Seemingly every contract in use in the construction industry today, especially as between a general contractor ("GC") and a subcontractor or a sub and a sub-sub, uses what is known as a flow down clause--a contract provision by which the parties incorporate the terms of the general contract between the owner and the GC into the lower tier agreement. This is true no matter if the project is a traditional design-bid-build or if it is a design-build project. One of the possible effects of the use of a flow down clause in a private contract situation is to cause any dispute resolution or forum selection provision from the general contract to be enforceable between the GC and the subcontractor even without a specific reference to that clause. Such was the case in Kessmann and Assoc., Inc. v. Barton-Aschman Assoc., Inc., 10 F. Supp. 2d 682 (S.D. Tex. 1997), where the subcontract's incorporation of the general contract was held by the court to necessarily include incorporation of the methods of dispute resolution.
Underlying Basic Facts
Barton-Aschman Associates ("Barton") entered a contract with the Nevada Department of Transportation (NDOT) whereby Barton would provide the engineering services to upgrade the Las Vegas Area Traffic Computer System (LVACTS). As a part of that contract, Barton engaged Kessmann and Associates ("Kessmann") as a subcontractor in 1993 to provide expertise for the design of a traffic signal system upgrade. Performance of the subcontract progressed, and the relationship between Kessmann and Barton became acrimonious at best. After several alleged changes to the original subcontract, a dispute between Kessmann and Barton arose out of an alleged failure by Barton to pay Kessmann for out-of-scope work as well as retainage and remaining fees. Consequently, Kessmann sued Barton in the United States District Court in the Southern District of Texas.
The Court's Decision
Based in large part upon the incorporation of NDOT contract into its contract with Kessmann, Barton convinced the court to dismiss the Texas lawsuit. In the subcontract, Barton and Kessmann agreed that their relationship would be "governed by and in strict compliance with the terms of [Barton's] contract with [NDOT]." A copy of the NDOT-Barton contract was also attached to the subcontract and was incorporated into the subcontract by specific reference.
In the NDOT-Barton contract, a dispute resolution procedure was set forth in detail, indicating the proper method for perfecting a claim. This procedure indicated that NDOT would first adjudicate any disputes in the NDOT-Barton relationship. Thereafter, a second clause stated that nothing in the NDOT-Barton contract should be construed to impair Barton's rights to sue in Nevada courts. Considering upon these clauses as a whole, the court found this language sufficient to make Nevada the only proper place for filing a lawsuit, despite the failure to label the clause as a forum selection clause.
The court based its decision upon two separate reasons. First, the court cited the general policy favoring forum-selection clauses and their enforcement absent a clause that is unreasonable under the circumstances or if the clause is invalid for reasons such as fraud. Second, the court saw a forum selection clause as similar to a clause requiring arbitration as the dispute resolution process and cited several previous decisions compelling arbitration between parties based upon an arbitration clause incorporated from the main contract into a lower tier agreement. The court found that the language in the disputes clause in the NDOT-Barton contract was sufficient to establish a forum selection clause that could be enforced to dismiss Kessmann's lawsuit based upon the subcontract.
Comparison to Miller Act Decisions Rejected
In an effort to avoid the application of the disputes and forum selections interpretation advanced by Barton, Kessmann attempted to rely on the contract decisions interpreting the federal Miller Act and holding that a disputes procedure in the general contract is not binding upon the subcontractor unless the provision is "expressly" applicable to the subcontract. The court in Barton rejected this argument stating that the Miller Act cases were "inapposite" and that these cases were not applicable because they involved the United States as one of the contracting parties.
On the other hand, in situations such as the one in the Kessmann case and as in the J.S. & H case, where a municipality or state government entity is involved, dispute resolution can entail any of the alternative dispute resolution practices or choice of forum clauses that otherwise are not available in federal government contracts. In addition, courts do not have the impediment of the federal Miller Act and its policy of protection of the subcontractor by placing certain conditions on the application of flow down clauses and the disputes procedure. As a result, the flow down clause in a subcontract is likely to be enforced outside of the context of the Miller Act; as the Kessmann court noted, Miller Act cases are an exception to the general rule in interpreting such clauses.
Preventative Contracting Practices
As the court in Kessmann pointed out, the subcontractor and the general contractor have every right to avoid seemingly ambiguous or onerous forum selection clauses by proper negotiation of the subcontract. The convenience of the forum and the nature of the disputes process when maintaining a claim should be evaluated every time that a subcontractor signs a new contract. Scrutinizing the language of every clause in the subcontract before signing it can avoid surprises later if the project does have problems. Furthermore, it is in the best interest of all contractors to ensure that their forum selection and dispute resolution clauses are clearly stated--it is far easier to negotiate such a clause in the beginning then to be forced to go to court just to determine where a lawsuit should have been filed. As with all parts of the contract, preventative contracting is the best policy to follow for all involved.