Out of State, Not Out of Mind

By Ashton Smith | February 17, 2023

Alabama Contractor Sued in Tennessee for Construction Defect on Alabama Project

In a cautionary tale that some out-of-state contractors may find somewhat surprising, the Tennessee Court of Appeals recently ruled that a homeowner could sue an Alabama contractor in Davidson County regarding construction of a lake house in Muscle Shoals, Alabama.

Baskin v. Pierce & Allred Constr., Inc., 2022 Tenn. App. LEXIS 35 (Tenn. Ct. App. Jan. 28, 2022) involved an appeal from the Davidson County Chancery Court’s dismissal of the owner’s contract and warranty claims against a contractor on jurisdiction and venue grounds. The homeowner alleged that although he “paid construction costs totaling more than $1,700,000, [contractor] failed to complete construction of the house and has left [homeowner] with a home riddled with construction defects that affect every major system of the home.”

The contractor argued that the court lacked personal jurisdiction because the contractor did not have the required minimum contacts with Tennessee for this Alabama project.  His reasons?  The contract was signed, the payments were made, and the work was performed in Alabama by a general contractor whose principal place of business is in Alabama and by subcontractors and laborers located in Alabama.

Not surprisingly, the homeowner countered that the court did have jurisdiction over the contractor.  He argued the contractor applied for a certificate of authority to transact business in Tennessee; applied for and received a Tennessee contractor license;  undertook two projects in Tennessee, including a $3 million house in Savannah, Tennessee (though unrelated to the project at issue); and iv) testified a desire to maintain its contractor license in Tennessee and stated on its website that it is “licensed in Alabama and Tennessee.”

The trial court ruled in favor of the contractor and further found that Davidson County was an improper venue because the contractor’s corporation was dissolved, its contractor license had expired, and as a result, contractor did not maintain a registered agent for service of process in Tennessee. The homeowner appealed.

In its ruling, the appeals court analyzed Tennessee’s long-arm jurisdiction statutes (Tenn. Code Ann. 20-2-214(a) and 20-2-225), which provide jurisdiction as far as the U.S. Constitution will provide. What does the U.S. Constitution provide?  The Due Process Clause of the Fourteenth Amendment of the U.S. Constitution requires sufficient minimum contacts such that maintaining a suit does not offend “traditional notions of fair play and substantial justice.”

This rule from International Shoe Co. v. Washington was also recently applied by the Tennessee Supreme Court in Crouch v. Lonestar, involving a Texas construction project with a contract signed in Texas. In Crouch, Lonestar (a Texas company) initiated a business relationship with Crouch, a Tennessee company that would perform the work in Tennessee. Lonestar didn’t travel to Tennessee, but regularly communicated with and sent payment to Crouch, knowing Crouch was located in Tennessee. Crouch’s design and engineering services for the project were provided from Tennessee.

In Baskin, as in Crouch, the court found that it could exercise personal jurisdiction because the contractor “purposefully directed activities at or availed itself of the forum state” as argued by the homeowner. The appeals court found that although there was “not a direct causal relation between its contracting and construction business in Tennessee and the breach of contract and warranty actions arising from the Muscle Shoals construction,” such a causation-only argument failed as it did last year in the Supreme Court case Ford Motor Co. v. Montana Eighth Judicial Dist. Ct.

Just like in Ford, the defendant’s conduct in the forum state did not directly give rise to the plaintiff’s claims. Nevertheless, specific personal jurisdiction may “arise out of or relate to the defendant’s contacts with the forum.” While the alleged defects did not occur in Tennessee, the court reasoned that if a company can enjoy the benefit and protection of a state’s laws, that state can hold the company accountable for related misconduct.

The court then analyzed whether it would be unfair or unreasonable to haul the contractor to court in Tennessee. Modern advancements in transportation and communications lessen any unfair burden on defendants, while a 2.5-hour drive from Muscle Shoals to Nashville was not a constitutionally significant burden. The homeowner had a substantial interest in obtaining relief in Tennessee, and the state has a “manifest interest in providing residents with a convenient forum for redressing injuries inflicted by out-of-state actors.” As a result, the court found the exercise of personal jurisdiction constitutional.

As for the venue argument, the contractor’s Tennessee certificate of authority and contractor’s license  provided the necessary grounds to find venue proper as a “transitory action.”  In other words,  the breach of contract could arise anywhere and was not only tied to the location of the construction site.

What’s the takeaway? In certain circumstances, multi-state contractors with Tennessee business may be hauled into court in Tennessee even for projects outside of this state. While plaintiffs bear the burden of proving the court’s jurisdiction over a defendant, that burden has recently been lessened. While jurisdiction and venue are fact- and case-specific, it’s important to be aware of the potential perils of transacting business across state boundaries.

Photo credit: Jareed licensed under Attribution 2.0 Generic (CC BY 2.0)

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