Invalidating Choice of Law or Forum Selection Clauses

Contracts commonly provide for a specific state law to apply (choice of law) or for disputes to be litigated or arbitrated in another state (forum selection). Unfortunately, out-of-state contractors often make subcontracts with New York subcontractors on New York projects subject to the laws of, and requiring disputes to be resolved in, other states, using the added expense and inconvenience as a means to dissuade subcontractors from pursuing claims.

This unfair side effect of choice of law and forum selection clauses begs the question: must a New York subcontractor pursue his remedies in another state or under another state’s law where its contract says so? The answer may be no.

Courts frequently grapple with the enforceability of choice of law and forum selection clauses. With respect to choice of law, New York courts follow a general rule that parties are free to make the contract subject to the law of whatever state they want, but the law of the state with the most “significant contacts” with the contract should ultimately be applied.[1] Applying this rule, a federal court in S. Leo Harmonay, Inc. v. Binks Manufacturing Company, a lawsuit by a New York subcontractor against an Illinois contractor involving a New York construction project, refused to enforce an Illinois choice of law because the only contact with Illinois was the home state of the contractor, while the work was performed in New York, the prime contract was subject to New York law, and the subcontractor was a New York corporation.[2] This situation is remarkably similar to the situation of many New York subcontractors faced with an out of state choice of law, so such a clause will probably not be enforceable in most situations.

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On the other hand, forum selection clauses are upheld by the courts unless it can be shown that “enforcement would be unreasonable or unjust or that the clause is invalid because of fraud or overreaching, i.e., a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging part would, for all practical purposes, be deprived of his or her day in court.”[3] In Bell Constructors, Inc. v. Evergreen Caissons, Inc., the court refused to invalidate a forum selection clause requiring a construction contract dispute to be litigated in New York, even though the contract was performed in Colorado and the defendant subcontractor was a Colorado corporation and would face expense and loss of business time in litigating the dispute in Colorado.[4]Thus, absent extremely unusual circumstances, forum selection clauses have been upheld by New York courts, a rule that has led to unfair results and created substantial expense and inconvenience for New York subcontractors.

More recently, however, the New York State Legislature has taken action to protect the rights of New York subcontractors by enacting the Prompt Payment Act.[5] The Prompt Payment Act contains provisions relating to timing of payments that go beyond the scope of this article, but importantly the Prompt Payment Act declares that contract provisions that impose the law of another state or that require dispute resolution to be conducted in another state are void and unenforceable,[6] meaning that a New York subcontractor under a contract subject to this law cannot be required to litigate in another state or under another state’s law. The Prompt Payment Act does not govern all contracts, and only an experienced construction law attorney can review your subcontract to determine whether the Prompt Payment Act applies, but it may nevertheless provide a means to avoid oppressive forum selections and choices of law by out-of-state contractors that would otherwise be enforced by the courts.

 

John_Caravella_construction_lawyer.jpgThe author, John Caravella Esq., is a construction attorney and formerly practicing project architect at The Law Office of John Caravella, P.C., representing architects, engineers, contractors, subcontractors, and owners in all phases of contract preparation, litigation, and arbitration across New York and Florida. He also serves as an arbitrator to the American Arbitration Association Construction Industry Panel. Mr. Caravella can be reached by email: [email protected] or (516) 462-7051.

[1] See, Compania de Inversiones Internacionales v. Industrial Mortgage Bank of Finland, 269 N.Y. 22, 198 N.E. 617 (1935); Haag v. Barnes, 9 N.Y.2d 554, 175 N.E.2d 441 (1961).

[2] 597 F. Supp. 1014, 1025-26 (S.D.N.Y. 1984).

[3] Bell Constructors, Inc. v. Evergreen Caissons, Inc., 236 A.D.2d 859, 860, 654 N.Y.S.2d 80, 81 (4th Dep’t 1997).

[4] Id.

[5] N.Y. Gen. Bus. Law. §§ 756 et seq.

[6] N.Y. Gen. Bus. Law § 757.

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