Legal Tip: Accepting Terms Not Spelled Out in Your Contract
Originally Published by: Pagel, Davis & Hill — May 10, 2023
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Editor’s Note: The following article is the first in a series prepared by Kent Pagel, president of the Houston, Texas, law firm, Pagel, Davis & Hill, and legal counsel for the National Framers Council (NFC). Since 1994, Kent has been advising local, regional and national companies involved in residential, commercial and industrial construction, providing counsel on matters of litigation and arbitration, insurance, liability, contracts and operations.
This NFC Legal Tip of the Month™ discusses the importance of “incorporation by reference” clauses that exist in virtually every subcontract form and options available to framing subcontractors to lessen their impact.
An example of an incorporation by reference clause in a subcontract is:
“The Subcontractor is bound to the General Contractor by the terms and conditions of the Owner General Contractor contract and shall assume toward the General Contractor all of the obligations and responsibilities that the General Contractor assumes toward the Owner.” [Emphasis added]
Don’t for a minute think this type of provision is boilerplate and either insignificant or meaningless. These clauses bind the subcontractor to duties and obligations that are not spelled out in the subcontract, and are instead buried in other contract documents that the subcontractor might not have seen.1 This includes all terms of the Owner and General Contractor (the “GC”) contract, also referred to as the “prime contract”. In other words through incorporation by reference your obligations to the GC mirror the GC’s obligations to the owner. For example, if your subcontract was silent on liquidated damages for delay, yet the prime contract allowed for the owner to assess this type of damages against the GC, through “incorporation by reference” the liquidated damages provision becomes a term of your subcontract. Further imagine you have successfully negotiated twice monthly labor draws as a subcontract term yet the GC agrees to onerous payment conditions in the prime contract. Through incorporation by reference those same payment conditions become part of your subcontract!
As a general rule, a subcontractor will be held to the terms of an incorporated prime contract whether or not the subcontractor has read the prime contract, particularly if the subcontract contains language stating that the subcontractor has received a copy of the prime contract, or that a copy of the prime contract has been made available to the subcontractor. Therefore, if a prime contract is incorporated by reference into a subcontract, the terms of the prime contract should be reviewed thoroughly. If the incorporated prime contract includes further incorporations (e.g., a prime contract that incorporates specifications), all the relevant documents should be reviewed. There will be many areas that should be reviewed including the subcontractor’s working conditions, payment terms and conditions, retainage, certification of completed work, insurance requirements, indemnity provisions, notice requirements, delay damages, termination, arbitration and other terms.
When negotiating a subcontract and facing an incorporation by reference clause, since the GC will not likely agree to remove the clause in its entirety, the framing subcontractor should consider the following options.
OPTION 1: Limit your obligations such that you are only required to perform your work in accordance with a limited portion of the project contract documents, such as the specific technical specifications and plans upon which you have based your bid. By doing so, framers thereby avoid risk associated with terms of the prime contract. Here is an example of a provision to include in your subcontract to effectuate this option:
“The subcontract consists of this Subcontract Agreement, the following technical specification sections [INSERT] and drawing numbers [INSERT] and [INSERT]. This subcontract does not include, nor incorporate by reference, any other contract documents such as the prime contract, general conditions, supplementary conditions, modifications to general conditions, or any other documents by which the General Contractor is obligated to the Owner.” [Emphasis Added]
If necessary the framer can broaden the language from Option 1 to include additional specific clauses from the prime contract. The key is to make sure you include the italicized language from the above example after identifying those clauses from the prime contract that will be included in the subcontract.
Along those same lines, if the GC will not permit an Option 1 type of provision, following your review of the prime contract and all other contract documents that are incorporated into the subcontract and you find provisions that are unacceptable and perhaps even inconsistent with the terms of your subcontract, carve out those provisions through a clause to your subcontract that read similar to the following provision. This example deals with an indemnity provision from a Prime Contract that was quite broad:
“Notwithstanding any clause in the Prime Contract or the Contract Documents to the contrary, Subcontractor shall not provide indemnification of any indemnitee other than to the extent damages arise out of third party claims against the indemnitee and to the extent caused by Subcontractor’s willful misconduct or negligence.”
OPTION 2: If the alternatives in Option 1 are not workable, make your subcontract terms prevail over the Prime Contract terms. Here is a suggested subcontract clause that will accomplish this objective:
“Where a provision of the Prime Contract, General Conditions, Supplementary Conditions, or modifications to General Conditions, or any other documents by which the General Contractor is obligated to the Owner are inconsistent with a provision of this Subcontract Agreement, this Subcontract Agreement shall govern.”
A variation of Option 2 can be achieved by allowing the Prime Contract to prevail over the subcontract terms and excepting only certain provisions from the subcontract that take precedence. Here is an example:
“Where a provision of the Prime Contract, General Conditions, Supplementary Conditions, or modifications to General Conditions, or any other documents by which the General Contractor is obligated to the Owner are inconsistent with a provision of this Subcontract Agreement regarding the following provisions [INSERT], the provisions of this Subcontract Agreement shall govern.”