B uild Your Construction Contract On Solid Ground: Know The Documents You Incorporated By Reference

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Contract On Solid Ground:

Know The Documents You Incorporated By Reference! By Subcontractors USA ences the prime contract between the general contractor and owner and “flows down” those obligations to apply Contracting parties should obtain and review all of the documents referenced in a contract that include News Provider them in a similar manner between the subcontractor commercial and legal terms that may be asserted against and general contractor. Although flow down clauses them in litigation. Contracting parties in the construcA construction contract is the foundation of any construction project. But a foundation is only as strong as the ground it is built on. Docutypically focus more on legal obligations, they can lead to similar issues and require the same mitigation suggestions as incorporation by reference clauses. tion industry will generally be considered sophisticated parties and will not be excused for not pursuing documents that are referenced in its contract. ments that are incorporated by reference into your con2. Use an Order of Precedence Clause for Possible tract may lead to unknown risks that are only unearthed when claims or disputes flare-up, or worse, in litigation. Executing a contract without knowing the referenced “Incorporation by Reference” May Create Ambiguities “Incorporation by Reference” May Create Ambiguities Conflicts. An order of precedence clauses defines how courts and arbitration panels should resolve conflicts between documents’ terms or failing to preemptively mitigate Courts and arbitration panels typically look within contract documents rather than find the contract amthe risks from these referenced documents is building the written four corners of a contract to determine the biguous. Although an order of precedence clause is your project’s foundation on shaky ground. intent of the parties. While each jurisdiction has its common in construction contracts, this type of clause is

This article first explains how courts and arbitration own body of law for contract interpretation, a clear and not universal. For example, ConsensusDocs includes an panels consider documents “incorporated by reference,” unambiguous contract will typically be enforced as writorder of precedence in its standard forms while the AIA then describes a few issues and subsequent consequences ten. Because interpreting a contract is a question of law standard forms do not. [1] In fact, the Associated General that are typically caused (and litigated) by referencing and not a question of fact, a court may grant summary Contractors of America (“AGC”) has commented on other documents, and finally suggests actions the conjudgment and avoid a full-blown trial when the dispute the AIA’s lack of an order of precedence clause and even tracting parties can take to mitigate these issues. can be resolved by interpreting the plain meaning of suggested resolving this issue by using language similar the contract. And arbitration panels may do the same to the ConsensusDocs’ order of precedence clause. [2] When is a Document “Incorporated by When is a Document “Incorporated by without an evidentiary hearing. As a result, when a dis3. Expressly Identify the Purpose of Document InReference”? Reference”? pute occurs on a project, legal fees may be significantly reduced by avoiding trial or narrowing the scope of the corporated by Reference. A good rule of thumb is to expressly identify the

Construction contracts often refer to numerous other hearing due to an unambiguous contract. purpose for which documents are referenced. Generdocuments besides the base contract such as design and Conflicts created by the additional language from a ally speaking, courts and arbitration panels will strictly construction plans, specifications, exhibits, addenda, referenced document may cause what looked clear within construe unambiguous language regarding the express and even other contracts between other parties. When the four corners of the contract to become unclear or purpose of a referenced document. Expressly identifying the proper operative language is used, these referenced ambiguous. Ambiguous simply means susceptible to more the purpose that referenced documents are incorporated documents that are “incorporated by reference” become than one reasonable interpretation. If the ambiguity provides clarity to the parties and direction to the court part of the contract, and enforced by courts and arbitracannot be resolved within the contract, including all or arbitration panel when interpreting the contract. tion panels, as the document that is ultimately signed. referenced documents, the matter has to go to trial to For example, if the prime contract is referenced in

Proper operative language does not require magic receive evidence on the proper interpretation. the subcontract to flow down only certain obligations words to incorporate a document by reference into a between the owner and general contractor to the subcontract. Generally, the contract must simply identify the document that is to be incorporated by reference and for what purpose the document is referenced. Further, “Incorporation by Reference” May Incorporated Unexpected Terms “Incorporation by Reference” May Incorporated Unexpected Terms contractor, the subcontract could identify the specific terms or the types of obligations that are applicable. An alternate option would be, after referencing the prime the referenced document usually does not need to be Incorporating documents by reference can inadvertcontract, to specifically exclude the terms that the para legal document but can include a project’s plans and ently change or relinquish legal rights otherwise available ties do not intend to flow down. ConsensusDocs 750 specifications. A document can even be referenced and to one of the parties. For example, a referenced document includes a version of a flow down clause as part of the made a part of the contract without providing it to the could extinguish a contractor’s right or preference to standard subcontract.[3] other party. litigate a claim in federal or state court by unexpectedly

Simply put: a document may be incorporated by incorporating a requirement to arbitrate. Or, a referenced reference into a contract by expressly identifying the document could force a party to abide by an unexpected [1] ConsensusDocs 200 Agreement and General Conditions referenced document and clearly stating the referenced forum selection clause. Between Owner and Constructor, Section 14.2 Interpretation document is a part of the contract. Why Do Parties Use “Incorporation by Reference” Provisions? Referencing other documents allows the contracting parties to expand a contract’s “four corners.” Parties may Why Do Parties Use “Incorporation by Reference” Provisions? Referenced documents could also include project documents that materially impact the expected scope of work. For example, a referenced specification could require that the work only be completed at night even though the parties only verbally discussed day time work. Or, a referenced design plan could require building an embankment when prior discussions never specified a of Contract Documents; ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor, Section 13.1 Interpretation of Subcontract Documents. [2] AGC’s Commentary on the AIA A201 General Terms and Conditions Document, 2017 (July 25, 2017). [3] ConsensusDocs 750 Standard Agreement Between Constructor and Subcontractor, Section 3.1 Obligations. incorporate by reference other documents to streamline manner of wasting excess materials. The views expressed in this article are not necessarily the contract drafting and negotiating process or as a those of ConsensusDocs. Readers should not take or “belt and suspenders” approach to ensure that the minutia of various technical scopes of work are included Suggestions to Mitigate Risk Suggestions to Mitigate Risk refrain from taking any action based on any information without first seeking legal advice. in the contract. Below are some suggestions to consider to avoid many

A common type of incorporation by reference clause of the issues that could arise from incorporating other Source: Associated General Contractor is a flow down clause. “Flow down” clauses in subcondocuments by reference into your next contract. tracts seek to ensure a uniformity of obligations down 1. Obtain and Review All of the Referenced Docuthe chain of privity. A flow down clause typically referments.