mandatory intent unless a convincing argument to the contrary is made.” In order to rebut the required presumption that the clause applied to the hotel dispute, the Federal Court stated that Main Line must prove one of the following: (1) the subcontract formation was induced by fraud or overreaching; (2) grave inconvenience or unfairness of the selected forum; (3) fundamental unfairness of the chosen forum’s law that results in deprivation of a remedy; or (4) enforcement would offend strong public policy. Main Line failed to prove any of these factors and was therefore unable to persuade the Federal Court that enforcement of the forum selection clause was unreasonable. As a result, the Federal Court remanded the case back to the Circuit Court of Montgomery County, Maryland in accordance with the parties’ subcontract.
This decision contains an important lesson that all parties should remember when deciding whether to dispute forum selection terms that appear to be straightforward. The Federal Court noted that the general contractor and subcontractor were “sophisticated construction companies who presumably regularly enter into contractual arrangements containing forum selection clauses.” Through this not-so-subtle observation, the court warned future litigants that, as business professionals, they should not expect the benefit of the doubt when attempting to defeat an unambiguous forum selection clause. The court underscored this point when it granted Herman/Stewart’s petition to recover its attorney’s fees incurred to have the case remanded to State Court in accordance with the forum selection clause. Under federal law, a court may award attorney’s fees “where the removing party lacked an objectively reasonable basis for seeking removal.” The law permits the recovery of attorney’s fees even if removal is sought in subjective good faith. In this case, the Federal Court found that Main Line “clearly contracted to litigate in the Circuit Court for Montgomery County” and therefore “lacked an objectively reasonable basis for seeking removal” to a federal court.
While no one likes to think about disputes before work begins on a new project, the reality is that disputes are not uncommon in the construction industry. Contractors, subcontractors, and owners need to pay close attention to forum selection clauses, choice of law provisions and mandatory arbitration clauses when negotiating all new contracts.