Incorporation of main contract terms


Sometimes taking a short cut may lead you up a blind alley. The same may also be true if you attempt a contractual short cut. Sometimes subcontracts (often drafted without legal advice) attempt to incorporate main contract terms by various shorthand means, using provisions which state that the subcontract is “subject to the terms of the main contract”, “deemed to incorporate the terms of the main contract”, or use other words to that effect. Such an approach is widely adopted in an attempt to make subcontract terms back to back with obligations agreed under the main contract. Given that this type of clause attempts to incorporate a different contractual regime relevant to a separate agreement, it isn’t surprising that such efforts often come unstuck and are less effective than people might assume.

When questions arise as to the effect of the incorporation, each contract must be interpreted on its own terms. It is not necessarily the case that these types of provisions will prove ineffective – they may work, depending on the terms of the particular contract as a whole. However, it should be taken as read that uncertainty as to the effect of contractual terms is never a good thing.

The issue is even more difficult where a party wishes to rely on a dispute resolution provision (ADR) which is part of a contract said to be incorporated by reference. This could happen if a party wishes to argue that one adjudication procedure applies in preference to another (common where a responding party is wrangling over an appointed adjudicator’s jurisdiction) or a party wishes to stay court proceedings on the grounds that an arbitration agreement has been incorporated which supplants the jurisdiction of the court.

In respect of both adjudication and arbitration procedures, it has been held consistently by the courts that there must be a specific reference to an ADR provision if either procedure were to be incorporated into a separate contract. In one case, the court was asked to decide whether an adjudication procedure included in the main contract was stepped down to a subsubcontract which incorporated the main contract terms by reference. In answer, the court considered that it was difficult to understand the subcontract as importing wholesale the ADR provisions of the main contract (for instance, where the parties to the main contract had agreed to very specific arrangements for negotiation of disputes between themselves). On this issue, the court ruled that it was “not possible to borrow the adjudication procedure in the main contract…and in some way force it to apply as between a subcontractor and a subsubcontractor”.

The court went on to consider the treatment of arbitration clauses incorporated by reference. In those cases, general words of incorporation are sufficient to incorporate an arbitration clause where the clause comes from an earlier contract between the parties or from standard terms containing an arbitration agreement. However, if a party seeks to rely on an arbitration clause in some other contract, not previously used by one or more of the parties, a general reference to the contract’s terms will not be sufficient to incorporate the arbitration clause.

The court considered that the principle was analogous in the case of adjudication provisions. Therefore, as a matter of principle, if an agreement to adjudicate disputes is to be incorporated from one contract into another, there must be an express reference to the dispute resolution clause itself in the agreement between the parties; reference to the terms and conditions of a contract which included a separate adjudication procedure was not enough.

And so it seems blind reliance on an incorporation clause wholesale may be misplaced. To hear the words “it is a matter of interpretation” uttered from a lawyer’s mouth should set alarm bells ringing in the heads of those who require certainty from their agreed contractual terms. Sometimes the long way round is the shortest route to a particular destination and if there are specific obligations in a main contract which are onerous, or sensitive to the actions and adequate performance of a subcontractor, it is worth considering whether the subcontract should take those into account expressly. Where a party wishes to incorporate ADR provisions from some other contract, it is necessary to draft the subcontract so that it specifies that the ADR provisions of the main contract apply. General words of incorporation alone will not do.

View by author:

Would you like to hear more?