California Appeal Decision Highlights Importance of Ensuring Consistency Between Prime Contract and Subcontract | Davis Wright Tremaine LLP
When a general contractor enters into a subcontract with a subcontractor, the general contractor will generally want to ensure that the subcontract complies with the main contract. The general contractor wants to avoid, for example, a prime contract that requires disputes to go to a California state court and a subcontract that requires disputes to be arbitrated in Oregon, which could cause the general contractor to litigate in two instances, spending twice as much money on legal fees and exposing himself to potentially inconsistent results.
One potential way to avoid inconsistencies in the main contract and subcontracts is to incorporate the former by reference into the latter. But as a recent California appeal decision shows, this approach can present pitfalls if the general contractor is not careful, at least when it comes to arbitration arrangements.
In Corrective Construction Services, LP c. AECOM, Inc.1, a subcontractor brought legal action against a general contractor, and the general contractor requested binding arbitration.2 The main contract’s dispute resolution provision required that all disputes be settled by binding arbitration in Texas, where the owner of the project was based.3 The general contractor argued that the arbitration clause of the main contract was incorporated into the subcontract by virtue of the following provision:
The contract between the entrepreneur and [Owner] . . . is hereby incorporated and made part of this Agreement by reference. The subcontractor assumes to the contractor all the obligations and responsibilities contained in the main agreement or the transfer arrangements of the customer. . . that the contractor assumes towards his client with regard to the execution of the work by the subcontractor. In the event of a conflict between any provision of this Agreement and the Main Agreement, the more restrictive provision shall prevail.4
The trial court dismissed the request for compulsory arbitration and the California Court of Appeals upheld. The court of appeal began by noting that under the incorporation provision in the subcontract, the subcontractor only assumed the obligations of the general contractor under the main contract to the extent where they concerned the work of the subcontractor, without any indication that this would include the assumption of the arbitration clause.5 It seemed particularly important to the court that the arbitration clause was a single clause in a 151-page main contract.6
Even more problematic from the court’s point of view was the fact that the subcontract contained a dispute resolution provision requiring litigation in the courts and also included a provision stating that the subcontract took precedence over the contract. principal insofar as they contained contradictory provisions.7 These provisions also supported a conclusion that disputes under the subcontract were not subject to arbitration.
General contractors should remember this case to ensure that there are no significant inconsistencies between their main contract and their subcontracts. If the prime contract contains an arbitration provision, the general contractor should consider including an arbitration provision in their subcontracts rather than relying solely on an incorporation by reference provision.
At a minimum, however, the general contractor should ensure that the subcontract does not have a conflicting dispute resolution provision that requires litigation in the courts. Given the importance that some courts place on the right to a jury trial, the general contractor will want the subcontract to state as clearly as possible that all disputes are submitted to arbitration in order to minimize the risk. that a court subsequently concludes that the subcontractor is not obliged to arbitrate.
Of course, if the main contract requires litigation in the courts, before inserting an arbitration clause into the subcontract, the general contractor should carefully consider whether the benefits of arbitration of disputes with the sub -treatment outweigh the inconvenience of a possible litigation in two separate instances.
Subcontractors should use this case as a reminder to familiarize themselves with the main contract if it is incorporated by reference into the subcontract. Subcontractors will want to avoid finding themselves in a dispute in the middle of the construction site and discover, on first reading of the main contract, that they are subject to a multitude of obligations that they were previously unaware of.
1 65 Cal.App.5e 658, 279 Cal.Rptr.3d 909 (2021).
2 Identifier. to 911.
4 Identifier. to 913.
7 Identifier. at 913-14.