When drafting an electrical subcontract, it is fairly standard for a general contractor (GC) to refer to the contract between the owner and GC. GCs typically want to include the owner’s terms and conditions. What does it mean to you—the electrical contractor—and how does the inclusion of the owner/general contractor agreement modify your agreement?
What is incorporation by reference?
It often is convenient for a contracting party not to physically attach all documents that are part of the contract. The owner may have a health and safety plan generally applicable to companies entering the site. The GC may inform you that the Davis-Bacon Act applies because the project is receiving federal funds. In these and other instances, the referenced documents may be voluminous.
Contract law does not require all papers that constitute the contract to be assembled in one place. It is enough that the unattached papers are adequately identified and that they are expressly noted to be part of the contract. These referenced documents are then considered incorporated into the contract.
Incorporating technical data
At a minimum, the GC will want to include the owner’s specifications and the drawings into your subcontract. When these kinds of technical information are incorporated, there may be little confusion.
Even so, electrical contractors will often try to exclude all these technical documents except for the electrical specifications and drawings. The purpose of these exclusions is to limit the electrical contractor’s responsibility for coordination with the designs for other trades and for errors or omissions in other specifications or drawings, say between the electrical and mechanical specifications and drawings.
Incorporating other terms
More complicated difficulties arise where the GC tries to incorporate, by reference, the owner’s commercial terms and conditions. The owner’s terms can include change order procedures, entitlement to time extensions, limitations on delay damages, payment prerequisites, differing site conditions and other standard and nonstandard clauses. In addition, the owner’s terms may conflict with the terms used in your subcontract with the GC.
Too often, the GC will incorporate these documents without analysis-—the GC’s intent being to pass along its burdens to its subcontractors.
How the incorporation is effectuated, and the exact language used for the incorporation, help to define the problem. Even so, there is a degree of unpredictability in how a court will interpret the incorporation language.
Perhaps the simplest example of an incorporation clause is where the subcontract states that the owner/general contract is “made a part hereof.” But what does this statement mean? A facial interpretation of this language is that the subcontractor now knows what the GC agreed to in its contract with the owner and nothing more.
For example, the GC may be required to coordinate all of its subcontractors, maintain a work schedule, notify the owner of changes within a prescribed set of criteria, etc. Many of these general requirements cannot be transferred to a subcontractor.
To better define its intentions, many generals go further, using the following language: “The subcontractor shall be bound to the general contractor to the same extent the general contractor is bound to the owner.”
This last iteration is ambiguous at best. As noted, the general will often have responsibilities to the owner that the subcontractor cannot have. The duty to build the entire project is the major example where this broad incorporation becomes unworkable.
There is a more sophisticated version: “The subcontractor shall have all rights and responsibilities to the general contractor that the general contractor has to the owner.” In many respects, this formulation will not work as the owner’s terms may differ considerably from those in your subcontract. To alleviate this issue, the GC may add: “In the event of a conflict, this subcontract shall control.” Some versions also limit the incorporation of the owner’s terms “to the extent they relate to the subcontractor’s Work.”
This last variation creates other interpretation problems. If the owner has a “no damages for delay” clause, or an arbitration provision, do these contract administration clauses concern the subcontractor’s “Work” in a technical sense?
None of these variations necessarily leads to a legally predictable result. Consider, for example, where the general contract has a design/build scope, but the subcontract does not. And, what if the GC has a fixed price contract, but the subcontractor’s work is time and materials?
Some jurisdictions, such as New York, will not allow disputes clauses to flow down to a subcontractor through a general incorporation provision. Disputes clauses in this context include arbitration and “no damages for delay.” Other jurisdictions do not follow the New York rule.
In a recent Michigan decision, the incorporation clause had a limitation—that the owner’s terms and conditions were incorporated into the subcontract “to the extent that they concern the Work” of the subcontractor. The clause also stated that, in the event of conflict, the subcontract terms take precedence. The owner had an arbitration clause requiring the hearings to take place in Mississippi with one arbitrator using the American Arbitration Association (AAA) as the administering body. The subcontract also had an arbitration clause, but it did not specify a hearing locale, did not require AAA involvement and provided for three arbitrators.
A federal judge ruled that arbitration somehow “concerned the Work” of the subcontractor and that the two clauses were not inconsistent, merely additive to each other. As a result, the arbitration was to be held in Mississippi with three arbitrators and administered by the AAA, a procedural amalgam of the somewhat inconsistent clauses. That result is not what the subcontractor or the GC understood would happen when they signed the subcontract.
What should you do?
In many instances, subcontractors do not even get a copy of the owner’s terms and conditions, and when they do, they do not read that document. Quite frankly, it will often take some legal training to compare the subcontractor’s and owner’s terms and conditions and determine if there are conflicts between the two.
For electrical contractors, if you cannot delete reference to the owner’s terms and conditions, it may be worthwhile to review them in detail and object, in writing, to any attempt to incorporate owner’s terms that are unacceptable to you. You may also want to consider adding language that the incorporation is limited to the technical electrical scope of work and not to commercial terms (e.g., notice clauses, change order limitations, “no damages” provisions).