No less a tribunal than the U.S. Supreme Court will try to clarify construction-industry conflict about where lawsuits between primes and subs are tried. Lower courts have disagreed about what to do, but the prevailing industry wisdom is that it is best to try prime-sub disputes near the project location. Yet some primes insist subs sign "forum selection" clauses, which require trials in the prime's home state—and subs continue to cave in and sign them. Neither action speaks well for the state of risk-management in the construction industry. Despite the forum-selection clauses, many subs will sue locally for money they say they are owed, no matter the contract specifics.
The case is called Atlantic Marine Construction Co. Inc. v. U.S. District Court for the Western District of Texas. Argued before the Supreme Court on Oct. 9, the case involves more than the simple matter of what is the best forum. It revolves around the legal issue of whether a judge is free to exercise discretion to void a clause in a private contract between a prime and a sub.
Twenty-two states have passed laws that void or limit contract subclauses that require lawsuits to be filed out of state. The reason is that, in most cases, such clauses are fundamentally unfair, imposing burdens on a sub that may make suing or defending itself financially unfeasible.
Small businesses made to wait for payment can be like turkeys in the weeks before Thanksgiving—in danger for their lives. In this case, Atlantic Marine allegedly owes $160,000 to Texas-based J-Crew Management Inc. The subcontractor isn't in danger of going out of business while it wages its legal battle. Atlantic Marine, Virginia Beach, Va., which has a staff of about 40, is much bigger. It held the prime contract for a child development center project at Fort Hood, Texas, for which J-Crew was a subcontractor.
In its subcontract with J-Crew, Atlantic Marine or its legal counsel successfully shifted through the forum clause the risk related to judicial venue to its home state, Virginia, 1,505 miles from the project jobsite. It's also clear that J-Crew accepted the terms of the contract. As J-Crew and the American Subcontractors Association have argued in Supreme Court briefs, forum-selection clauses that force disputes to be tried outside the project's region may, in fact, deprive a sub of its day in court when suing is too costly.
The bigger danger is that a ruling for Atlantic Marine will give federal judges the authority to ignore the 22 state laws voiding or limiting such forum-selection clauses as contrary to public policy. There's much more clarity in the state statutes than in the current differences among the federal districts on how to handle this issue. And clarity, rather than litigation about litigation, is preferable to what's going on now.