By Bruce Jervis
Prime contractors enjoy a lot of leverage when awarding subcontracts. One way they utilize this advantage is to specify the forum and governing law for any claim or dispute under the subcontract. Although the project and the subcontractor may be located in one state, the subcontract may require litigation in the prime contractor’s home state. This is costly and inconvenient for the sub. And, the governing law may be less favorable.
In a recent case, both the project and a design subcontractor were located in California. The prime architectural contractor, based in Texas, stipulated a Texas forum and governing law. Pay-if-paid clauses are enforceable in Texas but not in California – a key factor in the subcontractor’s payment claim against the architect. Fortunately for the sub, a California statute rendered the subcontract clause void and unenforceable. The subcontractor could sue in California.
The California court said at least 24 states have similar statutes negating subcontract clauses that require out-of-state claim litigation. Apparently, the issue is widely recognized. What is your opinion? Should subcontractors be statutorily protected against this practice? Or, is it essentially a matter of freedom of contract and prime contractors should be allowed to impose these terms when awarding a subcontract? Your comments are welcomed.