Can You Arbitrate Where You Want To?

Authored by: Darren Rowles

A forum selection clause is a contractual provision designating a certain state or court as the jurisdiction in which the parties will resolve disputes arising out of their contract.  These clauses are very common in the construction industry.  Just as common are agreements to arbitrate disputes arising out of the contract, which may also select where the dispute will be heard.  If, for example, a Georgia company enters into contracts to perform work outside of the state, it might still want its contract to include a provision indicating that all disputes relating to the contract are to be resolved in Georgia (rather than where the project is performed).

Some states, including Florida, Virginia, North Carolina, South Carolina, and Louisiana, have enacted statutes that purport to prohibit the enforcement of forum selection clauses.  Despite these state statutes prohibiting the enforcement of forum selection clauses as against public policy, parties may still be able to enforce forum selection clauses when arbitration is the contractually agreed upon method of dispute resolution.  Some courts have held that the Federal Arbitration Act (“FAA”) preempts state laws prohibiting forum selection clauses as against public policy.

For example, in M.C. Construction Corp. v. Gray Co., 17 F. Supp.2d 541 (W.D. Va. 1998), a North Carolina contractor and Kentucky subcontractor entered into a contract for a project in Virginia that contained an arbitration agreement and a forum selection provision naming Kentucky.  Virginia Code § 8.01-262.1 provides:

“The forum for any arbitration proceeding required in such a [construction] contract . . . shall be in this Commonwealth.  If the contract provides for arbitration proceedings outside the Commonwealth, such provision is unenforceable and the arbitration proceeding shall be in the county or city where the work is performed.”

When a dispute between the parties arose, the contractor sought arbitration from the subcontractor in Virginia.  The subcontractor removed the case to federal court and sought a declaratory judgment that the arbitration should take place in Kentucky as that was the locale designated in the parties’ contract. The contractor objected on the grounds that Virginia law invalidates construction contract agreements requiring arbitration to occur outside the state if the project was performed within the state.  The court ruled in favor of the subcontractor.  The court first found that the FAA was applicable because the construction contract entered into between a North Carolina contractor and a Kentucky subcontractor for work to be performed in Virginia involved interstate commerce.  It then held that the Virginia statute invalidating construction contract agreements that required arbitration to occur outside the state when contracted-for work was to be performed in the state, was preempted by provisions of the FAA that declared arbitration agreements to be valid and irrevocable, and thus designation of Kentucky as the site for arbitration was enforceable, even though the work was performed in Virginia. 

The take-away from M.C. Construction Corp. and other similar holdings is that even where a state statute purports to prohibit a choice of forum provision, parties involved in interstate commerce that agree to arbitrate may still have their disputes heard in their contractually chosen forum.

The Construction Group at Smith, Gambrell & Russell, LLP advises and assists businesses in transactional and litigation matters related to construction contracts.

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