An electrical contractor on an automobile assembly plant project was asked to sign a one-page, two-sided document as the contract. The document was straightforward; it confirmed the price and contained standard contract clauses. One clause transformed the one-page subcontract into a 50-page one. That small clause stated, “The terms and conditions of the owner/general contractor agreement are incorporated by reference into this subcontract.” That separate owner document was not provided to the electrical contractor.

What does it mean for subcontractors?

On its face, the owner/general contractor agreement (the prime contract) gave direction and responsibilities solely to the general contractor. So, how would the sub be affected? For example, the clauses for changes and time extensions in the prime contract provided that the general contractor must give notice to the owner, and clauses pertaining to no damage for delay, indemnities, liquidated damages, etc., all concerned the general contractor without mentioning “subcontractor.” Did all these clauses mean that the electrical subcontractor was equally bound?

Court decisions interpreting these broad incorporation clauses are all over the map. Some decisions seem to be that the sub must support the obligations of the prime contractor so the prime can fulfill its obligations to the owner. 

To that end, some general contractors add language to the incorporation clause that in the prime contract, “the term subcontractor shall be substituted for general contractor and the term general contractor shall be substituted for owner.” A little bit of switching hats, but this clarification creates its own problems. There are GC responsibilities that cannot be transferred to a subcontractor, such as authority to coordinate subcontractors’ work and overall scheduling.

Another variation provides that the flow-down incorporation language only applies to the “work,” but that creates more confusion. Do clauses for written notice or no damage for delay, no liens or for arbitration concern the “work” or simply contract administration?

These confusions are amplified where the subcontractor has its own terms and conditions with the GC. How do you reconcile differences between terms and conditions in the prime contract and subcontract? For example, one document may have a 10-day notice for delay and the other may have a five-day notice. Or, one may designate arbitration for disputes and the other no arbitration. There may be differences in insurance requirements.

To generate some clarity with a flow-down clause, some courts have ruled that an incorporation of a prime contract into a subcontract binds the sub only to those provisions relating to “the scope, quality, character and manner” of the sub’s work.

Does this language help you understand what you are bound to from the prime contract? Perhaps insurance requirements do not flow down as they do not involve the character of the “work,” and neither do disputes clauses like those for arbitration. But what about a changes clause? Does that really involve the manner of “work”?

In a March 2019 article in the American Bar Association Forum on Construction Law, the author stated that in New York and some other states, clauses that do not flow down through a general incorporation clause include arbitration, no damage for delay and some insurances.

Other states hold differently and allow for a wider coverage of incorporation. In yet other states, the law remains undefined, and courts decide what is incorporated on a case-by-case basis.

In a decision in Washington, the purported incorporation of the prime contract, an AIA document, was ineffective because the sub was not given a copy of the prime contract and claimed not to know the terms and conditions in it. Yet, with all this unclear meaning, GCs continue to insert general incorporation by reference clauses.

What could you do when you see an incorporation by reference clause? One approach might be to delete the incorporation language, but the general contractor may not accept your deletion. A subcontractor I know inserts this language: “In the event of a conflict in terms and conditions between the prime contract and this subcontract, the subcontract terms take precedence.”

This language seems like it could solve some of the problems, although there may still be instances where the term “conflict” is subject to interpretation. For example, is a five-day notice in conflict with a 10-day notice, or is it merely a variation? Perhaps the word “inconsistency” would be better than conflict.

Think about what you have done or should do when presented with an incorporation by reference provision. You get a copy of the prime contract and review its terms and conditions. By having that contract, you will be at least in a position to request clarifications or revisions and get a better handle on what your agreement includes. At the very least, you will be able to see the elephant. 

For more on this topic, read “Incorporation by Reference: Ghosts in the Contract” from August 2000 on ECmag.com.

staock.adobe.com / lchumpitaz