This article appeared in the August 2013 of Dixie Contractor
By Zack Rippeon
A common provision in many construction contracts involves the parties’ election to resolve disputes (should they arise, of course) in a particular geographic location or with a specific state’s law. These “choice of forum” and “choice of law” clauses are typically enforceable as courts are reluctant to interfere with the parties’ explicit agreements. However, some states have enacted laws prohibiting outbound choice of forum or choice of law provisions – that is, those providing for the venue of any dispute resolution to be outside the home state or for a law other than the home state’s to govern. Tennessee Code Annotated 66-11-208, for example, precludes parties to a construction contract to apply any state’s law other than Tennessee or to elect another state as the forum for their dispute resolution.
Imagine the situation where a Florida general contractor is building a project in Memphis, Tennessee, and hires an Alabama subcontractor. The parties agree that Florida law governs their agreement and select Destin, Florida, as the venue for any dispute that may arise. The Alabama subcontractor obtains materials from a Tennessee supplier, which are later alleged to be defective. The Florida general contractor files a lawsuit against the Alabama subcontractor in Destin under Florida law. The Alabama subcontractor files a third-party claim against its Tennessee supplier in that same lawsuit. Tennessee law could be interpreted to allow that Tennessee supplier to drag everyone from Destin, Florida, to Memphis, Tennessee, to resolve the claims and force Tennessee law to apply to the dispute.
While such an example is not likely to exist in such a simple form, contractors should be sure to investigate the applicability of local laws when performing work out of state. A “foreign” contractor working in Tennessee will likely hire Tennessee subcontractors and find itself in a similar predicament if/when a dispute arises. It should be noted that the Tennessee law appears to have originally been intended to protect Tennessee residents dealing with out-of-state residential builders. It was, however, drafted broad enough to encompass commercial projects as well.
One potential caveat to the application of such legal prohibitions on outbound forum selection clauses involves arbitrations. There is a wealth of law on the Federal Arbitration Act’s (FAA) preemption of conflicting state law in constraining parties’ ability to arbitrate their dispute. FAA preemption has been raised in cases dealing with laws similar to Tennessee’s, particularly when a particular locale is identified within the parties’ arbitration provision. In such cases, any attempt by a state law to limit the parties’ arbitration agreement, including where the arbitration is to occur, can be viewed as conflicting with the FAA’s intent to promote alternative dispute resolution. A similar argument could be made if the parties include a choice of law within their agreement to arbitrate.
In conclusion, it is recommended to carefully craft the independent arbitration agreement within the contract documents in order to ensure that the parties’ wishes are enforceable in states with prohibitions on outbound selection.
Zack Rippeon is an attorney in the Atlanta office of Burr & Forman LLP.