A DC Court of Appeals recently discussed a subcontractor’s choice of law and forum selection clause. The Court ultimately reversed a trial court’s decision that dismissed the claim for improper venue, finding the clause to be permissive rather than mandatory. Another issue discussed in this case is whether a notice of lis pendens is required when the lien claim is bonded off.
This case provides a good insight into some technicalities that a DC contractor may face when it comes to pursuing claims for nonpayment.
How contract terms can affect your payment rights
An interesting case out of the DC Superior Court offers two lessons to DC contractors regarding their rights to payment.
The first pertains to the careful drafting of construction contracts. Specifically, the forum selection clause. If a mandatory and enforceable forum selection clause is included in a contract, then all claims must be brought in the agreed-upon court. But what constitutes a “mandatory” forum selection clause?
The second issue discussed involves the recording of a notice of lis pendens requirement for DC liens. Generally, this notice must be filed in order to properly enforce a lien claim. However, is this still required for a lien that has been bonded off prior to a foreclosure action? Short answer: No.
Let’s take a closer look at the case.
DC Appeals Court analyzes forum selection clauses and the lis pendens requirements
The case in question is King Carpentry, Inc. v. 1345 K St. SE, LLC et seq.
Project Snapshot
- Owner: 1345 K Street SE, LLC (K Street)
- Represented by: J. Andrew Baxter of General Counsel PC
- General Contractor: ADI Construction of Virginia, LLC (ADI)
- Represented by: Alexia Kent McClure of Stein Sperling Bennet De Jong Driscoll PC
- Subcontractor: King Carpentry, Inc. (King)
- Represented by: Stephen M Seeger of Cozen O’Connor
K Street as an owner/developer hired ADI as a general contractor for a condominium project in DC. King was hired by ADI for rough carpentry and framing on the project. The subcontract between the parties contained the following clause:
“This Contract shall be governed by the law of the Commonwealth of Virginia. The parties agree that any claim arising out of or related to this agreement and the Project that ADI Construction of Virginia, LLC and Subcontractor are unable to resolve consensually shall first be submitted to mediation, which mediation shall be conducted in Fairfax County, Virginia, and such other place as the parties shall mutually agree.
The parties further agree that if the mediation is unsuccessful, they hereby consent to personal jurisdiction and venue, for any action arising out of breach or threatened breach of this Agreement in the Circuit Court in and for Fairfax County, Virginia.”
After some disagreements between ADI and King regarding the scope of work and compensation, King filed a Notice of Mechanics Lien with the District’s Recorder of Deeds. After the lien was recorded, K Street and ADI immediately bonded off the claim using Great American as the surety, releasing the lien from the property.
King subsequently filed a complaint in the DC Superior Court under two claims: breach of contract against ADI, and enforcement of a lien against K Street, ADI, and Great American. The defendants responded by filing a motion to dismiss each of the claims.
- Regarding the breach of contract claim, the ADI argued that the claim should be dismissed due to the forum selection clause.
- Regarding the lien enforcement claim, the Defendants argued that the claim should be dismissed for King’s failure to file a notice of lis pendens as required under D.C. Code §40-303.13
The trial court agreed, and both claims were dismissed. King appealed.
Appeals court: Forum selection clause was permissive
King argued that the forum selection clause was permissive, rather than mandatory. So the Court analyzed each of the three sentences individually.
1. “…Contract shall be governed by the law of the Commonwealth of Virginia.”
The Court determined that this was a choice of law provision, and not a forum selection clause, so they moved on to the next sentence.
2. “…mediation shall be conducted in Fairfax County, Virginia…”
This sentence constitutes an agreement to submit disputes to mediation — also not a forum selection clause.
3. “…if the mediation is unsuccessful, they hereby consent to personal jurisdiction and venue, for any action arising out of breach or threatened breach of this Agreement in the Circuit Court in and for Fairfax County, Virginia.”
This, indeed, is a forum selection clause. However, the Court compared the language in this sentence to the previous two. While the first two use concrete terms such as “shall,” this one merely states that the parties consent to jurisdiction and venue in Virginia. In the Court’s own words:
“The forum selection clause effectively provides that if either party files suit in Fairfax County, the other party waives any objection it might otherwise have on personal jurisdiction or venue grounds.”
The Court concluded that the forum selection clause was indeed permissive, not mandatory. Therefore, the breach of contract claim was proper.
Appeals Court: Lis pendens not required if lien was bonded off prior to enforcement
Pursuant to DC’s lien laws, any person with a lien and who has recorded a valid notice of intent shall only enforce the lien by… (B) Recording, within 10 days of filing suit, a notice of pendency of action in accordance with §42-1207 in the land records.”
King conceded that a notice of lis pendens was not filed. However, they argued that they weren’t required to do so because the lien was bonded off, and there was no basis to record a lis pendens against the property.
When a lien is bonded off, the property is discharged from the lien, and replaced by the bond itself. The purpose of filing a notice of lis pendens is to act as notice to third parties that there is pending litigation concerning or affecting the title or other interest in real property.
But, the claim was not against the property, but rather the substituted bond. Thus, a notice of lis pendens was not necessary, nor even possible.
“[King], having filed its complaint after ADI and [K Street] successfully discharged the lien on the property, was not subject to the procedural requirement… to file a lis pendens within ten days of filing suit.”
Accordingly, the Appeals Court reversed the trial court’s dismissal of the lien enforcement claim and remanded the claims to trial.
Case takeaways
First, when drafting a contract, pay particular attention to the language. Although the forum selection clause, in this case, is enforceable, the language used didn’t constitute a mandatory clause, only a permissive one. Any only due to the use of the word “consent” as opposed to “shall.” If it were mandatory, then the enforcement claim and the breach of contract claim would’ve needed to be filed in separate courts. The breach of contract claim in Fairfax County, VA, and the lien enforcement claim in DC.
Second, as for the filing of a notice of lis pendens, this requirement is often overlooked, but an important one nonetheless. But as this case points out, if the claim is bonded off, the ultimate purpose of the notice of lis pendens is defeated. In legalese, a lien enforcement is an in rem proceeding (meaning the legal action is against property) while a claim against a bond is an in personal proceeding (meaning the action is directed against a particular person.)
So if the action is no longer against the property, no notice that there is pending litigation against the property is necessary.