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American Subcontractors Association News

ASA to Support Sub in ‘Forum-Selection’ Case

U.S. Supreme Court Case That Will Decide Whether Subs Can Be Forced to Resolve Claims in Far Off Jurisdictions

ALEXANDRIA, Va. — On Aug. 23, 2013, the American Subcontractors Association will urge the U.S. Supreme Court to affirm an appeals court’s decision in a case concerning whether construction disputes should be resolved in a local forum or, instead, subcontractors can be forced to take their claims to a far off jurisdiction.

ASA will file an amicus curiae brief in Atlantic Marine Constr. Co. v. J-Crew Management, Inc., supporting the subcontractor, J-Crew, in a case in which the country’s highest court will determine whether federal courts are required to enforce contractual forum-selection clauses or whether judges have the right to consider other factors, such as the overall convenience of the parties and witnesses and the interests of justice when deciding if venue is proper.

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.

“The general contractor’s expediency comes at the detriment of its subcontractors, whose places of business, records, and personnel generally are close to the location of the construction project,” said ASA Chief Advocacy Officer E. Colette Nelson. “Forum-selection clauses can chill a subcontractor’s ability to recover claims by imposing significant and unnecessary impediments and financial costs to the recovery of amounts due.”

If the Supreme Court were to require strict enforcement of such clauses, it would undermine subcontractors’ ability to point to state law voiding or making voidable forum-selection clauses in construction contracts that mandate litigation or arbitration in a state other than the state where the project is located.

“Twenty-two states have enacted laws that void, or make voidable, forum-selection clauses in construction contracts that attempt to require litigation outside the state where the work was performed,” Nelson noted.

In the underlying 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 ignored the forum-selection clause and 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 called on the 5th Circuit Court of Appeals 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 has granted review.

‘Pay-If-Paid’ Clauses Should Be ‘Unenforceable,’

ASA and ASA of Ohio Tell Ohio Supreme Court

In an Ohio Supreme Court case that “will impact construction across the State of Ohio where billions of dollars of construction work is in progress,” ASA, ASA of Ohio, and the Ohio/Michigan Chapter of the National Electrical Contractors Association filed an amicus brief, urging the court to rule that “pay-if-paid” clauses are “unenforceable” in construction contracts. A decision by the Supreme Court of Ohio in Transtar Electric, Inc. v. A.E.M. Electric Services Corporation will determine whether prime contractors can shift financial risk of construction projects to subcontractors and suppliers through “pay-if-paid” clauses. “These clauses unreasonably and improvidently transfer the risk of loss from the party best able to analyze and control the loss and their own profit, the prime contractor, to all of the other parties in the construction process,” ASA, ASA of Ohio and the Ohio/Michigan chapter of NECA said in their brief, filed on June 20, 2013. The organizations urged the state Supreme Court to affirm an appeals court’s decision “determining that pay-if-paid clauses should either be extraordinarily explicit so as to convey the inherent risk of nonpayment by the project owner, a condition completely uncontrolled by the subcontractor, or eliminated as a method of subjugation of subcontractors as being void and unenforceable as against public policy.” A.E.M. was the general contractor on the construction of a swimming pool at a Holiday Inn in Maumee, Ohio. In January 2007, A.E.M. entered into a subcontract agreement with Transtar for certain electrical work to be performed on the project. The subcontract provision in question included: “RECEIPT OF PAYMENT BY CONTRACTOR FROM OWNER FOR WORK PERFORMED BY SUBCONTRACTOR IS A CONDITION PRECEDENT TO PAYMENT BY CONTRACTOR TO SUBCONTRACTOR FOR THAT WORK.” Transtar invoiced A.E.M. for work performed in the amount of $186,709, and A.E.M. paid Transtar $142,620.10. The remaining balance was not paid. On Sept. 27, 2010, Transtar sued A.E.M. for the unpaid amount, and A.E.M. denied liability. A.E.M. did not dispute the unpaid amount, but argued that “the project owner had failed to pay” A.E.M. that amount and more. A.E.M. said it would continue to attempt to collect the money from the project owner and pledged to pay Transtar if collection efforts were successful. Absent such payment, however, A.E.M. insisted it was not contractually obligated to pay. Transtar argued that the contractual provision that A.E.M. characterized as a pay-if-paid clause should be deemed a pay-when-paid clause. The trial court concluded that the contract clause at issue was a pay-if-paid provision, but the appeals court reversed, saying, “Because we conclude that the purported pay-if-paid contract provision does not manifest the intent of the parties to shift the risk of owner non-payment from the general contractor to the subcontractor, we reverse.” ASA’s Subcontractors Legal Defense Fund financed the brief in this case.

ASA Reports P3 Payment Protection Trend to FHWA

In supplemental comments filed on May 31, 2013, ASA told the Federal Highway Administration that “state governments increasingly recognize that, given the unpredictable diversity of public-private partnerships, they need to provide reliable payment protection to the construction subcontractors and suppliers on such projects.” ASA Chief Advocacy Officer E. Colette Nelson reported that since she had filed comments on April 10, 2013, three additional state legislatures — Florida, Maryland, and North Carolina — had passed laws requiring payment bonds on projects financed through public-private partnerships, bringing the total to seven. ASA again urged the Department of Transportation “to incorporate into model contracts payment protections for subcontractors and suppliers at least as effective as those provided by the 1935 Miller Act on construction undertaken directly by a Federal agency or by the so-called Little Miller Acts of the various States for construction projects undertaken by a state agency.”