During contract negotiations and review, the parties make choices about what risks they are willing to accept and at what cost. But one often overlooked choice—the choice of law applicable to the contract—can undermine carefully negotiated construction contracts and expose contractors to risks they never intended to accept.
Choice-of-law provisions are standard provisions in most contracts. These provisions allow the parties to the contract to decide which state’s laws will apply to their contract. Often, choice-of-law in the construction contract is the law of the state where the project is located and there will be no issue. But, if the project is located in an unfamiliar, the owner or prime contractor may prefer the laws of the state where the owner or prime contractor is primarily located over the laws of the state where the project is located.
Generally, most states will enforce the parties’ choice of law in a contract. But that may not be the case for construction contracts. States like Texas, California, New York, Florida, Louisiana, and others may prohibit parties from agreeing to the application of another state’s law for construction projects in their states.
This article explores some of the impacts state anti-choice-of-law statutes can have on the contractor’s risk under the contract and some of the variations on these anti-choice-of-law statutes. Notably, anti-choice-of-law statutes may not be the only barrier to enforcing the parties’ choice-of-law provision in a construction contract. States may also refuse to enforce choice-of-law provisions based on the state’s public policy set forth in case law. This article discusses only the anti-choice-of-law statutes for simplicity, but the impact of state case law regarding policy can similarly impact the contractor’s risks under the contract.
What’s the Risk?
Choice-of-law provisions can shift the risk in the construction contract in important ways. Indemnification, waivers, and limitations of liability are some of the risks that can vary widely depending on state law and can change the parties’ rights under the contract depending on the applicable law.
Indemnity Provisions. Many states have anti-indemnity statutes that apply to construction contracts, but these anti-indemnity laws can vary widely by state. Anti-indemnity statutes may prohibit a subcontractor from indemnifying the contractor for the contractor’s own negligence. But, depending on the state, anti-indemnity statutes may include exceptions to allow for “knock-for-knock” indemnity—meaning the subcontractor can agree to indemnify the contractor for the contractor’s own negligence if the claim is related to the subcontractor’s employees or property. States like Texas also impose an additional “fair notice” test for such indemnity provisions meaning that the indemnity language must be clear and specific and in all caps, bolded, and/or in larger font than the rest of the contract or the indemnity will be unenforceable. In other words, if a contract is drafted to comply with Louisiana state indemnity law, for example, because that is the choice-of-law the parties agreed to, the indemnity provision may not be enforceable under Texas law if that is the law that ultimately applies.
Waivers and Limitations on Liability. State laws also vary on whether certain waivers and limitations on liability will be enforceable. Some states will not enforce a lien waiver that is agreed to in the contract prospectively before lien rights accrue. State laws may also vary on requirements for enforceability of liquidated damages provisions. Some states will not enforce no-damage-for-delay provisions or pay-if-paid provisions in construction contracts. If the state law that is ultimately applicable to the contract does not enforce these provisions, a contractor may be paying a premium to the subcontractor in the contract price for limitations of liability that the contractor is not able to enforce.
These keys provisions in risk allocation between the parties to a construction contract vary in important ways from state to state. Negotiating a contract with the expectation that the agreed-to state’s law will apply to the contract, only to have different state law apply, can expose the contractor to unexpected and unplanned risk.
When Do Anti-Choice-of-Law Statute Apply?
Anti-choice-of-law statutes may apply broadly to construction contracts for projects in the state or may apply more narrowly only under certain circumstances. The statues in New York, Texas, and Louisiana provide an example of how these statutes can vary.
In New York, for example, the anti-choice-of-law statute applies broadly to construction contracts that make the contract subject to the laws of another state and renders those provisions automatically void and unenforceable.
New York General Business Law § 757
The following provisions of construction contracts shall be void and unenforceable:
- A provision, covenant, clause or understanding in, collateral to or affecting a construction contract, with the exception of a contract with a material supplier, that makes the contract subject to the laws of another state or that requires any litigation, arbitration or other dispute resolution proceeding arising from the contract to be conducted in another state.
Texas also has an anti-choice-of-law statute for construction contracts, but the Texas law provides that the choice-of-law provision is voidable by the party performing the work, giving the contractor or subcontractor the right to decide whether the choice-of-law provision will apply or not.
Texas Business and Commerce Code § 272.001
(a) This section applies only to a construction contract concerning real property located in this state.
(b) If a construction contract or an 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.
Allowing the party “obligated . . . to perform the work” to decide whether to void the choice-of-law provision or not protects the contractor or subcontractor from performing work in Texas, but being subject to less favorable treatment by the application of another state’s law. On the other hand, if the other state’s law is more favorable, the contractor or subcontractor can decide to enforce the other state’s law.
Louisiana treats the anti-choice-of-law issue differently from both Texas and New York. In Louisiana, if one of the parties to the construction contract is domiciled in Louisiana and the work to be done involves a construction project in Louisiana, the choice-of-law provision applying a different state’s laws is “null and void and unenforceable.”
Louisiana Revised Statute § 9:2779
A. The legislature finds that, with respect to construction contracts . . . for public and private works projects, when one of the parties is domiciled in Louisiana, and the work to be done and the equipment and materials to be supplied involve construction projects in this state, provisions in such agreements requiring disputes arising thereunder to be resolved in a forum outside of this state or requiring their interpretation to be governed by the laws of another jurisdiction are inequitable and against the public policy of this state.
B. The legislature hereby declares null and void and unenforceable as against public policy any provision in a contract, subcontract, or purchase order, as described in Subsection A, which either:
(1) Requires a suit or arbitration proceeding to be brought in a forum or jurisdiction outside of this state; rather, such actions or proceedings may be pursued in accordance with the Louisiana Code of Civil Procedure or other laws of this state governing similar actions.
(2) Requires interpretation of the agreement according to the laws of another jurisdiction.
Conclusion
If a construction contract contains a choice-of-law provision applying the laws of a state different from the state where the project is located, the contractor should determine whether the state where the project is located has enacted an anti-choice-of-law statute or a state policy against enforcement stated in case law. Which state’s law applies to the contract can shift the risk profile of construction contract in major ways as discussed in this article.