Seventh Circuit Rules That Forum Selection Clause in Construction Contract Is Enforceable Under Illinois Law

Roberts & Schaefer Co. v. Merit Contracting, Inc.,
99 F.3d 248, 1996 U.S. App. LEXIS 28280 (U.S. Ct. of Appeals, 7th Cir.)

Contract between the parties contained an enforceable forum selection clause, even though the actual written agreement was signed by only one of the parties; therefore, suit brought in Illinois state court pursuant to the forum selection clause, was not removable to Federal Court.

Roberts & Schaefer Co. (“Contractor”) was awarded a contract to design and build a new coal storage facility for the 84 Mining Company. Contractor in turn subcontracted with Merit Contracting, Inc. (“Subcontractor”) to perform demolition, excavation and other construction work for the project. The formation of contract between Contractor and Subcontractor, and the terms of that agreement, are key to the court’s decision in this case. Contractor initially asked

Subcontractor to submit a bid to perform the construction services for the project. Contractor provided a “bid package” prepared by the owner to Subcontractor and, based on the information provided in the bid package, Subcontractor submitted a bid of $1.775 million. This bid was ultimately accepted verbally by Contractor. At Contractor’s direction, Subcontractor proceeded with the work. Thereafter, Contractor sent Subcontractor a letter confirming its purchase order for the construction work. The letter briefly described the work and listed a price of $1.775 million. The letter also stated that the confirming purchase order documents would be forwarded to Subcontractor as soon as they were complete. Subcontractor submitted an invoice for over $150,000 and Contractor paid the invoice by check.

Contractor then sent Subcontractor a purchase order and several accompanying documents (“Purchase Order Documents”). These documents included the “General Notes and Conditions” which contained terms relating to scheduling, payments, risk of loss, and the choice of law and forum selection provision at issue in the case. The documents also included a “Sub-Contract Agreement” that had been signed by Contractor, but Subcontractor never signed that document. Later, Contractor sent Subcontractor three revised pages of the purchase order reflecting certain changes to the concrete volume and liquidated damages provisions that had been discussed between Contractor and Subcontractor.

The Subcontractor continued to perform its work on the project but the project completion date was delayed. Ultimately, Contractor filed suit against Subcontractor in the Illinois state court alleging that Contractor and Subcontractor had entered into an agreement defined by the terms of the Purchase Order Documents and that disputes had arisen between the parties related to delays and increased costs on the project. Subcontractor removed the case to federal court based on diversity of citizenship and thereafter filed a motion to dismiss for lack of personal jurisdiction. According to Subcontractor, it did not have the required “minimum contacts” with Illinois to subject it to the jurisdiction of the Illinois state court, or a federal court in Illinois applying Illinois law. The Contractor filed a motion to remand the case back to the state court based on the forum selection clause contained in the Purchase Order Documents.

The federal district court found that the forum selection clause never became part of the parties’ agreement and, therefore, refused to remand the case to state court and dismissed the suit for lack of personal jurisdiction because Subcontractor lacked sufficient minimum contacts with Illinois. On Appeal, the Seventh Circuit Court of Appeals reversed the district court and remanded the case to the state court.

The appellate court first noted that under Illinois law, a forum selection clause is enforceable except in certain exceptional circumstances. The primary question on appeal was whether the forum selection clause in the Purchase Order Documents ever became part of the parties’ contract. Subcontractor argued that the contract was formed when Contractor accepted its bid and that the terms of the contract were those set forth in the bid package. Subcontractor never signed the document which incorporated the forum selection clause and claimed it never accepted the terms of that clause. The Contractor, on the other hand, argued that Subcontractor’s continued performance of the work on the project constituted acceptance of the terms set forth in the Purchase Order Documents. Contractor also argued that it and Subcontractor entered into a similar subcontract agreement, which contained the same forum selection clause, a year before the present transaction.

The court, examining all the facts surrounding the parties’ negotiations and performance, found that the Subcontractor’s conduct demonstrated that it performed the work according to the terms embodied in the Purchase Order Documents. The court noted that the Subcontractor took steps to notify Contractor in writing of delays in construction consistent with the procedures outlined in the Purchase Order Documents. The court specifically noted that the notice given by Subcontractor could not have been made pursuant to the terms of the bid package because the bid package contained no timetable for the completion of the work. In sum, the Contractor was able to demonstrate that the Subcontractor conducted itself as if it believed the terms of the purchase order documents represented the parties’ agreement. Because the forum selection clause was included in the agreement, the federal appellate court remanded the case to state court.

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