It is not uncommon in the construction industry for an out-of-state general contractor to include a provision in a subcontract requiring a California subcontractor to resolve disputes outside the state of California, even though the work is to be performed within California. Fortunately, most California subcontractors are immune from this tactic. California law generally prohibits clauses requiring subcontractors to travel outside California to resolve construction disputes.
California Code of Civil Procedure Section 410.42, [CCP 410.42 Link] renders “void and unenforceable,” any provision in a contract that “purports to require any dispute to be litigated, arbitrated, or otherwise determined outside this state,” so long as the contract is “between the contractor and a subcontractor with principal offices in the state, for the construction of a public or private work of improvement in this state.” Similarly, this law voids any similar contractual term that might prevent the California subcontractor from commencing an action, obtaining a judgment, or resolving its dispute in the courts of California.
The Third Appellate District of the California Court of Appeal has provided the only published opinion that analyzes and applies Section 410.42. In the case of Dick Emard Electric, Inc. v. Templeton Development Corp., (2006) 144 Cal. App. 4th 1073, Emard sued Templeton and various other parties in California for breach of contract and foreclosure of a mechanics’ lien after Templeton failed to pay Emard for the labor, services, materials, and equipment supplied by Emard pursuant to the contract, which was performed in California. Templeton unsuccessfully moved to dismiss the lawsuit, arguing that Emard must mediate before filing suit and that any mediation or lawsuit must take place in Las Vegas, Nevada, pursuant to the contract. Prior to Templeton’s Motion, Emard offered to mediate in California, pursuant to Section 410.42. Templeton refused the offer.
The Appellate Court ruled that Section 410.42 dictates that the out-of-state mediation provision was unenforceable and that Emard fulfilled any mediation requirement by offering to mediate in California instead of Las Vegas. Templeton filed a petition for a writ of mandate with the Third Appellate District seeking to have the decision set aside, in part because Section 410.42 does not specifically mention “mediation.” The Appellate Court upheld the prior ruling, determining that the phrase “or otherwise determined,” includes mediation. The Court published its opinion, establishing a legal precedent for future California cases.
The out of state forum selection clause seems a daunting hurdle to a subcontractor contemplating whether to enter into a subcontract where it would appear that the subcontractor could only enforce its rights by traveling out of state. The prospect of bringing witnesses and legal counsel to another state sets an unequal bargaining position from the outset. Fortunately, CCP Section 410.42, and the Emard case avoid the prospect of dragging California subcontractors to another state to resolve their dispute.
As a final bit of advice, when subcontracts contain a provision that would force a California construction dispute between a contractor and subcontractor to be mediated, arbitrated or litigated in another state, be sure to consider the impact of the Federal Arbitration Act, 9 U.S.C., §1, et seq. (“FAA”). To avoid any confusion, and to keep the dispute resolution process within California, be sure that the agreement also unambiguously states that California procedural and substantive law will govern the agreement rather than the provisions of the Federal Arbitration Act.
Article by William L. Porter, Esq. in 2022. Mr. Porter is a principal in Porter Law Group, Inc. in Gold River, California. He can be reached by phone at (916) 381-7868.
