[minti_headline type=”div” font=”font-special” size=”fontsize-xxxl” color=”#ffffff” weight=”fontweight-700″ lineheight=”lh-12″ class=”lowercase”]STA LEGAL LOG – NOVEMBER 2021[/minti_headline]
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Incorporation By Reference Provisions in Subcontracts

May Not Necessarily Preclude Claims by Subcontractors

By Andrew Richards, Co‑Managing Partner, Kaufman Dolowich & Voluck LLP

 


Andrew Richards
Co‑Managing Partner
Kaufman Dolowich & Voluck LLP

In an effort to avoid having to pay subcontractors’ claims, prime contractors often attempt to bind its subcontractors to certain key terms set forth in the prime contract, such as terms concerning payment, the procedure for seeking payment for extra work, damages and dispute resolution.  A typical method used by general contractors to protect them is the use of “incorporation by reference” provisions.  Such provisions in the subcontract will contain language stating that certain terms of the general contract are incorporated into the subcontract as if they had been fully set forth in the document itself.

By doing this, the prime contractor can avoid paying a subcontractor’s claim if the prime contractor cannot recover damages for the claim from the owner.  However, not all incorporation by reference clauses preclude a subcontractor’s claim unless the prime contractor can recover from the owner. The law in New York is that general incorporation by reference clauses (i.e.  “[a]ll of the terms of the prime contract are hereby incorporated by reference in this subcontract”) bind the subcontractor only to the prime contract provisions relating to the: (i) scope; (ii) quality; (iii) character; and (iv) manner of the work to be performed by the subcontractor.

For example, many prime contracts require the prime contractor to adjudicate its claims in a court of law.  New York courts, however, will not require subcontractors to use the court system when the subcontract has an arbitration provision unless the requirement to utilize the court system is specifically and expressly incorporated into the subcontract.  Additionally, prime contracts between government agencies and prime contractors often contain notice provisions whereby the prime contractor must provide notice of claims within a certain period of time. If the subcontract does not require the subcontractor to provide such notice within a time period less than the prime contractor’s time to give notice, the prime contractor may have to defend against an extra work claim while it cannot seek indemnification against the owner.

Thus, a subcontractor should not assume that it cannot bring a claim against the prime contractor solely because the terms of the prime contract are generally incorporated into the subcontract.

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