By Brent Carpenter, Attorney
This article was originally published in the April 19, 2019 edition of the Daily Journal of Commerce.
A common group of provisions in construction contracts pose a significant risk to unwary subcontractors. However, with knowledge of these provisions and their interaction with federal law, a wary subcontractor can negotiate to protect itself from this risk. Large general contractors from outside of Oregon routinely include in their construction subcontracts a provision that any disputes arising under the subcontract are subject to the laws of another state—usually the general contractor’s home state—and that any action arising from the dispute must be filed in that state.
Provisions that make a contract subject to the laws of another state are known as “choice of law” provisions, and provisions that require a party to bring an action in another state are known as “forum selection” clauses. Under such provisions, for example, if the general contractor fails to pay the subcontractor, the subcontractor would have to file a lawsuit or demand arbitration in another state. Obviously, this could be a great inconvenience—and even a deterrent—to a subcontractor of limited resources.
In part for that very reason, in 2003 the Oregon Legislature enacted a statute intended to prevent general contractors from forcing subcontractors to engage in dispute resolution in another state. Oregon Revised Statute (“ORS”) 701.640 provides that:
(1) A construction contract may not include any provision, covenant or clause that:
(a) Makes the construction contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the construction contract to be conducted in another state; [and]
(2) Any provision, covenant or clause described in subsection (1) of this section is void and unenforceable.
Thus, it would seem that provisions that purport to make a construction contract subject to the laws of another state or require any dispute resolution to be conducted in another state are unenforceable under the clear language of the statute.
However, even 15-plus years after the enactment of the statute, general contractors continue to include such provisions in their subcontracts. The reason for this may be that there is potentially a loophole in the statute regarding arbitration. General contractors frequently include provisions in their subcontract that require the parties to settle any disputes arising from the subcontract through binding arbitration. Arbitration is a quasi-judicial process in which an arbitrator—usually a lawyer or retired judge—or panel of arbitrators operate as a judge would in a lawsuit. A federal statute, commonly known as the Federal Arbitration Act (“FAA”), applies to both federal and state courts. The FAA provides that:
A written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
9 USC § 2. In other words, under the FAA, an arbitration provision is enforceable unless the contract as a whole is revocable.
Thus, the FAA seemingly conflicts with ORS 701.640, the statute that renders unenforceable any provision in a construction contract that requires that an arbitration be conducted in another state. Pursuant to the Supremacy Clause of the United States Constitution and decisions of the United States Supreme Court, a federal statute that conflicts with a state statute will preempt the state statute.
No Oregon court has had the opportunity to determine whether the FAA and ORS 701.640 conflict and whether the former preempts the latter. However, other jurisdictions that have considered this issue have found that the FAA preempts state law prohibiting forum selection clauses in construction contracts. Other states have enacted statutes similar to ORS 701.640 and courts have found them to be pre-empted by the FAA. For example, Louisiana Revised Statute § 9:2779 declares “null and void and unenforceable as against public policy any provision in [certain construction subcontracts]. . .which [ ] [r]equires a suit or arbitration proceeding to be brought in a forum or jurisdiction outside of [Louisiana].” The Fifth Circuit Court of Appeals held that “[t]he statute directly conflicts with § 2 of the FAA because the Louisiana statute conditions the enforceability of arbitration agreements on selection of a Louisiana forum; a requirement not applicable to contracts generally.” OPE Intern. LP v. Chet Morrison Contractors, Inc., 258 F3d 443, 447 (5th Cir., 2001). The court held that “[t]he FAA therefore preempts the Louisiana statute, which prohibits the arbitration agreement between CMC and OPE” and affirmed the lower court’s compelling of arbitration. Id. at 447–48. While cases from other states are not binding on Oregon courts, a general contractor would likely cite these cases and, given that there is no Oregon case law, Oregon courts would likely consider them persuasive authority.
Therefore, a subcontractor who is presented with a subcontract that requires binding arbitration and contains a choice of law and forum selection clause faces a real risk of having to arbitrate its claim against the general contractor in another state. A subcontractor in this situation should attempt to negotiate the choice of law and forum selection clauses to make the subcontract subject to the laws of Oregon and place forum for any disputes in Oregon. If the subcontractor is unable to obtain such a revision, it should proceed with care and with the knowledge that any dispute will likely be costly.
Thank you for your interest in this article. The information contained in this article is for the general interest of our readers and should not be regarded as legal advice. If you have questions, or to obtain more information on this topic, please contact an attorney in our construction practice group.
Brent Carpenter is a shareholder at Jordan Ramis PC and focuses his practice on construction law. Contact him at 503-598-7070 or firstname.lastname@example.org.