Brian C. Padove | ConsensusDocs
One of the foundational tenets of contract law is that a party may only be bound by terms they agree to, or in other words, if the party did not sign a contract, that party cannot be bound by the terms thereof. While this principle is generally unwavering, there are certain situations in which a non-signatory to a contract may still be bound by the terms of a contract.
In particular, this non-signatory issue may arise when a payment bond claimant makes a bond claim, subsequently files a lawsuit, but the bond contains a forum selection clause different than the venue of the lawsuit and the surety seeks to enforce the bond’s forum selection clause. For example, the claimant may have filed its lawsuit against the surety in federal court, even though the bond provides language specifically mandating that no lawsuit shall be commenced by any claimant other than in a state court where the project is located. Thus, the question then becomes, can the surety enforce the forum selection clause against the claimant when the claimant did not sign the bond and/or never agreed to the terms thereof? The short answer, it depends (yes, that is a very lawyer-like answer). Given recent case law over the past decade, however, the surety has a strong argument in favor of enforcement of the forum selection clause.
This article will provide a brief summary of the United States Supreme Court decision in Atlantic Marine Constr. Co. v. United States Dist. Court for Western Dist. of Texas, 571 U.S. 49 (2013), in conjunction with the Seventh Circuit’s approach for analyzing forum selection clauses. It will then set forth an analysis of the applicability of these rules to payment bond claimants, along with a summary of a concept known as “direct-benefits” estoppel and conclude with final takeaways for sureties and payment bond claimants (including subcontractors and suppliers) to consider.
In relevant part, the United States Supreme Court’s decision in Atlantic Marine impacted forum selection clauses on two fronts. First, Atlantic Marine clarified the procedural mechanism parties should follow when seeking dismissal or transfer of a lawsuit involving a valid forum-selection clause. Second, the decision affirmed the position that courts favor enforcement of the freedom of contracting between parties, which includes forum selection clauses. As to the proper mechanism, the Supreme Court found that enforcement of a forum selection clause triggers 28 U.S.C. § 1404(a) when a lawsuit is filed in a federal forum different than a federal forum specified in the forum selection clause. If the forum selection clause calls for litigation in a foreign country or state court, however, the “remedy’ is to file a motion to dismiss under the common law doctrine of forum non conveniens. Id. at 61. As to the latter, the Court noted that a valid forum selection clause should be given great weight in all but exceptional circumstances because it represents and protects the parties’ expectations and the interests of the justice system. Atlantic Marine, 571 U.S. at 63.
Accordingly, there is a strong presumption in favor of enforcing forum selection clauses and, under Seventh Circuit case law, they are prima facie valid and enforceable unless enforcement unreasonable under the circumstances. See Bonny v. Soc’y of Lloyds, 3 F.3d 156, 159 (7th Cir. 1993). Seventh Circuit courts narrowly construe this “unreasonable” exception to enforceability and will generally only consider the clause unreasonable and refuse transfer to the chosen forum in the face of fraud, grave inconvenience, or contravention of strong public policy. See, e.g., Faur v. Sirius Intern. Ins. Corp.¸ 391 F. Supp. 2d 650, 657 (N.D. Ill. 2005).
In essence, Atlantic Marine and Seventh Circuit courts have set forth a three-part test as to enforcement of forum selection clauses: (1) whether there is a valid and enforceable forum selection clause; (2) whether the clause is “mandatory” through the use of obligatory language; and (3) if elements one and two are met, whether there are exceptions present to the general rule of enforceability. Thus, the first step is looking to the agreement to determine whether there is, in fact, a forum selection clause. From there, one looks to whether the clause’s language is mandatory. For instance, does the clause say that the claimants “may” file suit in a specific jurisdiction, or is there language stating that any suit on the bond “shall” be filed in the specified jurisdiction? The latter language using “shall” constitutes “mandatory” language in support of enforcement. Finally, courts will look to the exceptions to determine whether there exists any fraud or grave injustice, . Note, however, that once a valid and mandatory forum selection clause is established, the burden is on the party opposing transfer to demonstrate that one of the exceptions to enforcement applies.
