Beware of Out-of-State Venue Contract Clauses

Earlier this year, the Texas Courts took action which effectively obliterated the current law protecting contractors from out-of-state venue provisions in their contracts.  

In this case, MVP Terminalling contracted with McCarthy Building for construction services around the Pasadena Terminal project on the Houston Ship Channel.  McCarthy subcontracted with RLB for dredging work.

The prime contract between MVP and McCarthy included a paragraph stating that the parties agreed that the contract was made in Oklahoma, would be governed by Oklahoma law and any trial would take place in Tulsa, Oklahoma.

The subcontract between McCarthy and RLB included two key paragraphs: one stated that the subcontract would be governed by the laws of the state of Texas; and another which included typical “flow-down” language stating that RLB “binds itself” to all “terms and conditions of the Contract Documents” including the prime contract with MVP.

As you may know, the Texas Business & Commerce Code includes section 272.001 intended to protect contractors from having to litigate claims outside of the state and under other state’s laws.  The Code states that such contract language is “voidable” by the party obligated to perform the work.  

In this case, after completion of RLB’s work, a payment issue arose and RLB filed suit against MVP and McCarthy in Harris County District Court.  MVP filed a motion invoking its out-of-state venue contract clause, arguing that litigation should occur in Oklahoma.  The District Court disagreed with MVP, citing Tex. Bus. & Comm. Code sec. 272.001.  MVP appealed the case to the Fourteenth Court of Appeals in Houston.

Unfortunately, the Court of Appeals held that McCarthy waived its right to void the out-of-state venue provision by signing the prime contract which included the out-of-state venue language.  But more importantly, the Court held that the waiver by McCarthy extended to RLB through the “flow down” language in the subcontract.  The basis of the Court’s decision was the word “voidable” in the statute rather than “void”.  Void essentially means it never happened; whereas “voidable” means that a party must exercise its right to void something, and in this case, the Court said McCarthy waived its, and RLB’s right to void the provision by signing the contract.

RLB appealed the Court of Appeals ruling to the Texas Supreme Court and on January 26, 2024, the Supreme Court denied RLB’s appeal without an explanation.  

So, what’s the moral of the story here?  Be aware of what is in the prime contract.  And if there is an out-of-state venue provision in the prime contract, consult with your attorney on how that may impact your subcontract.

See In re MVP Terminalling, LLC, No. 14-21-00399-CV (Tex. App. – Houston [14th Dist.] 2022, writ denied).