We have all encountered it at one point or another – the boiler plate contract from the out of state general contractor or property owner that would require the California Contractor to resolve disputes, whether by mediation, arbitration, or litigation outside the state even where the work was performed in California. If you are now thinking of signing such an agreement, or have signed such an agreement and have a dispute brewing, do not be bullied into agreeing to an out of state forum or resolving the dispute out of state.
In 1991, the California state legislature passed a bill that is now California Code of Civil Procedure Section 410.42. This law renders 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 involves a subcontractor with principal offices in California for the construction of a public or private work of improvement in California. 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.
Despite the law’s 15-year existence, the Third Appellate District of the California Court of Appeal recently handed down the, as yet, only published opinion to analyze and apply Section 410.42. In the case of Dick Emard Electric, Inc. v. Templeton Development Corp., Emard sued Templeton and various other parties in Sacramento County for breach of contract and foreclosure of mechanic’s lien after Templeton failed to pay Emard for the labor, services, materials, and equipment supplied by Emard pursuant to the contract. 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 and Templeton refused.
The Superior Court ruled that pursuant to Section 410.42, the alleged 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 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 and published its opinion, making it a resource citable in future disputes.
The out of state forum selection clause is often a daunting hurdle as a contractor contemplates whether to enter into a contract or try to enforce its rights under a contract and get paid. After all, it will cost more to fight out of state than it will in state as all the evidence, witnesses, and work are here in California. However, the out of state fight may not be the only option. Section 410.42 may help keep you in state as would other laws (e.g. lien claims must be brought in the County where the property is located and work on Federal land is subject to the Miller Act which requires the case be brought in the Federal Court where the property is located).
Porter Law Group represented Dick Emard Electric, Inc. at both the Superior Court and Appellate Court level. The firm can be reached at (916) 381-7868.