Does a foreign state’s laws govern a Texas construction contract?
A situation that commonly arises is where a Texas contractor enters a construction with an owner that is from another state. In some circumstances, the out of state owner may wish for their state’s laws to govern the terms of the construction contract. The question then arises whether that is allowable, i.e. may a foreign state’s laws govern a Texas construction contract?
Section 272.001(b) of the Texas Business and Commerce Code provides that if a construction contract contains a provision making the contract subject to another state’s law (litigation in the courts of another state or arbitration in another state), that provision is voidable by the party obligated by the contract to perform the work.
Importantly, Section 272.001 applies only to a construction contract concerning real property located in Texas.
Further, Section 272.001(b) does NOT apply to:
(1) a partnership agreement or other agreement governing an entity or trust;
(2) an instance providing for a loan or other extension of credit and the party promising to perform the work that is the subject of the construction contract is doing so as part of the party’s agreements with the lender or other person who extends credit; or
(3) an instance involving the management of real property or improvements and the obligation to perform the work that is the subject of the construction contract is part of that management.