Dangers of Incorporating a Prime Contact "by reference"

A recent unpublished decision from the Appellate Division exhibits why caution should be used when incorporating prime contracts into subcontracts “by reference”.  In this matter, a General Contractor ("GC") had an agreement with an Owner to construct two grocery stores.  The prime contract between GC and Owner contained a forum selection which directed any disputes to be filed in courts in upstate New York. The GC subcontracted the electrical work to a Subcontractor (“SC"), but the subcontract had no such forum selection clause.  Instead, there was language directing mediation for disputes in the same upstate New York locale, and further language that all disputes were to be, "settled according to the dispute resolution procedures in the Prime Contract."
 
As is unfortunately too common in the construction realm, SC completed work but was not paid. Prompting SC to file construction lien claims against the GC and Owner along with a lawsuits in the New Jersey counties where each property was located seeking damages under the Prompt Payment Act ("PPA") and enforcement of the construction liens. The Owner objected to jurisdiction in New Jersey based on the prime contract's language and incorporation into the subcontract.  At the trial level, each judge held that the selected New Jersey venues were proper and rooted their decisions on the PPA's language whereby it states, such an "action shall be conducted inside of this State."
 
On appeal, the Appellate Court would not endorse a complete preclusion from contracting away venue selection.  Instead, the appellate panel conducted an in-depth review of the language of both contracts, and noted that there was a great deal of ambiguity and confusion as to the terms of each.  The court noted that the subcontract included a venue provision only for mediation and was silent as to the terms of any other form of dispute resolution if mediation was unsuccessful.  While there was reference to the prime contract, the court found that the prime contract contained very little instruction for a how to resolve subcontractor disputes, and specifically focused on the resolution of disputes between the Owner and GC.  To apply those terms to a subcontractor was nonsensical in the courts mind, and therefore the Appellate Division found there to be no forum selection clause in the subcontract as to litigation and permitted the two lawsuits to proceed. (Sal Electric Company, Inc. v. The Pike Co., Inc, et. al.)