The Dispute Resolution Process: Choice of Law and Forum Selection

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The Dispute Resolution Process: Choice of Law and Forum Selection
By: Joseph Scott Shannon, Esq., Lee/Shoemaker, PLLC

Contracts are written to avoid misunderstandings but also in anticipation of problems. While no party enters into a contract expecting a dispute, contracts exist to define the parties’ obligations and rights so as to avoid disagreements, and, ideally, provide a mechanism and process for addressing and resolving disagreements that might arise.

The perfect contract has not been written. Yet, no amount of legal verbiage will avoid contract disputes arising from unforeseen conditions, overblown owner expectations, incompetent claims contractors, or even the occasional design error or omission. Absent a dispute resolution provision, recourse to the courts is the default option; however, providing a contractual process to incrementally address disagreements often promotes an amicable, or, at least negotiated, resolution that avoids the parties incurring litigation fees and costs.

A contractual dispute resolution clause should include language defining when it applies, i.e.: “In the event of any claim or dispute arising out of or relating to the interpretation or application of any provision of this Agreement and/or the obligations of Owner and Architect hereunder . . .”; the applicable law and forum (which may differ); and the process to be followed. In short, it establishes how the parties plan on interacting during a dispute before the dispute itself has an opportunity to fray the relationship.

In selecting the applicable law and forum, on a project between a design professional and owner who are residents of the same state which is also the location of the project, courts are reluctant to enforce choice of law or forum provisions that have no relationship to either the parties or the project. As long as the designated state’s law and forum bear a “reasonable relationship” to either the project or one of the parties, courts will generally enforce such contractual choices.

Choice of Law Considerations

There may, however, be reasons to designate the law of one state (with a relationship to either the parties or the project) as controlling, and to select a different state as the forum for mediation, arbitration or litigation.

For example, Virginia has a statutory provision that voids provisions in construction contracts requiring design professionals to indemnify another party for liability arising from bodily injury or property damage caused by the party being indemnified, Va. Code Ann. § 11-4.4. The corollary provision in Maryland only bars indemnification for the “sole negligence” of the indemnitee (i.e., the Owner or whoever is seeking indemnification), Md. COURTS AND JUDICIAL PROCEEDINGS Code Ann. § 5-401. A design professional with a Virginia office providing services on a Maryland project may agree to a clause designating Maryland as the forum state but requiring application of Virginia law for the greater protection afforded by Virginia’s bar to such contractual indemnification. Many states have similar statutory provisions including North Carolina, N.C. Gen. Stat. § 22B-1 (similar to Virginia), and Delaware, 6 Del. C. § 2704 (applicable to projects located in Delaware). 

Forum Considerations

Virginia is one of a handful of states with a statute providing that for a Virginia entity that contracts to provide design services for a construction project located in Virginia, “[a]ny provision in the contract mandating that [an action on the contract] brought in a location outside the Commonwealth shall be unenforceable.” Va. Code Ann. § 8.01-262.1. Texas has a similar, broader statute applicable to projects located in Texas without regard to the resident state of the contracting parties, and makes either choice of law or forum clauses designating another state a “voidable” provision.  Tex. Bus. & Com. Code § 272.001. Whether the state in which the project is located has similar provisions can inform your negotiations of such clauses.

The wording of the forum selection provision is key. If the intent is to describe a process that will require mediation as a first step and, if unsuccessful, then litigation in a state court to the exclusion of a federal district court in the state, then the contract language must include a statement to that effect, i.e.: “The parties shall submit any dispute to mediation through the American Arbitration Association. If mediation is unsuccessful, each party irrevocably submits to the exclusive jurisdiction of the Circuit Court of Fairfax County, Virginia, in any such suit, action or proceeding”; or “Each party irrevocably submits to the exclusive jurisdiction of the American Arbitration Association located in Washington, D.C., to hear, determine and make a final award, through its arbitration processes, any dispute the parties are unable to resolve through negotiations or mediation.”

The prudent design professional recognizes that the venue clause may play a role in how a claim against them plays out:

• Does the venue clause require that you travel across country to the “home court” of the other party to the contract to resolve claims?
• How convenient is the venue for other fact witnesses who may have documents relevant to the dispute or who may need to testify (e.g., contractors, subcontractors, consultants, etc.)? Can you compel their participation in a venue in a different jurisdiction from the project?
• Have you consistently defined the venue in the prime contract with the Owner and the consultant agreements with the consultants?

Simply “acquiescing” to a venue provision in another jurisdiction may have cascading (and unanticipated) consequences for the unwary design professional.

Conclusions

Contractual dispute resolution provisions can operate to avoid lengthy litigation, or they can be a trap for the unwary. Rather than gloss over choice of law and venue provisions, these are important provisions which should be considered and evaluated before simply saying, “yes.” In fact, the decisions made on choice of law and forum have cascading effects on other dispute resolution provisions in the contract (the mediation—arbitration—litigation process and options) and serve as the foundation of subsequent decisions.

In subsequent articles in this series, we will discuss the dispute resolution process itself, and how to prepare for and obtain a successful resolution to contract disputes.

Scott Shannon is Senior Counsel at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals in DC, Maryland, and Virginia. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.

Lee/Shoemaker PLLC is an Educational Program Sponsor of AIA Potomac Valley.

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