Incorporation by reference

Most trade contracts incorporate “by reference” the terms and conditions of the prime contract.

Are these clauses effective? Short answer: not really.

The general rule of interpretation is that a trade contractor is only bound by the terms of the principal contract to the extent that the term incorporating the prime contract is explicitly set out in the trade contract.  Where the term purporting to incorporate the prime contract is ambiguous, the court will look at the trade contract to determine “on its face” whether incorporation by reference was intended. The court will also consider the intentions of each party to be bound by the term as demonstrated by their actions and correspondence.

What if the trade contractor never even sees the prime contract?

The prime contract is rarely attached to bidding documents, and the tight timelines involved in the bidding process do not always allow trade contractors to investigate documents not related specifically to their work.  An extremely common resulting situation is that despite incorporation by reference language in the trade contract, the trade contractor has never been provided with a copy of the prime contract nor reviewed any of its terms.

If the trade contractor was not, at a minimum, given access to the prime contract or at least the relevant sections of it, a court may decide that it was not incorporated into the agreement at all. Similarly, where the trade contractor is only given parts of the prime contract, the trade contractor will likely succeed with an argument that the incorporation by reference is restricted to only those portions of the prime contract actually provided to it.

On the other hand, where the prime contract is available for review, courts have held that a trade contractor is obligated to make further inquiries into obtaining a copy of it for review. If that is not done, the trade contractor may well be bound by the prime contract including any applicable burdensome terms or conditions.

What is the best way to avoid problems with incorporation by reference?

One would think that the most comprehensive incorporating clause, for example one that holds the trade contractor to all of the terms of the prime contract, would be the most binding on the parties. In reality, these clauses actually leave the most room for disagreement because the relationship between the owner and the general contractor is quite a different one than the relationship between the trade contractor and the general. Similarly, a clause that just generally incorporates the prime contract by reference have been interpreted to only incorporate the terms that specifically apply to the trade contractor and not all of the general conditions of the prime contract. This also leaves ample opportunity for dispute.

Attaching the specific prime contract terms desired to be incorporated into the trade contract is a better way of ensuring in the event of a dispute that such terms are found to form part of the trade contract.

Ultimately however, the best practice is to avoid incorporating terms and conditions by reference altogether and including within the body of the trade contract those terms of the prime contract that are meant to be incorporated. By using a self-sufficient trade contract that contains the relevant terms of the prime contract, the parties will avoid all uncertainty as to what is meant to be included.

Norm Streu is the President & Chief Operating Officer of the LMS Reinforcing Steel Group. Christopher Hirst is a partner and the leader of the Construction & Engineering Group, Alexander Holburn Beaudin + Lang LLP. This article was prepared with the assistance of articled student Samantha Boyce.