Venue and Choice of Law – Contractual Rendition?

Is performing a construction contract in one state and being subject by the terms of the construction contract to the laws of another state contractual rendition?  Here’s something for you contractors and subcontractors who are constantly “tortured” by having to accept broad form and intermediate form indemnities in your client’s construction contracts to think about.

By Kit Werremeyer

President, Southernstar Consultants, LLC

“Rendition” is a term frequently used today to generally describe the process of taking persons captured in one country with lots of civil rights laws and rules against torture to another country which does not have a lot of civil rights laws and rules against torture.

But what is “Contractual Rendition”?

Language similar to the following example appears frequently in construction contracts.

Article 59 – Venue and Choice of Law

59.1          This contract shall be interpreted in accordance with the laws of the State of Texas without regard to any conflicts.

59.2          All claims, disputes, and lawsuits arising out of or in connection with this Contract shall be resolved or adjudicated in the city of Houston in the State of Texas.

Maybe it sounds pretty innocuous if you’re working in a state bordering Texas, or you just pass it over in the contract negotiations because you don’t fully understand the consequences of agreeing to such a contractual obligation.  Wherever you are located, you just have to get on your horse and travel to Texas to take care of any problems.  Okay, you say, we can deal with that.

Here’s an example situation:

You have worked really hard and long to win a large construction contract with a major EPC Contractor for a part of a major industrial project with a private client in the State of Montana.  The construction contract you have to sign has the above Article 59 included.

In your contract review, you cruise right by Article 59 with the afterburners on; no problem.  The construction contract also has the following very conspicuous, bold print, concise and specific indemnity in it:

Article 33 - Indemnity

To the fullest extent permitted by law, Contractor shall defend at Contractor’s expense, indemnify, and save Main Contractor and Client harmless from all claims for injuries to, or death of, any and all persons, and for loss of or damage to property, regardless of how caused, that arise under or in connection with Contractors performance of this Contract, except only those claims that arise out of the sole negligence of the Main Contractor or Client.

You really want this contract, and you know this indemnity stinks because it is an intermediate form indemnity which makes you fully responsible for those claims arising out of up to 99% of the Main Contractor’s and/or Client’s negligence.  The only types of claims excluded are those claims that arise out of the Main Contractor’s or Client’s sole—100%--negligence.  And you get to pay all the Main Contractor’s and Clients defense costs, too!  Talk about a contractual landmine!!

You probably can’t even insure your company’s financial exposure that may arise out of this type of unlimited indemnity.  And if it’s ultimately enforceable, your construction company could be bankrupt by having to pay a large claim that you had nothing to do with.

Welcome to the world of contractual rendition.

There is a reason that Article 59, Venue and Choice of Law is in this contract along with the conspicuous, bold print, Indemnity in Article 33.

Recall that the project is being built in the State of Montana.

 Montana is one the few progressive and forward looking states in the US that has a clear and effective anti-indemnity statute in place.  Basically, under the Montana anti-indemnity statute it is against the law to require a contractor to accept a broad form or an intermediate form indemnity in a construction contract.  Let’s translate this.  If a claim arose out of the construction contract, and the Main Contractor or Client tried to enforce the indemnity in Article 33 in Montana courts, it is very likely—maybe certainly—that the indemnity would be ruled void and unenforceable as it is a violation of Montana’s anti-indemnity law.

So the indemnity would be struck from the construction contract and thrown out onto the judicial trash heap, right where it belongs.

However, under the terms of the construction contract, Article 59, Venue and Choice of Law, any claim that arose under the contract between the Contractor and Main Contractor and/or the Client would have to be resolved in Texas and under Texas law.

Presently in Texas, there is no anti-indemnity statute in place that protects construction contractors. And since the indemnity in Article 33 is specific and conspicuous (Mr. Contractor, how could not understand this bold print clause?) it’s likely that a court in Texas would enforce its provisions.  Too bad for the Contractor; do a better job the next time of negotiating your contract, if you’re still in business after paying the claim that you had nothing to do with.  And don’t forget that you’ll probably have to pay the Main Contractor’s and/or Client’s legal defense costs, too.

So there you have it:  contractual rendition.  You can’t be “tortured” by an indemnity in states that have effective anti-indemnity legislation, but you can be “tortured” by an indemnity if you agree to allow the claim to be transferred (rendered) to a state which does not have an effective anti-indemnity statue in place.

Next time you are reviewing a contract and see a Venue and Choice of Law clause that moves the jurisdiction to another state from which the project is being built, think contractual rendition.  There’s a reason it’s in the contract, and it’s not for the benefit of the Contractor or Subcontractor.

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Authors Notes:

1.      Interested readers can take a look at Montana Code 28-2-2111, titled:  Construction Contract Indemnification Provisions, to see an example of an anti-indemnity statute that makes broad and intermediate form indemnities in construction contacts void and unenforceable.

2.      A number of recent attempts to introduce an anti-indemnity statute for construction contracts in Texas have been defeated.

3.      Some states, like Colorado, require claims arising on projects in the State to be resolved in the state and under Colorado law, so they are aware of “contractual rendition” and have made it illegal. Article 59, Venue and Choice of Law, as shown in this article would likely not be enforceable.

4.      Always check the laws in the state in which you are working for effective anti-indemnity statutes and whether or not “contractual rendition” is allowed or is illegal.

 ©2007 Southernstar Consultants LLC