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ASA: Far Off Litigation Is Bad Policy

What happened in Texas for local subcontractors didn't stay in Texas.

Wed September 04, 2013 - National Edition
Construction Equipment Guide

A federal appeals court was correct in its decision not to dismiss or transfer a case from its Texas venue — where a construction project and all of its subcontractors were located — to a far off jurisdiction in Virginia where the general contractor specified in its subcontract that any dispute resolution must take place, the American Subcontractors Association told the U.S. Supreme Court.

The Supreme Court, ASA said in its amicus brief filed on Aug. 23 in support of the subcontractor in Atlantic Marine Constr. Co. v. J-Crew Management Inc., should affirm the judgment of the U.S. Court of Appeals for the 5th Circuit. “Forum selection clauses in construction contracts are unenforceable under the laws of both Texas and Virginia when the clause requires litigation to proceed in a forum outside the state where the project was located,” ASA wrote.

In the construction industry, out-of-state general contractors commonly require their subcontractors to sign forum-selection and choice of law clauses, arguing that it’s more convenient and less expensive for them to resolve disputes in a jurisdiction of their choice.

“Subcontractors are often left with the choice of accepting boilerplate terms in a subcontract form provided by the general contractor or losing the subcontract to a local competitor,” ASA told the Supreme Court. “In the best of times this is little of a choice. And in difficult economic times, there is really no choice at all for a company needing work to stay alive.”

ASA argued in its brief that Atlantic Marine “was not too inconvenienced by the distance to go into the heart of Texas to work. It is disingenuous to suggest it would be an undue hardship for Petitioner (or any similarly situated general contractor) to litigate in a state it freely traveled into to work,” ASA wrote.

“The additional burdens [of a distant forum] can often be prohibitive and effectively deprive a subcontractor of its day in court and/or leverage it to heavily discount, if not abandon, even the most worthy of claims.”

In the case, the general contractor, Atlantic Marine, hired J-Crew as a subcontractor to work on a construction project to build a child care facility at a military base in Fort Hood, Texas. The subcontract contained a forum-selection clause requiring that all disputes “shall be litigated in the Circuit Court for the City of Norfolk, Virginia, or the United States District Court for the Eastern District of Virginia, Norfolk division.”

J-Crew subcontracted much of its work to predominantly local subcontractors and suppliers, almost all of which were located in the western district of Texas in or around Killeen, Texas, and near the project. All of the subcontract work was performed in Texas. When the project was completed, almost $160,000 remained unpaid to J-Crew, even though it had timely completed its work.

J-Crew sued in Texas in the federal district where the project was located. Atlantic Marine moved to dismiss or transfer the case to federal court in the eastern district of Virginia, relying on the forum-selection clause in the subcontract. J-Crew argued that the U.S. Code provides that if a lawsuit is filed in a proper venue, the court may transfer it to another venue “for the convenience of the parties and witnesses, in the interest of justice.” J-Crew asserted that the trial court had to consider interests of justice and the convenience of the parties and witnesses when resolving disputes over venue, and cited case law that courts must weigh in the decision to transfer “according to the individualized, case-by-case consideration for convenience and fairness.”

In this case, the project, the subcontractor, the subcontractor’s office, project records, personnel, and all of the second-tier subcontractors and non-party witnesses who performed the work were located in Texas. J-Crew argued that convenience and fairness supported litigation in Texas instead of Virginia. In addition, there were at least seven non-party witnesses who were beyond the subpoena power of the Virginia Court and could not be compelled to testify in Virginia. Moreover, because project records were in Texas, there were costs and efficiencies from having discovery in the state where the project and principal witnesses were located.

Finally, J-Crew argued that litigating the dispute in the western district of Texas was important from a policy standpoint, citing Texas law making voidable any forum-selection clause in a construction contract that provided for venue outside of the state.

The trial court agreed with J-Crew and refused to dismiss the case or transfer venue to Virginia. Atlantic Marine asked the federal appeals court to enforce the forum-selection clause, but the appeals court agreed with the trial court’s reasoning. Atlantic Marine appealed to the U.S. Supreme Court, which granted review.

ASA told the Supreme Court that its reversal of the 5th Circuit’s decision, “… would compel federal courts to disregard: (1) the law of the state where the project was located, and (2) the legitimate policy concerns those laws were designed to address. Reversal would also mean that a small Texas-based subcontractor (and many other similarly situated subcontractors ensnared by such a decision) would be forced to travel across the country to litigate claims for payment in states where they never worked, and before courts lacking subpoena power over important witnesses and documents.”

ASA general counsel, Kegler, Brown, Hill & Ritter, Columbus, Ohio, prepared the brief. ASA’s Subcontractors Legal Defense Fund financed the brief. The SLDF supports ASA’s critical legal activities in precedent-setting cases to protect the interests of all subcontractors. ASA taps the SLDF to fund amicus briefs in appellate-level cases that would have a significant impact on subcontractor rights.

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