January 2017 – Law and Civil Engineering

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Beware When Your Contract Incorporates Provisions “By Reference”
by Eugene Bass

Your contract may include provisions where documents outside the contract are “incorporated by reference.” Much of the time, a contracting party may not have the documents that are incorporated and may assume that they are unimportant. They can be very important and should be reviewed and understood, especially, those provisions that could be applied to the performance of your contract work.

A dispute arose between a contractor and owner where the contractor alleged that he was owed money by the owner. The matter was submitted to arbitration in accordance with the agreement between the owner and contractor. The owner counterclaimed against the contractor for damages arising from the contractor’s performance of the work. The contractor demanded that it’s subcontractors join in the arbitration. They each declined to participate. The general contractor then sued to compel the subcontractors to enter the arbitration but the trial court refused the contractor’s demand. The contractor appealed. On appeal, the subcontractors were compelled to participate in the arbitration.

The subcontracts between the contractor and subcontractors contained two pertinent provisions. The first was an arbitration clause and the second was a clause which stated that the subcontracts assume the construction contract.

The arbitration clause was fairly standard and essentially provided in case of any dispute that either party may demand arbitration and set forth specific provisions for the implementation of the arbitration process and selection and compensation of arbitrators.

The provisions addressing the assumption of the construction contract by the subcontractors provided that the work to be done under each subcontract was a portion of the work required of the contractor under the general contract with the owner and that the subcontractors would be bound by all of the terms and conditions of the contractor – owner agreement. It further provided that all rights and remedies that the owner had against the contractor would apply to and be possessed by the contractor in its dealings with subcontractors.

The appellate court stated that if there was a written agreement between the parties to arbitrate, it will compel arbitration. With reference to the incorporation of provisions of other documents into a contract by reference, the court stated that the reference and incorporation must be clear and unequivocal and the terms of the incorporated document must be known or easily available to the contracting parties. In this case, the court found that the required conditions were met and compelled the subcontractors to be part of the arbitration.

While “known or easily available” can be an issue, the law is clear that “incorporation by reference” is enforceable. Any contract that contains such provisions should be taken seriously and carefully reviewed.

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