Gallet Dreyer & Berkey, LLP | Incorporation By Reference: Does It Work?
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Incorporation By Reference: Does It Work?

2/11/2016 | By: Randy J. Heller, Esq. | Winter 2016 Newsletter
As construction contracts on larger projects continue to increase in length, there may be a temptation to “incorporate by reference” collateral documents, rather than attach them in full. Is a contracting party bound by the contents of a document only referenced in the main agreement, or does a document have to be physi­cally attached to bind a party?

As with most things, the devil is in the details. Or in other words, the more detail you use to identify the separate document, the more likely it will be deemed incorpo­rated by reference and binding upon the other contracting party.
 
Construction projects in New York involve many parties and many contracts. The own­er will undoubtedly have a contract with its general contractor or construction manager (the “prime contract”). The GC or CM will then enter into subcontracts with other trades (the “subcontract”). This can contin­ue down through multiple tiers — each one performing a portion of the scope of the higher tiers, and referring to contracts up the ladder. Most contracting parties are savvy enough to reference the higher-tiered contracts, but many do not actually attach them. Truth be known, many don’t even offer to make them available for inspection (and shame on those subcontractors who never even bother to ask for them).

In New York, the courts have held that a higher-tier contract will be deemed to be incorporated by reference if two elements are satisfied: (1) the agreement must suf­ficiently describe the document to be incorporated “beyond all reasonable doubt” and (2) it must be clear that the parties to the agreement had knowledge of and assented to the incorporated terms.

Plainly stated, you don’t have to have read it, and you don’t have to have seen it, for you to be bound by it. All that is required is that your agreement clearly describes the higher-tier contract and you agree to be bound by its terms. It does not have to be attached to your agreement to bind you.

Contractors routinely incorporate by ref­erence the terms of the prime contract in their subcontracts. While merely identify­ing it by date, description and parties is probably sufficient, some contractors go to greater lengths to ensure it is binding upon their subcontractors, sometimes including verbatim paragraphs.

But even when an unattached document is deemed “incorporated by reference,” that does not mean that every part of that agreement becomes binding upon the third party. The well-settled rule in New York is that “incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference, bind the subcontractor…as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor.”

On the other hand, “provisions unrelated to the work of the subcontractor, such as a ‘dispute’ clause governing the  resolution of monetary claims between the project owner and general contractor, are not incorporated by reference into a subcon­tract.” Thus, an arbitration clause in the prime contract may not preclude a sub­contractor from commencing litigation. As a rule of thumb, the “nuts and bolts” of the scope are more likely to be incorporated by reference, and bind the subcontractor, than the “legal” boilerplate of the prime contract. But this general rule can often be overcome by specific mention in the subcontract.

The safest practice is to physically attach the document you wish to incorporate by reference, mentioning it as an attached document in the body of the main agree­ment to establish that you have done so. But even if you do not, the more detail you provide to characterize the separate docu­ment, the more likely it will be considered incorporated by reference and binding upon the subcontractor.