Why worry about a clause in a contract that requires your company to arbitrate or litigate in another state? It can be tempting to skim the numerous terms and conditions of a lengthy contract. Do not let that legalese lull you into a false sense of security. One of the most overlooked terms in a contract relates to arbitration and forum selection.
At the time of contracting, few people are thinking of why or how the contract might be breached and what happens if so. However, a forum or arbitration selection clause may pre-determine your outcome regardless of who was at fault for breaching the contract.
North Carolina has a statute (N.C. Gen. Stat. §22B-3) that appears favorable to North Carolina residents and businesses. It provides that any clause in a contract “entered into in North Carolina” that requires the arbitration or litigation of a dispute under the contract to proceed in another state is “against public policy and is void and unenforceable.” End of story, right?
Not so fast. On November 19, 2025, the North Carolina Court of Appeals decided the case of Earnhardt Plumbing v. Thomas Builders, Inc. (924 S.E.2d 844). In this case, Plaintiff, Earnhardt Plumbing, sued the general contractor, Thomas Builders, Inc., a Tennessee corporation, alleging it was owed approximately $160,000 for plumbing labor and materials supplied for a hotel project in Fayetteville, North Carolina. The contract provided as follows:
The Arbitration shall be held at the discretion of the Contractor (Thomas Builders) either at the Contractor’s principal place of business or where the project is located.
The Defendant, Thomas Builders, argued, and the Court agreed, that because the contract involved interstate commerce, the Federal Arbitration Act (“FAA”) applied and preempted or overrode the North Carolina statute. The forum selection clause in that contract requiring arbitration to be conducted in the State of Tennessee was determined to be enforceable. In other words, the Tennessee company was able to force the North Carolina company to hire a Tennessee attorney and travel to Tennessee to pursue the general contractor on its home field.
The Court also made it clear that it does not take much to prove interstate commerce, holding that Thomas Builders sending employees from Tennessee to North Carolina to work on the project and Earnhardt Plumbing sending invoices to Tennessee, which were paid from Tennessee, was enough to establish interstate commerce. The only thing the North Carolina company did out-of-state was send its invoices to the general contractor’s Tennessee office. All the other interstate actions were taken by the general contractor. The Court held that even that minimal action triggered the FAA’s mandate that forum selection clauses be enforced according to their specific terms.
This means that in some circumstances, arbitration over a contract can occur hundreds or thousands of miles away from where the contract was executed and where the project is located. You can imagine the cost, inconvenience, and procedural hurdles involved for a North Carolina company to arbitrate a dispute over a North Carolina construction project in the State of Tennessee. If the other party intentionally breaches the contract, the expenses resulting from an out-of-state forum selection clause may effectively prevent you from asserting your rights.
In light of the holding of this case and the very minimal requirements for showing interstate commerce, contracting parties should be acutely aware of forum selection clauses that require litigation or arbitration in another state. Legal services for reviewing, drafting, and negotiating contracts are much cheaper than arbitrating or litigating a dispute under a contract that does not have terms favorable to you. Proactive measures are more efficient than reactive solutions.
