We sometimes overlook the singular importance of the choice of law clause in subcontracts under government contract prime contracts. The choice of the law to be applied in the event of any dispute is important because of the uniqueness of these subcontracts. As a corollary, the forum for resolution of such disputes also should be spelled out in the subcontract document. Finally, it is important to separate disputes arising under or related to the prime contract that implicate the subcontract from disputes between the prime contractor and the subcontractor that are unrelated to the prime contract.
We suggest a choice of law clause which makes it clear that all disputes between the prime contractor and the subcontractor be governed and construed in accordance with the federal common law of contracts. In the absence of federal law on the subject, the parties should select the state law that will be applied irrespective of that state's choice of law rules. The parties should then agree to submit to the exclusive jurisdiction of that state's courts and the federal courts sitting in that state.
We continue to believe that disputes arising under or related to the prime contract should be the subject of a separate clause binding the parties to follow the disputes procedures applicable to the prime contract. The subcontract should incorporate a so-called "pass through" clause permitting the parties to cooperate in passing through the dispute to the government under the prime contractor's disputes clause.
Much has been written about the pros and cons of the pass through agreement. It has been said a subcontractor should never agree to such an arrangement and that prime contractors always should insist on it. We think it is good business to pass through disputes to the government when they truly arise because of an action or inaction of the government which implicates the subcontract. These disputes should be governed, construed and adjudicated exclusively by the federal common law of contracts and the federal contract tribunals established to resolve them.
So, we suggest separating the disputes clauses as we suggest. It is fair, neutral and even handed. And it should preserve the relationship of the parties.
There is an excellent article on this subcontract choice of law by Joel Pearman in the August 2004 edition of Contract Management magazine. I take the American Bar Association (ABA) approach to which he refers at the end.