To limit the risk of litigating in multiple jurisdictions, regional and national prime contractors usually seek to centralize dispute resolution by including a forum selection clause in their subcontracts. But some states, North Carolina included, have statutes on the books declaring such clauses unenforceable as against public policy. See N.C. Gen. Stat. §§ 22B-2, 3. The legislatures in states like North Carolina apparently have concluded that subs should be able to litigate in the state in which the project is being built. While that public policy is no doubt embraced by local subs, it might irk primes who perform work across state lines.
Which begs this question: can prime contractors circumvent such anti-forum selection statutes and ensure home field advantage when litigating against first-tier subcontractors?
This tactic probably does the trick: pair that forum selection clause with an arbitration provision.
Why should this technique work? Because the Federal Arbitration Act (“FAA”) has been held to “trump” state law under the Supremacy Clause of the U.S. Constitution, rendering anti-forum selection statutes like North Carolina’s toothless. Wake County Bd. of Educ. v. Dow Roofing Systems, LLC, 792 F. Supp. 2d 897, 901 (E.D.N.C. 2011) (enforcing arbitration of breach of warranty claim despite N.C. Gen. Stat. § 22B-2; state statute must yield to the FAA under the Supremacy Clause of the United States Constitution).
Those of you who aren’t big fans of arbitration (and there’s been excellent commentary recently from Nebraska attorney Craig Martin suggesting that arbitration isn’t always the be-all, end-all construction dispute resolution procedure) might be wondering if this step is really necessary. Perhaps not. After all, the U.S. Supreme Court recently provided full-throated support for the enforceability of forum selection clauses in its unanimous Atlantic Marine decision. The high court, however, acknowledged that in exceptional cases, a prime’s motion to transfer a case back home can be defeated if the sub can prove the existence of one or more “public-interest factors” negating the enforceability of a forum selection clause. Some observers, including Georgia attorney Mark Cobb, have suggested that the existence of an anti-forum selection statute in the state where a sub files its lawsuit could represent such a “public-interest factor.” While that outcome is by no means certain (the Supremes didn’t address it head-on in Atlantic Marine), it is a risk. Fortunately for regional and national prime contractors, it appears that risk can be managed, provided arbitration — warts and all — is embraced as the dispute resolution method in the underlying subcontract.
And so if you’re a risk manager for a prime contractor tasked with developing a strategy for controlling litigation costs by keeping as much claim resolution inside state lines as possible, you could close your eyes, click your ruby slippers three times and hope a judge concludes your forum selection clause alone is sufficient to keep your company from litigating all over the map. In the alternative, you could improve your odds of obtaining home-field advantage by including well-drafted forum selection AND arbitration clauses in your subcontract general conditions.