New Jersey’s Prompt Payment Act May Override a Contractual Forum Selection Clause

Many subcontractors are faced with contracts from general contractors that include a “forum selection clause,” identifying the location and/or the court where any legal dispute will be litigated or arbitrated. That means that a party to a contract can agree to litigate or arbitrate disputes outside the location where the construction occurred or the dispute arose.  Out-of-state contractors often make subcontracts with New Jersey subcontractors requiring disputes to be resolved in the contractor’s home state, which may be far from the state where the subcontractor performed the work. Litigating a claim in an out-of-state forum adds to the subcontractor’s cost and burden of litigation; thus, out-of-state forum selection clauses may act as a disincentive for subcontractors to pursue legal claims.

However, in light of a recent New Jersey Appellate Division decision, out-of-state forum selection clauses may no longer be enforceable in New Jersey for contracts that fall under the New Jersey Prompt Payment Act, N.J.S.A. 2A:30A-1, et seq. (the “PPA”)[i].

While New Jersey courts routinely enforce forum selection clauses, they will decline to do so where enforcement would violate the strong public policy of New Jersey.  On May 7, 2019, in the case of ERCO Interior Sys., Inc. v. Nat'l Commercial Builders, Inc. , Docket No. A-4640-17T1, N.J. Super. App. Div. (per curiam), the New Jersey Appellate Division declined to enforce a forum selection clause in a parties’ subcontract that required any dispute regarding the subcontract work to be litigated in Kansas, holding that New Jersey's strong public policy for prompt and efficient payment of claims related to New Jersey-based construction disputes as set forth in New Jersey’s PPA required that the dispute be heard in New Jersey.

In ERCO Interior Sys., Inc., the defendant/contractor had a contract to construct movie screens in New Jersey and subcontracted the acoustical tiling work to plaintiff/subcontractor. The subcontract included a forum selection clause requiring that any litigation be brought in Kansas, the home state of the contractor. A dispute arose over payments allegedly owed by the contractor to the subcontractor, and the subcontractor filed a lawsuit in New Jersey for breach of contract, quantum meruit, unjust enrichment, and violation of the PPA.  The contractor moved to dismiss the New Jersey lawsuit based on the forum selection clause, arguing that any lawsuit must be brought in Kansas.  The trial court granted the contractor’s motion and declined to invalidate the clause.  The subcontractor appealed the trial court’s decision and argued that the PPA required that all PPA payment claims had to be litigated in New Jersey. The Appellate Division agreed with the subcontractor and ruled that enforcement of the Kansas forum selection clause would violate New Jersey’s strong public policy to ensure that contractors and subcontractors performing construction work in New Jersey are paid promptly,[ii] and ordered that the case proceed in New Jersey.

Thus, while the PPA does not govern all contracts, if it applies to your contract, it may provide a means to avoid oppressive forum selection clauses.

[i] In 2006, the New Jersey Legislature enacted the PPA to help protect the rights of New Jersey subcontractors and inter alia ensure they are paid promptly. The PPA mandates that all actions to collect payments under the Act be brought in New Jersey.  The New Jersey PPA is the subject of a prior blog post that you can read by clicking the link here.

[ii] The Appellate Division also found that applying the forum selection clause would violate the entire controversy doctrine because it would require the subcontractor to litigate its PPA claims in New Jersey, and its other common law claims in Kansas, contrary to New Jersey’s strong public policy in litigating all claims of all parties in one comprehensive lawsuit.

If you have any questions about this post or any related matters, please feel free to contact our Construction Law Practice Group.