Generally, payment bond claimants do not “accept” the terms and conditions of payment bonds through execution of bonds at issue. In fact, often claimants do not have knowledge of what terms are included in an upstream contractor’s payment bond until a copy of the bond is requested when a potential claim arises. The issue arises when the payment bond includes a forum selection clause that the claimant never agreed to and the surety wants to enforce the clause. Unsurprisingly, payment bond claimants may wonder how they can be bound by terms to which they never agreed, that are included in an agreement which they never signed.
The short answer to this question is: although a claimant may not be a signatory to the payment bond, it is foreseeable that a claimant would be bound by the bond’s terms, which would include the forum selection clause. According to the Seventh Circuit, a forum selection clause may bind a non-party if that party is “closely related,” such that it becomes foreseeable that it will be bound. Hugel v. Corporations of Lloyd’s, 999 F.2d 206, 209 (7th Cir. 1993). As such, notwithstanding that a claimant does not sign the payment bond and expressly agree to its terms, it is eminently foreseeable that a claimant is the type of party the forum selection clause intends to bind, and thus, the claimant would be bound by the forum selection clause. In other words, a payment bond claimant would clearly be a “closely related” party, whereby it would be foreseeable for that party to be bound. The fact that the claimant did not sign the payment bond should be of no consequence to enforcement of the terms, including the forum selection clause.
A surety looking to enforce a bond’s forum selection clause against a non-signatory payment bond claimant can also look to the doctrine of “direct benefits estoppel.” This doctrine generally applies to non-signatories who, on the one hand, embrace a contract’s benefits, but on the other hand, during litigation, attempt to repudiate a clause in the contract, such as a clause mandating arbitration. The United States District Court for the Northern District of Texas addressed this issue in Quality Custom Rail & Metal, LLC v. Travelers Cas. and Sur. Co. of America, No. 3:13-cv-3587-D, 2014 WL 840046 (N.D. Tex. March 4, 2014). Specifically, the Quality Custom court noted that the direct benefits estoppel doctrine would apply when a “non-signatory” payment bond claimant knowingly seeks and obtains benefits from the contract/bond or seeks to enforce the terms of the contract/bond which contains the forum selection clause. The court then determined that by seeking to enforce the terms of the bond by bringing a lawsuit against the surety for unpaid labor, the payment bond claimant was seeking direct benefits under the bond. Thus, the claimant could not then claim that the forum selection clause did not apply to it simply because the claimant was not a signatory to the bond.
In short, the direct-benefits estoppel doctrine generally provides that a party cannot pick and choose which provisions apply to it. That is, a payment bond claimant cannot bring a lawsuit seeking payment from a surety under a payment bond, and then assert that, because it did not sign the bond, it is not bound by the bond’s forum selection clause.
One of the fundamental maxims of contract law is that parties may generally only be bound by terms they agree to. However, in the payment bond context, this answer is not always clear. For claimants who, prior to a claim arising, may have no knowledge of a payment bond’s terms, they still may be bound by the terms of the bond – even though they never agreed to such terms. On its face, this goes against what many would believe is common sense. Given the fact that the claimants are attempting to recover under the bond, however, it is not surprising that the claimant must also be bound by the other terms of the bond.
Thus, contractors, subcontractors, and suppliers making payment bond claims should be aware that they are not only entitled to rights under the payment bonds but they also may be obligated to comply with other terms of the bond even though they never agreed to such terms. For sureties, Atlantic Marine, in conjunction with the direct-benefits estoppel doctrine,may provide guidance to disregard foundational contract law principles (that contract terms are only enforceable against signatories to a contract) and for the enforcement of a forum selection clause against payment bond claimants, regardless of whether the claimants agree to resolve their dispute in the chosen forum.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.