Kevin Schlosser Authors, "How to Avoid Litigating Disputes in a Foreign, Inconvenient Forum" For Construction Law

Publication Source: Construction Law

Your firm has been awarded a multimillion dollar job as the general contractor on a public improvement project for a state agency to repair portions of an interstate thruway. After your firm’s bid was accepted, an out-of-state supplier solicits you for a contract to provide materials for the job.

After visiting the supplier’s manufacturing premises out of state, a contract is signed for the materials. Thereafter, despite your firm’s best efforts, the supplier fails to meet its deadlines, your firm is subjected to liquidated and related damages by the state agency and, of all things, your company is hauled into court by the supplier in an out-of-state court hundreds of miles away. Could this happen to you?

In the absence of clear, protective language in your contract, you could find yourself litigating in a foreicn jurisdiction, without your own loyal legal counsel and far away from the evidence and witnesses you need.

A similar scenario arose in a recent case decided in the federal District Court of the Eastern District of Pennsylvania in Superior Precast Inc. v. Proto Construction & Development Corp. and highlights the need for clear contract language when entering into agreements with out-of-state subcontractors and suppliers.

In June 1998, Proto Construction and Development Corp. of Woodside, N.Y.. was selected by the New York State Thruway Authority to erect sound barriers along the New York State Thruway in Westchester County, New York.

Superior Precast Inc., a Michigan corporation with offices in Pennsylvania, solicited Proto to supply precast concrete posts and panels to be used in the public improvement project. After Proto engaged Superior, a dispute arose concerning the expected delivery of the materials.

In an obvious “race to the courthouse,” Superior filed suit against Proto and Proto’s surety in the United States District Court, Eastern District of Pennsylvania, far away from Proto’s headquarters and miles from where critical witnesses to the case lived and worked.

After the case was instituted, Proto asked the Federal Court to dismiss the action on various “procedural” grounds and, more importantly, requested that the entire lawsuit be transferred to New York for a determination there.

Proto argued, among other things, that the contract it had with Superior incorporated by reference all of the provisions of its prime contract with the New York State Thruway Authority, including the requirement that all disputes be resolved in the courts of New York.

Ordinarily, a contractor in such circumstances would believe that it was adequately protected from being hauled into court in an out-of-state forum by incorporating the provision for litigation of disputes only in New York state.

However, the federal court in Pennsylvania was not convinced that the forum-selection clause had been clearly made a part of the contract between Proto and Superior or that it encompassed the current litigation. Thus, Proto was forced to seek the discretion of the court in the interests of fairness and justice to transfer the matter to the most convenient and appropriate forum — New York state.

Proto argued that the more appropriate forum to resolve this dispute was New York because it centered around a New York public improvement project. New York state had a vested interest in resolution of the dispute and the relevant and critical witnesses were mostly located in New York.

Fortunately for Proto, on July 6, 1999, the federal District Court in Pennsylvania held that the action should be transferred to the District Court for the Eastern District of New York (where Proto had its case against Superior already pending) in the interests of justice.

Although Proto was thus saved from the inconvenience, expense and burden of litigating in a foreign forum, the case illustrates the need for clear and concise contractual language to protect a contractor's right to litigate in its home jurisdiction. The easiest way of avoiding the risk of litigating in a foreign forum is to include explicit language in the direct subcontractor or supplier contract - providing that disputes be resolved only in the forum of choice. As this case illustrates, simply relying upon a general provision incorporating by reference the requirements of the prime contract can be risky.

With half the battle won by litigating in a friendly, convenient forum, it is still no small consideration for any contractor. Nevertheless, this federal decision does provide some level of comfort for those who have existing agreements that are not clear on this issue.

The court exercised its discretion to determine as a matter of fairness and convenience that litigation over a New York public improvement should be resolved in the state where the project is located.

If doubt exists about these issues, it would certainly be prudent to have competent and experienced legal counsel review existing contracts to provide maximum protection in the future.