By: Thomas S. Tripodianos Published: February 2016

Can the Surety enforce an exclusive forum selection clause in the subcontract agreements between Bond Claimant and Principal?

Question.        Bond Claimant brings this state-law action for non-payment against Surety, the surety on two labor and material payment bonds issued in connection with two Public construction projects in New York City. On both projects, Bond Claimant served as a subcontractor to Principal, the principal on the bonds issued by Surety.

Can the Surety enforce an exclusive forum selection clause in the subcontract agreements between Bond Claimant and Principal?

Answer. Yes.

Bond Claimant alleges that it furnished labor, materials, and equipment to Principal in connection with two Public projects.

For each project, Bond Claimant entered into a subcontract agreement (the "Subcontract Agreements") with Principal, on January 27, 2010 and November 2, 2010, respectively.. Each Subcontract Agreement contains an identical forum selection clause, which, in relevant part, provides:

1.1 The venue of any action or proceeding shall be exclusively in the Supreme Court of the State of New York, County of Westchester, before a Justice of said Court. The parties hereto hereby waive the right to trial by jury.

1.2 Notwithstanding any contrary terms of conditions contained in any surety bond, the parties agree that the venue of any action or proceeding against any surety bonds made in connection with the Project shall be exclusively in the Supreme Court of the State of New York, County of Westchester, before a Justice of said Court. The parties hereto hereby waive the right to trial by jury.

For each project, Bond Claimant was also covered by labor and material payment bonds, issued by Surety, as surety to Principal, in the amounts of $40,000,000 (the "Project A Bond") and $116,000,000 (the "Project B Bond"), respectively. Bond Claimant alleges that these bonds-guarantees, essentially, that Principal would perform its contractual obligations to its subcontractors-create joint and several liability between Surety and Principal for any failure to perform by Principal. The parties have not indicated whether the bonds themselves contain forum selection clauses.

Bond Claimant commenced an action, seeking to recover labor and materials costs it purportedly provided to Principal on the two projects, but for which it was purportedly never paid. Only Surety-and not Principal-is named as a defendant. Surety now seeks dismissal of Bond Claimant's action, contending that the forum-selection clause in the Subcontract

Agreements between Bond Claimant and Principal is mandatory and must be enforced.

Bond Claimant contends that Surety is not a signatory to these Agreements, and that Surety therefore improperly relies on a forum selection clause that is absent in the four corners of the subject payment bonds.

Forum selection clauses are to be interpreted broadly and are not restricted to pure breaches of the contracts containing the clauses. Whether a particular claim falls within the scope of a forum selection clause is a contractual question that requires the courts to interpret the clause and, where ambiguous, to consider the intent of the parties. Courts have consistently analyzed a clauses scope by reference to the meaning of its terms.

Here, the language of the forum selection clauses is unambiguous: it applies to any cause of action brought against any surety bonds made in connection with the Project.. Although this language should not be read to encompass all claims that have some possible relationship with the contract, it is nonetheless sufficiently broad to encompass Bond Claimants particular claims here. Bond Claimants Complaint makes clear that its claims arise from its Subcontract Agreements with Principal, and it seeks damages in the amount of materials and services that remains unpaid by Principal on the Project A and Project B Projects, with Surety named only its capacity as surety.

Bond Claimant does not seriously contend otherwise. It asserts only that the venue provisions in the Subcontract Agreements cannot apply to Bond Claimants claims on the payment bonds, but otherwise offers no support for this proposition. Accordingly, its claims fall within the scope of the Subcontract Agreements forum selection clauses.

That a party is a non-signatory to an agreement is insufficient, standing alone, to preclude enforcement of a forum selection clause. Indeed, a non-signatory can enforce the forum selection clause against a signatory when the non-signatory is closely related to another signatory. Such a close relationship exists where the non-signatory’s enforcement of the forum selection clause is foreseeable to the signatory against whom the non-signatory wishes to enforce the forum selection clause.

Here, the relationship between Bond Claimant and Surety was sufficiently close for Surety, a non-signatory to the Subcontract Agreements, to nonetheless enforce the forum selection clauses contained therein. Although only Bond Claimant and Principal are signatories to the Subcontract Agreements, the enforcement of the forum selection clauses by sureties on the Project A and Project B Projects is expressly contemplated. Surety is Principal surety on both projects-and, indeed, is the surety on the payment and materials bonds pursuant to which Bond Claimant seeks recovery.

That Bond Claimant elected to sue only Surety does not permit Bond Claimant to escape its contractual obligations. It should have been foreseeable to Bond Claimant from the clear language of the forum selection clauses that Surety, as the surety on its projects, would seek enforcement of these clauses if sued anywhere but New York State Supreme Court, Westchester County.

As the first three prongs of the forum selection analysis are satisfied, the forum selection clauses in the Subcontract Agreements are presumptively enforceable. Bond Claimant may therefore defeat dismissal only if it overcomes this presumption, namely, by establishing that enforcing the forum selection clauses would be unreasonable or unjust. A forum selection clause is enforceable unless (1) its incorporation was the result of fraud or overreaching; (2) the law to be applied in the selected forum is fundamentally unfair; (3) enforcement contravenes a strong public policy of the forum state; or (4) trial in the selected forum will be so difficult and inconvenient that the Plaintiff effectively will be denied of his day in court.

Bond Claimant has not credibly argued that the forum selection clauses here should be set aside because their enforcement would be unreasonable or unjust. Instead, it offers a wholly unsubstantiated public policy concern, namely, that Surety’s requested relief would turn the construction industry upside down.  Finding that Surety can enforce the forum selection provisions of Bond Claimants contracts with Principal, however, will not preclude subcontractors from recovering against sureties. It will merely ensure that they do so in the proper forum. Here, that forum-one that Bond Claimant assented to when it signed the Subcontract Agreements-is New York State Supreme Court, Westchester County.

© Welby, Brady & Greenblatt, LLP.
All Rights Reserved. By visiting this site, you agree to our Terms of Service. For more information please read our Privacy Policy Attorney Advertising