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OP-ED: Federal contractors, litigate in Hawaii only by choice

Daily Journal of Commerce Oregon
April 25, 2017

Overview

A contractor performing work on a federal project in Oregon could be sued or forced to sue in Hawaii over disputes arising out of work on that federal project within Oregon.  Likewise, a contractor who agrees to a single contract requiring work on federal projects in multiple states could be forced to litigate claims that arise out of that single contract in multiple states.

The place that your disputes are resolved will have a strong bearing on your resolution perspective. Litigation in your backyard is substantially easier to manage than litigation on the other side of the country. Litigation in numerous states could be crippling, where the same litigation in one state would make financial sense.

What’s more: states have different rules regarding interest that accrues on unpaid amounts, the types of claims a contractor might bring, and the sorts of witnesses that are available.  You might not be in Kansas anymore; or, more precisely, you may have a problem because you are in Kansas.  This strange situation makes it very important that construction contracts for federal projects choose an acceptable location for dispute resolution.

The Oregon legislature anticipated this potential issue and enacted a statute to ostensibly protect Oregon contractors.  Under ORS 701.640, “a construction contract” may not include any clause that “requires any litigation, arbitration or other dispute resolution proceeding arising from the construction contract to be conducted in another state.”  

Other states have enacted substantially similar statutes, which appear to be based on an assumption that the location of construction should also be the place where related litigation occurs.  But those statutes fail to consider federal projects, which do not necessarily arise in any state and can involve work in multiple states.

For example, a federal court in Texas in the case J-Crew Management, Inc. v. Atlantic Marine Constr. Co. ruled that a dispute arising out of work on a federal project in Texas could be litigated in Virginia because the parties’ contract chose Virginia as its dispute resolution state.  The court explained that the state of Texas had no right to “exercise legislative jurisdiction over property located entirely within the federal enclave.”

So if an Oregon court were to follow the same reasoning, federal projects performed within the boundaries of Oregon could be subject to dispute resolution in far-flung locations. 

Federal projects sometimes involve work in multiple states.  Imagine a federal project with work in ten states. A dispute arises over a payment of $500,000. Neither party wants to compromise on that amount of money. They have a forum selection clause for one state but that state is more favorable to one of the parties. The other party might threaten to force litigation in all ten of the states where the work was performed.

How could that be done?  Statutes like ORS 701.640 arguably require that construction disputes be resolved in the state where the construction work occurred. If the construction work occurred in ten different states, ORS 701.640, the argument goes, would require litigation in ten different states.  No legislature would have intended such an expensive and absurd result; these types of projects are unique and best governed by the dispute resolution provision in the parties’ contract, which could have been reviewed by both parties in advance of any dispute.

How should a contractor protect itself in this crazy environment? First, read the dispute resolution clause in the construction contract. Disputes arising out of work on federal projects could be subject to resolution in a far-flung location. Contractors should be aware of whether they are taking that risk.

Second, if a contractor is working on a federal project involving multiple states, that contractor would be well served to choose a single location for litigation. Your friendly lawyer would prefer that you choose Hawaii.


Column first appeared in the Daily Journal of Commerce on April 25, 2017.

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