Today’s Contracts Enforceability Issues, Part II: Those Pesky Forum Selection Clauses
This installment of our series on contract provisions that may not be enforceable focuses on clauses that require the parties to litigate or arbitrate their disputes in particular forums or venues. So-called “forum (or venue) selection clauses” are often ignored as legal boilerplate. But in fact, they can inflict considerable tactical and cost disadvantage on the burdened party by requiring disputes to be resolved in legal forums more favorable or familiar — and/or more conveniently located — to the benefiting party.
It may surprise some to learn that often such clauses may be invalidated and that, in fact, the law regarding their enforceability is in flux in many jurisdictions. For example, a growing number of states (up to about half of them, at last count) have enacted laws that on their face require disputes over construction projects to be litigated within the state boundaries, if not the actual counties, where the projects are located. Generally, these laws are thought to protect local contractors and design professionals from out-of-state upstream parties, who often have the bargaining power to insist on such clauses.
Illinois has one such statute, the Building and Construction Contract Act (Illinois BCCA), 815 ILCS 665/1 et seq. The Illinois BCCA provides in pertinent part:
“A provision contained in or executed in connection with a building and construction contract to be performed in Illinois that makes the contract subject to the laws of another state or that requires any litigation, arbitration, or dispute resolution to take place in another state is against public policy. Such a provision is void and unenforceable.”
Like other similar statutes, the Illinois BCCA also requires Illinois law to govern disputes arising out of construction projects in the state. Though not specifically stated, the Illinois BCCA arguably implies that the parties may not opt out of its protection. But this issue has not yet been litigated.
In an ironic twist, however, the Illinois BCCA — and other statutes like it — may itself not always be deemed enforceable. Or, as a practical matter, these statutes may end up being enforced only after expenditure of substantial litigation costs.
Enforceability in Flux: Examples
The first example involves disputes required to be resolved by domestic arbitration. Federal and state policies that favor parties’ rights to resolve their disputes by arbitration are reflected in corresponding arbitration statutes that may be deemed to override or preempt state forum selection statutes. One appellate court in Illinois has held that the Federal Arbitration Act preempted the Illinois BCCA in a situation in which a general contractor required a subcontractor, pursuant to a forum selection clause, to arbitrate a dispute in Minnesota arising out of an Illinois construction project. R.A. Bright Const., Inc. v. Weis Builders, Inc., 402 Ill.App.3d 248 (3rd Dist. 2010).
A second example involves international arbitration. Like many other states with laws that encourage it, Illinois has one such statute, the International Commercial Arbitration Act (Illinois ICCA), 710 ILCS 30/1-1, et seq. One provision of the Illinois ICCA provides that the parties are “free to agree of the place of arbitration.” Id. at 30/20-15. However, the applicability of Illinois ICCA to forum selection clauses has not been tested in any reported decisions.
A third example involves certain federal construction projects. In a 2013 opinion in a case that involved a Texas federal construction project in which a subcontractor initiated a lawsuit, the United States Supreme Court held that the case should be transferred for resolution from Texas federal court to the contractually agreed forum in Virginia federal court. Atlantic Marine Const. Co., Inc. v. U.S. Dist. Court for Western Dist. of Texas, 134 S.Ct. 568 (2013).
This latter opinion has drawn attention because of the way it applied tests of federal rules of procedure and the weight it gave to the contractual intent of the parties versus other factors. The court held that forum-selection clauses should be enforced unless “unusual” or “extraordinary” circumstances unrelated to the convenience of the parties clearly disfavor a transfer.
Of particular interest to the construction sector, however, is that while Texas has a state forum selection statute similar to the Illinois BCCA, the Supreme Court applied federal law and did not consider the impact of the Texas statute. Thus, questions of how arguable conflicts between federal rules of procedure, the court’s test and state forum selection statutes should be resolved remain in flux.
A fourth example may arise out of practicality when the substantive or procedural laws of two states come into conflict over choice of forum or where the courts of one state simply do not recognize the laws of another state in a given situation. Under those circumstances, a party (e.g., a contractor) who wants to enforce a forum selection statute such as the Illinois BCCA and to stop a party (e.g., an owner) from suing it in another state may end up being forced to expend significant sums to fight an action initiated by the owner in that other state.
In disputes where relatively little is at stake, such efforts may simply not be cost effective. This is especially so in the absence of a prevailing party provision that allows the party seeking to enforce the Illinois BCCA to recover its attorneys’ fees.
Managing Uncertainty: Lessons for Contracting Parties
First, seemingly boilerplate forum selection clauses should not be ignored and consideration should be given to how choice of forum may affect contracting parties in any dispute. Second, contracting parties may need to be aware of whether statutes have been passed (particularly in the location of the project, but also in any other applicable jurisdictions) that may invalidate such clauses. Third, contracting parties also may need to understand whether, in turn, there are judicially or statutorily imposed exceptions to the enforceability of such laws, such as in domestic or international arbitration. And fourth, careful drafting may be needed to even the playing field.
Counsel should be consulted when parties are confronted with such clauses in specific contracts. Because the law is in flux in this area, periodic consultations with counsel regarding any template contract forms are also recommended.