Where you'd fight: venue, governing law and arbitration in a California subcontract

Nobody signs a subcontract expecting a dispute. But the dispute clause decides where a fight over your money would happen, whose rules apply, and how expensive it would be to bring. A national GC's form often points all of that toward its home state.

Three questions every dispute clause answers

Where? The venue: which court, or where an arbitration is held.

Under which law? The governing law clause. It matters because states treat key clauses differently. California, for example, generally won't enforce pay-if-paid clauses, while some other states will.

Court or arbitration? Arbitration can be faster and private. It can also be more expensive up front, and the right to appeal is very limited.

California's protection for local subs

California Code of Civil Procedure section 410.42 makes two kinds of provisions void in a contract between a contractor and a subcontractor, when the sub has its principal offices in California and the work is on a California project:

• a provision requiring disputes to be "litigated, arbitrated, or otherwise determined outside this state", and
• a provision that stops a party from bringing a proceeding, or getting a judgment, in California.

So a California electrical sub on a California job generally can't be forced to sue in Georgia, whatever the form says. Arbitration is less certain: at least one federal court has held that the Federal Arbitration Act overrides this rule for an out-of-state arbitration clause, so push back on one at signing rather than counting on the statute. The protection is about where the dispute is decided. It doesn't by itself stop the contract from choosing another state's law, so read the governing law clause separately.

If your principal office is outside California, or the project is, this section won't help you, and the clause in the contract will usually stand.

What else to look for

• Pass-through disputes. Many subcontracts say that if your claim involves the owner, you're bound by whatever happens in the GC's dispute with the owner, and must wait for it. Check whether you get a say, and whether you share the cost.
• Step clauses. Negotiation, then mediation, then arbitration or court, with deadlines at each step. Missing a step can delay your claim.
• Fees. Does the winner recover attorney's fees? One-sided fee clauses are worth pushing on.
• Short limitation periods. Some forms shorten the time to bring a claim. Diary it.
• Lien rights. A dispute clause shouldn't stop you from recording or enforcing a mechanics lien. Recording a lien to protect your rights shouldn't count as breaching the arbitration agreement.

What to ask for

• Disputes heard in the county where the project is
• California law for California projects
• Mutual attorney's fees for the winner
• Mediation before arbitration or litigation, with a short deadline so it can't be used to stall
• An express carve-out for lien and bond claims

The dispute clause is the one nobody reads until it's too late to change. Read it at signing.