Your contract may contain the phrase “per plans and specifications.”
Do these words affect your scope of work? Your subcontract probably says that the terms and conditions of the general contractor’s agreement with the owner are incorporated into your agreement. What is the legal effect?
Documents are often made part of a contract without being physically attached. For example, contracts commonly refer to codes or standards and bind you to perform in accordance. Equally common, unfortunately, are vague or ambiguous references to another document or discussion, such as “as per our meetings” or “as previously agreed.”
One court has ruled that “neither physical attachment nor specific language is necessary to incorporate a document by reference....” Another court has taken the opposite position, that the incorporated document must identify the other document “beyond all reasonable doubt.”
This article outlines the law of “incorporation by reference” and offers advice on how to deal with this concept.
The basic standard
When forming a contract, the courts speak in terms of the “meeting of the minds.” This phrase is an “objective” standard: How would a “reasonable person” view the facts? It does not mean what you personally believed was happening.
For example, in an Illinois case, the subcontract referred to parts of the specifications which, in turn, referred to the general conditions of the general contract. One of those conditions required a lien waiver prior to any progress payments. The court decided that the lien waiver requirement had been incorporated into the subcontract. They ruled:
The specific adoption by a subcontract of the drawings and specifications provisions of the prime contract make those provisions as much a part of the subcontract as if they were expressly written in it: they cannot be ignored. [The subcontractor] had a duty to learn of or know the terms of the general contract....
You can create a contract by exchanging correspondence, memoranda, telephone messages, even a handshake. However, it is a rare case when the contract, however formed, expresses all of the agreements and understanding of the parties. In order to make their agreements as complete as possible, owners, contractors, and subs reference and attach other documents to the contract. Proposals and counterproposals, marked-up drawings, and other agreements—these are the kinds of documents that are typically made part of the contract by reference and attachment.
AIA “Standard Form of Contract Between Contractor and Subcontractor” (A401)
The Subcontract Documents
1. The Subcontract Documents consist of (1) this Agreement; (2) the Prime Contract, consisting of the Agreement between the Owner and Contractor and the other Contract Documents enumerated therein, including Conditions of the Contract (General, Supplementary and other Conditions), Drawings, Specifications, Addenda issued prior to the execution of the Agreement between the Owner and Contractor and Modifications issued subsequent to the execution of the Agreement between the Owner and Contractor, whether before or after the execution of this Agreement, and other Contract Documents, if any, listed in the Owner-Contractor Agreement; (3) other documents listed in Article 16 of this Agreement; and (4) Modifications to this Subcontract issued after execution of this Agreement. These form the Subcontract, and are as fully a part of the Subcontract as if attached to this Agreement or repeated herein. The Subcontract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written or oral. An enumeration of the Subcontractor Documents, other than Modifications issued subsequent to the execution of this Agreement, appears in Article 16.
After reading this clause, do you know what is in and what is not? It’s entirely possible, even probable, that the subcontractor has never even seen the terms and conditions of the prime contract. Is the work schedule part of the agreement? What about the schedule of values? Or pre-contract clarifications?
Article 16 of AIA A401 allows you to enumerate other documents that should be a part of the agreement. For instance, you may want to attach your bid proposal including any clarifications made since it was published, or you may want to modify the warranty clauses for purchased items so that your warranty is limited to the manufacturer’s warranty. You may also want to specify exactly which drawings and specification sections apply to your work so as to avoid conflicts with other trades.
When additional documents are added to a contract, it is vitally important to know their terms. In one case, the subcontractor’s acceptance letter stated that the subcontract was “subject to all provisions of our Proposal....” The proposal contained a clause entitling the subcontractor to damages beyond its control. That language in the proposal referenced in the acceptance letter was enforced. When the general contractor refused to pay the sub for damages caused by an act of God, the subcontractor sought its money in court and won.
Dispute clauses—a problem area
The decisions of state courts across the country have not been consistent in ruling on what general contractor clauses “flow down” to the subcontractor. A major legal problem area concerns “disputes” clauses.
A number of cases have held to the position that an incorporation-by-reference clause only applies to provisions relating directly to the work. As long ago as 1916, the Supreme Court of the United States ruled that it is critical to know the exact language of any reference to another document. In that case, a reference to “drawings and specifications” was held not sufficient to bind the subcontractor to the owners’ changes and time extension clauses.
[T]he true rule...is that in the case of subcontractors...a reference by the contracting parties to an extraneous writing for a particular purpose makes it a part of their agreement only for the purpose specified.
Guerini Stone Co. v. P.J. Carlin Constr. Co., 240 U.S. 264 (1916).
The result is markedly different if the incorporation language provides that “all of contractor’s rights and obligations to the owner shall be the subcontractor’s rights and obligations to the contractor.” With a statement this broad, changes clauses, notice clauses, and other provisions which do not pertain directly to the means, methods, and manner of performance may still be binding on the subcontractor.
The courts are very divided about whether disputes clauses flow down from the general to the sub. These contract clauses fall under a variety of concepts: arbitration, mediation, no damages for delay, liquidated damages, and force majeure, to name a few.
In New York, for example, the “no damages” clause in the contractor/owner agreement does not flow down to the subcontractor without some explicit warning. An example of an explicit warning is the following:
In the case of any dispute between the Subcontractor and Contractor, Subcontractor agrees to be bound to the Contractor to the same extent that Contractor is bound to Owner by the terms of the General Contract and by any and all decisions or determinations made thereunder by the party or board so authorized in the General Contract.
If you want to be clear about what has been included in your agreements by reference, you need to do some investigation. Find out which law applies to your contract. (Construction contracts often contain a “choice of law” clause that designates what state’s law applies.) Your attorney can advise you about state laws so you know whether you are bound by terms and conditions that appear to be incorporated by the language of your contract. It is important to obtain the opinion of a legal expert, as some states will not enforce certain contract provisions regardless of whether you agreed to them and signed the contract.
If the contract terms offered to you are unacceptable, you should recall, and use, the incorporation principles discussed in this article. Add language to your agreement to clarify which clauses you are rejecting or amending and incorporate your change. You might also consider adding language that your subcontract conditions take precedence over the clauses in the general/owner contract. That way, if there is a contradiction and a dispute arises, the meaning expressed in your subcontract should prevail.