You might find yourself asking this question if you don’t pay attention to an often-overlooked provision in your construction contract. Most contracts have a clause dictating where any dispute resolution procedure is to take place. This provision, called a “forum selection clause” or “venue selection clause,” can cause headaches and cost money if not carefully considered when negotiating a contract. Venue selection clauses can apply to any form of dispute resolution: litigation, arbitration, and mediation. In response to these issues, many states have enacted laws specifically directed to forum selection clauses in construction contracts. However, in states that don’t have such laws, there are several things you should keep in mind when negotiating a forum selection clause. This article will discuss how to identify a forum selection clause, explain the potential pitfalls hiding in these clauses, and address the states that seek to control the use of forum selection clauses by statute.
A forum selection clause can be worded in numerous ways, but they all share a few key words and phrases. The American Institute of Architects AIA Document A101-2017 uses the following language: “[t]he mediation shall be held in the place where the Project is located, unless another location is mutually agreed upon,” and “[t]he Arbitration shall be conducted in the place where the Project is located, unless another location is mutually agreed upon.” Sometimes the clause will be more specific as to the location. For example, a forum selection clause may require a lawsuit to be filed in the state or federal courts serving a specific city or county. There are several issues to consider when deciding whether to agree to a certain forum.
An important consideration is the inconvenience and expense that may result from an agreement to litigate, arbitrate, or mediate in a specific location. Agreement to a distant forum will require travel to and from hearings, depositions, and meetings that can be a great disruption to ongoing business. There is also a great deal of coordination involved in dispute resolution, no matter the resolution method. Arranging for witnesses to appear at hearings and trials is difficult enough when the witnesses are close to where the arbitration occurs or lawsuit is filed. Adding transportation of witnesses makes this even more difficult. A further consideration is the need to coordinate transporting evidence to the arbitration location or courthouse. On top of coordination, travel costs for you, your witnesses, your attorneys, and your experts will add up quickly. Taking these issues into consideration before agreeing to a specific forum may save a great deal of frustration and added expense.
Another consideration is how the forum selection clause interplays with the contract’s governing law provision. Inconsistent forum selection and governing law provisions can cause problems. For example, suppose a contract states it will be interpreted according to the laws of Florida but requires dispute resolution in Atlanta, Georgia. This requires a Georgia judge to apply Florida law, which is not ideal. If possible, it is best to negotiate a change to either the forum selection clause or governing law clause so they are consistent.
Several states have eliminated the need to negotiate forum selection. State legislatures have passed statutes requiring that disputes arising from a construction project located in that state be decided in that state. Many of these statutes read similarly to California’s which provides as follows:
(a) The following provisions of a contract between the contractor and a subcontractor with principal offices in this state, for the construction of a public or private work of improvement in this state, shall be void and unenforceable:
(1) A provision which purports to require any dispute between the parties to be litigated, arbitrated, or otherwise determined outside this state.
(2) A provision which purports to preclude a party from commencing such a proceeding or obtaining a judgment or other resolution in this state or the courts of this state. Cal. Civ. Proc. Code § 410.42.
In addition to California, 25 states have enacted similar laws. For projects in any of these states, a forum selection clause that designates a location in another state will be ineffective.
While forum selection clauses are seemingly benign, they can cause a host of problems if not addressed during contract negotiation. Care should be taken to evaluate these provisions to determine potential issues that may arise in the event of a dispute. Doing so may save many headaches and much unwanted expense.