When entering into construction contracts, the question of which state’s laws will govern is a pivotal consideration. Choice of law has real-world implications for how construction disputes are resolved. Different states have varying laws on contract interpretation, remedies, and liability. For instance, one state’s laws might limit damages or impose stricter deadlines for filing claims. For contractors and subcontractors, choice of law can directly affect project risks and financial exposure.
In Texas, Section 272.001 of the Texas Business and Commerce Code permits the contractor to void provisions requiring the application of another state’s law or dispute resolution outside Texas. However, this state law has faced significant limitations.
Understanding Section 272.001’s Choice of Law Protections for Texas Projects
Section 272.001 of the Texas Business and Commerce Code states:
(a) This section applies only to a construction contract concerning real property located in this state.
(b) If a construction contract or agreement collateral to or affecting the construction contract contains a provision making the contract or agreement or any conflict arising under the contract or agreement subject to another state's law, litigation in the courts of another state, or arbitration in another state, that provision is voidable by a party obligated by the contract or agreement to perform the work that is the subject of the construction contract.
On its face, this provision offers Texas contractors (but not owners) some assurance that disputes tied to Texas construction projects will be governed by Texas law and resolved in Texas—at least to the extent the contractor exercises its right to void a provision requiring that another state’s law govern. As explained below, this assurance is not without limits.
Federal Arbitration Act Preempts Section 272.001 in Arbitration Agreements
In the 2022 case Global Industrial Contractors, LLC v. Red Eagle Pipeline, LLC, the United States District Court for the Southern District of Texas significantly limited the application of Section 272.001. 617 F. Supp. 3d 633 (S.D. Tex. 2022). The court found that the Federal Arbitration Act (FAA) preempts this state statute in cases involving arbitration agreements.
In Red Eagle, the general contractor sought to compel arbitration against its excavation subcontractor, pursuant to the parties’ subcontract agreement. In response, the subcontractor agreed arbitration was proper, but asserted that Section 272.001 permitted the subcontractor to void the subcontract’s specification of the arbitral venue in Baton Rouge, Louisiana, and the application of Louisiana law because the project was located in Texas.
However, the court agreed with Global that the Louisiana venue and choice of law contractual specifications were binding and not subject to voidance under Section 272.001. Specifically, the court held that Section 272.001 is preempted by the FAA because the statute attempts to invalidate the parties’ contractually specified law and forum for arbitration.
The FAA broadly declares arbitration agreements “valid, irrevocable, and enforceable,” barring generally applicable legal defenses to contract enforceability. The FAA mandates that arbitration agreements must be enforced as written, except on grounds applicable to all contracts. See 9 U.S.C. § 2. Because Section 272.001 imposes conditions specific to arbitration—such as requiring a Texas venue and choice of law—the Red Eagle court held that Section 272.001 creates restrictions not generally applicable to contracts, in violation of the FAA’s directive to enforce arbitration agreements as written. This followed a similar Texas appellate decision. See Cleveland Constr., Inc. v. Levco Constr., Inc., 359 S.W.3d 843, 856 (Tex. App.—Houston [1st Dist.] 2012, pet. dism'd).
Courts May Ignore Section 272.001 Where a Forum Selection Clause Specifies a Non-Texas Forum.
Even though Section 272.001 allows a contractor to void the contractual requirement to litigate in non-Texas forums, the United States District Court for the Western District of Texas refused to enforce the statute in Ameri-Fab, LLC v. Vanguard Energy Partners, LLC, 646 F.Supp.3d 795 (W.D. Tex. 2022).
In Ameri-Fab, the parties’ sub-subcontract had a provision requiring that New Jersey law govern all disputes and also granting a New Jersey federal court with exclusive jurisdiction and venue over any litigated dispute. After a dispute arose, the sub-subcontractor sent a demand letter to the subcontractor unilaterally declaring void the choice of law and venue provisions, then initiated litigation in a Texas federal court. The subcontractor then filed a motion to transfer to the New Jersey federal court pursuant to the sub-subcontract’s terms.
Rather than enforce Section 272.001, which the sub-subcontract sought to invoke to void the New Jersey venue, the court elected to give effect to the parties’ bargained-for forum selection clause. The court concluded that the forum selection clause was presumptively valid and would be enforced absent extraordinary circumstances, which did not exist notwithstanding Section 272.001. The court reasoned that permitting the sub-subcontractor to unilaterally void the bargained-for forum-selection clause after-the-fact would encourage gamesmanship; thus, the court chose to hold the parties to their bargain.
It is worth noting that the United States District Court for the Eastern District of Texas reached a different result, enforcing Section 272.001 where a motion to dismiss was filed based on forum—as opposed to the motion to transfer at issue in Ameri-Fab. See Suretec Ins. Co. v. C.R. Crawford Constr., LLC, No. 6:21-CV-00398-JDK, 2021 WL 6280376, at *1 (E.D. Tex. Dec. 15, 2021), report and recommendation adopted, No. 6:21-CV-398-JDK, 2022 WL 45056 (E.D. Tex. Jan. 4, 2022).
How this Affects Your Project
As illustrated above, the Texas "home rule" statute is no guarantee of the application of Texas law in a Texas forum. Parties construction in Texas should carefully analyze and negotiate their contracts to avoid unintended consequences stemming from unfavorable choice of law provisions. As a final takeaway, contractors should not rely upon Section 272.001 to protect their interests in arbitration or dispute resolution. The best practice is to negotiate contracts that explicitly specify the favored governing state law, forum, and venue at the outset. By doing so, contractors can avoid the uncertainty of not knowing which venue or choice of law will be chosen by a court.
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