Dancor Construction, Inc. v. FXR Construction, Inc., 2016 IL App (1st) 150839 offers a nuanced discussion of forum selection clauses and choice-of-law principles against the backdrop of a multi-jurisdictional construction dispute.
The plaintiff general contractor (GC) sued a subcontractor (Sub) in Illinois state court for breach of a construction contract involving New York (NY) real estate. The contract had a forum selection clause that pegged Kane County Illinois (IL) as the forum for any litigation involving the project.
The trial court agreed with the Sub’s argument that the forum-selection clause violated NY public policy (that NY construction litigation should be decided only in NY) and dismissed the GC’s suit. Affirming, the Second District discusses the key enforceability factors for forum-selection clauses when two or more jurisdictions are arguably the proper venue for a lawsuit.
Public Policy – A Statutory Source
The Court first observed that IL’s and NY’s legislatures both addressed the proper forum for construction-related lawsuits. Section 10 of Illinois’ Building and Construction Contract Act, 815 ILCS 665/10, voids any term of an IL construction contract that subjects the contract to the laws of another state or that requires any litigation concerning the contract to be filed in another state.
NY’s statute parallels that of Illinois. NY Gen. Bus. Law Section 757(1) nullifies construction contract terms that provide for litigation in a non-New York forum or that applies (non-) NY law.
Since a state’s public policy is found in its published statute (among other places), NY clearly expressed its public policy on the location for construction litigation.
Forum Selection and Choice-of-Law Provisions
An IL court can void a forum-selection clause where it violates a fundamental IL policy. A forum-selection clause is prima facie valid unless the opposing side shows that enforcement of the clause would be unreasonable.
A forum-selection clause reached by parties who stand at arms’ length should be honored unless there is a compelling and countervailing reason not to enforce it. (¶ 75)
A choice-of-law issue arises where there is an actual conflict between two states’ laws on a given issue and it isn’t clear which state’s law governs. Here, IL and NY were the two states with ostensible interests in the lawsuit. There was also a plain conflict between the states’ laws: the subject forum-selection clause was prima facie valid in IL while it plainly violated NY law.
Which Law Applies – NY or IL?
Illinois follows Section 187 of the Restatement (Second) of Conflicts of Laws (1971) which provides that the laws of a state chosen by contracting parties will apply unless (1) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (2) application of the law of the chosen state would violate a fundamental policy of a state that has a materially greater interest than the chosen state on a given issue.
The Court found the second exception satisfied and applied NY law.
Section 757 of NY’s business statute clearly outlaws forum-selection clauses that provide for the litigation of NY construction disputes in foreign states. As a result, the contract’s forum clause clearly violates NY’s public policy of having NY construction disputes decided in NY.
The question then became which state, NY or IL, had the greater interest in the forum-selection clause’s enforcement? Since NY was the state where the subcontractor resided, where the building (and contract’s finished product) was erected and the contract ultimately performed, the Court viewed NY as having a stronger connection. Since allowing the case to proceed in IL clearly violated NY’s public policy, the Court affirmed dismissal of the GC’s lawsuit.
Forum selection clauses are prima facie valid but not inviolable. Where a chosen forum conflicts with a public policy of another state, there is a conflict of laws problem.
The Court will then analyze which state has a more compelling connection to the case. Where the state with both a clear public policy on the issue also has a clearer nexus to the subject matter of the lawsuit, the Court will apply that state’s (the one with the public policy and closer connection) law on forum-selection clauses.