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California Court of Appeal Rejects Arbitration of Subcontractor’s Claim Based on Incorporation of the Prime Contract Arbitration Clause

By November 21, 2021November 22nd, 2021No Comments
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In a recent published decision, the Second District Court of Appeal has ruled that a subcontractor is not bound to arbitrate its dispute with a general contractor based solely on the existence of an arbitration clause in the prime contract.  

In Remedial Constr. Services, L.P. v. AECOM, Inc., 65 Cal.App.5th 658 (2021) the Court of Appeal affirmed a trial court’s ruling rejecting the argument of general contractor AECOM that it’s prime contract with Shell Oil Products contained an arbitration clause and because the subcontract between AECOM and Remedial Construction was expressly incorporated by the subcontract, the parties were bound to arbitrate their dispute.  The subcontract agreement between AECOM and Remedial Construction was silent on dispute resolution.  The Second District Court of Appeal ruled that mere incorporation of the prime contract (as 1 of 37 exhibits to the subcontract) was insufficient to waive the subcontractor’s right to a trial.  The Court reinforced the principal that in the absence of a clear agreement to arbitrate disputes between the parties, the courts will not infer a waiver of the party’s rights to resolve their dispute in a court of law.  

This decision underscores the importance of including clear dispute resolution provisions in all subcontract agreements and contract documents.  Simply relying on upstream dispute resolution clauses through incorporation will not be sufficient to bind the parties.  If the parties elect to arbitrate their disputes, clear agreement to arbitrate must be articulated in the contract documents.  In the absence of clear language electing arbitration, the parties have agreed to have any dispute resolved in a court of law.    

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