Surety Bond Quarterly Professionals in Surety Bonding
By A. Michelle West of Smith, Currie & Hancock LLP
Parties can expect federal courts to scrutinize forum selection clauses in federal public contracts. Subject to multifactor reasonability tests and ambiguity inquiries, only the clearest clauses survive. A North Carolina federal district court declined to enforce a forum selection clause that sought to lay venue outside the state of North Carolina because it was ambiguous, contrary to the Miller Act’s venue provisions, and was otherwise invalid under a multi-factor test that included a public policy analysis. Sears Contract, Inc. v. Sauer Incorporated et al., 378 F. Supp. 3d 435 (2019).
When drywall subcontractor Sears Contract filed suit in the United States District Court for the Eastern Division of North Carolina, citing non-payment for services in violation of the Miller Act, general contractor Sauer and its surety moved to dismiss the action or, in the alternative, to transfer it, citing a forum selection clause for the U.S. District Court for the Middle District of Florida. The subcontract included the following forum selection clause:
Any claim by Subcontractor filed in state or federal court against Sauer and/or Sauer’s surety shall only be filed and or resolved in any court within the exclusive venue of Sauer’s office address written above.
The court rejected defendants’ motion to dismiss under FRCP 12(b)(3), noting that a motion for transfer of venue under 28 U.S.C. § 1404(a) was the proper vehicle to enforce a forum selection clause. The court turned next to evaluating the enforceability of the clause itself, analyzing ambiguity in the clause and the effect of a transfer on the litigants in light of North Carolina’s laws and public policy.
The court found the forum selection clause ambiguous. Rather than designating a specific court or even a specific geographic location such as a county or city, the clause identified acceptable forums by Sauer’s “office address.” The court found that the office address could refer to the street address, the city court, the state court, or even the entire United States. When defining a jurisdiction geographically, the language must specifically name the boundaries rather than making a vague reference to an address. The lesson here when writing forum selection clauses is to name a specific court or geographic location. Rather than relying solely on the ambiguity of the clause, the court continued its analysis to determine whether, under the circumstances of the case, the clause was valid.
Fourth Circuit courts err on the side of enforcing valid forum selection clauses in all but the most exceptional cases. These clauses enjoy presumptive validity, absent a clear showing that they are unreasonable under the circumstances. In determining the reasonableness of a forum selection clause under the circumstances, the Court analyzes many factors, including whether enforcement would result in the complaining party losing its day in court because of grave inconvenience and whether enforcement would contravene strong public policy of the forum state.
The court focused on practical as well as public policy considerations in determining the clause’s invalidity. The referenced Florida address in the forum selection clause was hundreds of miles from the project site and the primary offices of Sears Contract, and most witnesses would likewise be hundreds of miles away from a Florida court in the vicinity of the specified Florida address. The North Carolina General Statutes declare that any North Carolina contract that requires prosecution of disputes in another state is void and unenforceable as against public policy. The General Statutes also void any term for improvement of real estate or providing of materials to a North Carolina real estate project made subject to the laws of another state. Amplifying the public policy concerns is the language of the Miller Act that all suits under the Act “must [be brought in the] district in which the contract was to be performed and executed.” 40 U.S.C. § 3133(b)(3)(B). The court found no evidence of clear waiver of the venue prescribed by the Miller Act.
The court weighed facts in favor of enforcement as well, including the location of Sauer’s office in Jacksonville, Florida, and that the parties were sophisticated business entities that were capable of freely entering into a contract at arms’ length. These factors, however, did not persuade the court to enforce the clause. The court also noted that, while the forum selection clause named the surety, because no such clause existed in the payment bond, the surety was not subject to the forum selection clause. Judicial efficiency of trying both defendants in the same forum further supported invalidating the forum selection clause. Without a clear and express selection of a specific Florida court to the exclusion of all other locations in Florida or the United States, the court held that the clause was ambiguous and against public policy, and thus was unenforceable.
Consider that other states in the Fourth Circuit do not share North Carolina’s public policy views on forum selection clauses. In Virginia, by contrast, where contract is king, courts routinely enforce forum selection clauses that submit disputes to the jurisdiction of another state. Virginia views the bargained-for exchange as near sacrosanct unless unconscionable. Had this project and contract been in Virginia, the court might have reached a different conclusion.
While public policy of your forum state may weigh against your forum selection clause on federal public projects, to give it the best chance at enforcement,
- Clearly and unequivocally waive the venue dictated by the Miller Act;
- Expressly name the specific jurisdiction of your chosen venue; and
- Reference any forum selection language in the surety bond.
The more factors in favor of enforcement the court has to weigh against practical and public policy considerations, the more likely your forum selection clause is to survive.
FIND OUT MORE
Access a NASBP Blog post on forum selection clauses here: https://bit.ly/41IPuQp. Access NASBP Virtual Seminars here: https://learn.nasbp.org/. Listen to NASBP Podcast “Let’s Get Surety” here: https://letsgetsurety.org/.
Michelle West is a trial lawyer with Smith, Currie & Hancock LLP. Bringing her talents to complex commercial litigation in the construction law and suretyship space, West litigates throughout the state and federal courts of the D.C. Metro area. She can be reached at [email protected] or 703.506.1990.
