Construction / 5 min read
Amendment to Chapter 272 of the Texas Business and Commerce Code
A recent amendment to Chapter 272 of the Texas Business and Commerce Code has major implications for the enforceability of choice of law and venue provisions in construction contracts involving Texas real property. Section 272.001 formerly provided that any clause in a construction contract for a Texas project that subjected the agreement or parties' disputes to the laws or courts of another state or arbitration in another state was "voidable" by the party obligated to perform the work. Now, the statute goes further: if a construction contract—or any agreement collateral to or affecting the construction contract—contains a provision making the contract or any conflict arising under it subject to another state's law, litigation in another state's courts, or arbitration in another state, that provision is void as against Texas public policy.
The shift from "voidable" to "void" is significant. Under the prior law, a party had to actively challenge an out-of-state provision to avoid its enforcement. Now, such provisions are void and unenforceable from the outset, providing greater certainty to construction industry participants and reducing the risk of costly procedural battles. By making these provisions automatically void, the Legislature has closed a loophole that previously allowed parties to subject disputes to less favorable or less convenient law and forums, toward the end of ensuring that Texas's comprehensive legal framework is uniformly applied to in-state construction projects.
It is important to note that the statute's reach extends beyond construction contracts to include collateral agreements—such as guarantees and assignments—that affect the construction contract. For example, if a national contractor or an owner/developer backed by institutional investors includes a New York choice of law and venue clause in a contract for a Houston construction project, Texas courts will disregard the provision and apply Texas law, with venue in the county where the project is located. This change affects not only contractors, but also owners, architects, engineers, construction managers, subcontractors, suppliers, and out-of-state parties, all of whom should adapt their contracts and practices for Texas projects.
However, the statute does not apply to certain agreements, such as partnership agreements, loan agreements where the contractor is performing work as part of a credit arrangement, or property management agreements. Parties should therefore carefully analyze whether their agreements fall within or outside the statute's scope.
The change reflects strong Texas public policy that its own laws, courts and Texas based/located arbitrations should apply to construction projects located within the state. Local venue ensures that disputes are resolved where the project and evidence are located, making proceedings more efficient and accessible. Additionally, by mandating that Texas law applies and that disputes are resolved in Texas courts or arbitrations, the state prevents parties from circumventing important substantive protections afforded by Texas cases and statutes, through out-of-state choice of law or venue provisions.
Ultimately, Texas's stance reflects a commitment to maintaining oversight and consistency over legal matters that directly impact its real property, economy, and public interests.
Key Takeaways for Construction Industry Executives
- Out-of-State Choice of Law Provisions Are Now Void: Any attempt to designate the law of another state as governing a Texas construction contract is likely unenforceable. This means that Texas law should apply to disputes arising out construction contracts concerning Texas real property, regardless of what the contract says.
- Out-of-State Venue and Arbitration Provisions Are Also Void: Provisions requiring litigation or arbitration to occur in another state are also likely void. Disputes should be resolved in Texas, and, unless the parties agree otherwise after a dispute arises, proper venue should be the county where the property is located.
- Collateral Agreements Are Covered: The statute's reach extends beyond construction contracts to include collateral agreements—such as guarantees and assignments—that affect the construction contract. These, too, should not be able to circumvent Texas law or venue requirements.
- Limited Exceptions: The statute does not apply to certain agreements, such as partnership agreements, loan agreements where the contractor is performing work as part of a credit arrangement, or property management agreements.
Drafting Tips
To help ensure construction contracts are enforceable and minimize the risk of disputes under current Texas statutes and case law, executives and counsel should adopt practical drafting strategies. First, specify that Texas law governs the contract and that any disputes will be resolved in Texas courts or by arbitration to be conducted in Texas and before an arbitrator or arbitration panel seated in Texas, preferably in the county where the project is located. Conversely, avoid including provisions that specify another state's law, venue, or arbitration outside of Texas. It will also be important to take the same measures for collateral agreements, such as guarantees or assignments, to prevent noncompliance. Contracts should include dispute resolution procedures and provisions that comply with Texas law. Regularly reviewing and updating contract forms/templates in view of new statutes and case law will help reduce the risk of unenforceability and protect the interests of project participants. Finally, prepare for the litigation or arbitration of disputes to occur in Texas, and consider any impact that might have on project management/execution, costs, and legal strategy.
Risk of FAA Preemption
Although Texas law now voids contract provisions requiring arbitration outside Texas or under another state's law, parties should be aware of the potential for preemption pursuant to the Federal Arbitration Act (FAA). The FAA, which governs agreements to arbitrate in contracts involving interstate commerce, strongly favors the enforcement of arbitration agreements according to their terms, including the parties' chosen forum and governing law. As a result, some risk remains that a court could compel arbitration in a non-Texas forum or under non-Texas law specified in the contract, despite the Texas statute. As a result, Texas-based parties could nevertheless find themselves litigating or arbitrating disputes in locations outside of Texas and/or under non-Texas legal standards, despite Texas's strong public policy to the contrary. This risk underscores the importance of striving to negotiate for Texas choice of law and venue provisions whenever possible and striving to avoid agreeing to non-Texas choice of law and venue provisions whenever possible.
Conclusion
The recent change to Chapter 272 of the Texas Business and Commerce Code reflects Texas's strong public policy interest in keeping construction disputes involving Texas real property within the state and under the state's laws. Construction executives and counsel should act now to ensure compliance and avoid potentially unenforceable contract provisions that could complicate or delay dispute resolution. As the construction industry continues to evolve, it is essential for stakeholders to stay informed about further legislative changes and court decisions that may impact contract enforceability and dispute resolution.