Choice of Governing Law in Construction Contracts and Architects Agreements
Choosing The Governing Law - Choice of Law Clauses
Like most other contracts, construction contracts and architects agreements usually have a section on governing law - the choice of law clause. Choice of law clauses are usually good things. Contracting parties choose what law will govern the contractual relationship between them before they enter into the contract - while they're still on good terms, before they're polarized by confrontation and the posturing of their lawyers.
You can spend years and many thousands of dollars fighting not over the actual merits of who did what, whether they did it right, or paid enough when they were supposed to, but instead fighting over the law of which state should govern the dispute. If you don't choose governing law in advance, odds are good that you'll get to experience that fight. If you choose governing law in your contract, and choose it well, odds are you can save your powder for something more important.
A choice of law clause first needs to choose which jurisdiction's law will govern. In the U.S., this is going to be state law because the law governing contracts and most other private relationships in the construction context is state law (e.g., contract law, tort law, agency law).
Which Law To Choose?
The choice is easy when all of the following are in the same state:
- The project site.
- The parties' principal places of business.
- Organization of each party (i.e., they're all NevadaLLCs).
For example, consider an owner organized as a New York LLC with headquarters in Albany. They hire a Manhattan architect, organized as a New York professional corporation, to design and observe construction the build-out at the owner's new branch office in Rochester. Unless there are some other extraordinary contacts with another state and reasons for choosing the law of that state, the contract's choice of law clause is going to be New York law.
The choice gets more complicated the items mentioned above are in different states. Working off our example, change the owner to a Nevada LLC with their principal place of business in Atlanta. Change the architect to a Delaware corporation with their principal place of business in Chicago. Now we have contacts with five states instead of just one. Which state do you pick? Which one is the most critical?
The critical state is usually the one where the project site is located - what lawyers like to call the situs state. Lawyers like Latin words too. They make lawyers feel important and smarter than everyone else, even if they're not.
Regardless of all the other states with contacts affecting the project and the parties involved, the project's situs state is the most obvious, the most constant, and most expected choice for governing law. Part of the reason at least is that for at least a couple of generations, the American Institute of Architects's A201 General Conditions of the Contract For Construction has chosen the law of the situs state as the governing law.
Currently it's Section 13.1of the A201. So, the out-of-the-box "default" choice of law is the situs state.
Microsoft Internet Explorer's default homepage is MSN.com. But you can change the homepage to some other site. Click here and make this blog your homepage (I know you won't, but I have to try). Like your Explorer homepage, you can change the choice of law in your contract from the default too.
Sometimes you'll want to choose the law of another state and you'll have the negotiating leverage to insist on it. In our example, the Chicago architect may insist on Illinois law because
Illinois strictly applies the economic loss rule to claims for defective architectural design services. I'll spare you my own attempt right now to explain the economic loss rule and how it works. Suffice it to say for the moment, this rule makes it much harder for an owner to successfully sue an architect for defects in the design of a project.
And sometimes you'll want to avoid the laws of some state. For the same reason an architect may prefer Illinois law, an owner might want to avoid it and instead select the law of another state.
Wisconsin for example where the courts are much less strict in applying the economic loss rule to defective services.
Limits on Choosing Your Governing Law
But you can't choose the law of any state. There are two big things that restrict which state's law you can choose.
- The state you choose must have some contact with the parties or the project. The contact does not need to be much, but there must be contact. Usually you'll need at least one of the following points of contact:
- The project site's situsstate is the state you choose.
- One of the parties' principal places of business is in the state you choose.
- One of the parties is organized under the law of the state you choose.
If you don't have one of these, odds are a judge or arbitrator will not enforce your choice of law.
- Some states have mandatory choice of law statutes. They say that if the project is in that state, the law of that state will govern regardless of what you choose in your contract. Illinois has a one of these statutes - the Building and Construction Contract Act. At least 16 other states now have these statutes too (my next post will have a chart identifying these 16 states along with cites and free links to their statutes). If your project is in a state with one of these statutes and you choose the law of another state in your contract, you're in for a fight over whether which law will apply - the government's choice or yours.
Building A Better Choice of Law Clause
Once you choose which law you want to govern, there are some other things other things you should consider that will improve the chances an arbitrator or judge will apply your choice:
- If you want the law you choose to be the only law applied, have your contract say that. Say that the law you're choosing will "exclusively govern....". It's a little extra that can make a difference when someone else proposes applying some other law. The judge has to decide what the "parties intended" before s/he decides the issue. It'll be easier for the judge to choose your law, and only your law, if your choice of law clause says that your choice is exclusive.
- You'll usually want your choice of law clause to apply to the entire relationship between you and the other party, not just to the contract. A lot can happen on a construction project. And the claims and defenses that come up often arise from other, non-contract, law. For instance, tort law (e.g., fraud, negligence, negligent misrepresentation).
If you want better odds that the law you chose will to apply to non-contractual issues too, you'll fortify your choice of law clause with broader language. Something like: ".....governs all matters arising from, related to, or connected with, the contract or the work, regardless of how remotely and regardless of whether sounding in contract, tort, arising under a statute, or some other body of law". That kind of language isn't guaranteed to work. But, as Damon Runyon remarked, "the race is not always to the swift, nor the battle to the strong, but that's the way to bet."
- For choice of law purposes, each state divides it law into two bodies of law:
- Internal law - these are the substantive laws that set out people's rights and duties (e.g., how much damages you can recover for a breach of contract). This is what you probably think of as the law.
- Choice of law rules - these are the laws judges use to decide which state's internal law will apply to decide an issue. These are obscure and esoteric rules that sometimes produce absurd results. For example, assume California law says that Oregon law should govern some important issue. So you look to Oregon law for the answer. But Oregon law says that California law should govern. You go in an infinite circle......
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You're choosing the internal laws of the chosen state....
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Without regard to that state's choice of law rules.
- In the U.S., federal law "preempts" state law regardless of which state's law you choose. So if there is conflict between the state law you choose and federal law, the federal law will control. This doesn't happen often. But you need to be aware of it and be prepared for when it does.
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Put a choice of law clause in your contract.
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Choose law that you're familiar with. And if the law you choose does not give you a big advantage, try to avoid one that will put you at a big disadvantage.
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Remember that there are limits on which law you can choose. So make sure you, the other side, or the project has contacts with the state whose law you choose. And keep in mind that a statute may displace your choice.
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Consider using the suggestions above for improving your choice of law clause.
Lawyers call this renvoi (pronounced "rahn-vwah"). It's French. Using French words makes lawyers feel almost as important as Latin words. But for you it's easy to avoid renvoi and ensure that the internal law of the state you choose gets applied. Do this by simply saying so in your choice of law clause. Say that:
One place federal law frequently affects construction is the Federal Arbitration Act. A lot of construction contracts, architects agreements, and engineering contracts have arbitration provisions. And when one side wants to compel arbitration, or they wants to vacate or modify an arbitration award, the Federal Arbitration Act often gets involved.
Conclusion
Construction Law Today is a legal blog about construction contracts, disputes, finance, and the people whose job it is to deal with them.
