Construction, supply and other contracts frequently refer to other documents as part of the contract requirements, and often will incorporate other documents “by reference” to make them a part of the contract. This normally occurs because of the volume of information, and also as a method of simplifying the contract so that the obligations are clear among all the documents. Most jurisdictions use a version of the “clear reference” test to determine whether the referenced documents are properly incorporated into the applicable contract.
A leading case on the issue of incorporation by reference is Standard Bent Glass Corp. v. Glassrobots Oy, 333 F.3d 440 (3d Cir. 2003). In that case, the court stated the test as follows: “[i]ncorporation by reference is proper where the underlying contract makes clear reference to a separate document, the identity of the separate document may be ascertained, and incorporation of the document will not result in surprise or hardship.” Id. at 447. Frequently the incorporated document is attached, so the identity issue should not normally be a problem. While it is important that there be no surprise or hardship, a mere failure to read the incorporated document does not create surprise or hardship. Thus, the crux of the test is the “clear reference” element.
Plans and specifications are frequently incorporated by reference, but disputes sometimes arise as to the extent of the incorporation of commercial terms. An example is Westinghouse Elec. Supply v. Fidelity and Deposit Co. of Maryland, 560 F.2d 1109, (3rd Cir. 1977). In the Westinghouse case, the issue was the intention of the parties when incorporating the phrase “plans and specs” of a general contract into a subcontract. The court ruled that the phrase “plans and specs” included more than merely the labor and material needed to perform the described work; it also included commercial terms of the general contract not specifically referred to in the subcontract that governed the method of compensation for changed or extra work. In this case, the commercial terms were incorporated by reference, even though not specifically referred to, because they were necessary to determine how to pay for the work. Therefore, the incorporation satisfied the “clear reference” test.
A more recent case occurred in Florida. In Kaye v. Macari Bldg. & Design, Inc. 967 So. 2d 1112, (Fla. Dist Ct. App. 2007), the contract clearly incorporated plans and specifications by reference. There was, however, an issue of whether an arbitration clause, part of an AIA form, was also incorporated by reference. The court determined that general notes on the plans and specifications made the form a part of the contract, and therefore the arbitration clause was a part of the contract, and the parties were required to arbitrate. The reference to the standard form on the general notes was sufficient to satisfy the “clear reference” test.
Occasionally this issue arises with respect to limitation of liability clauses, which may add an element of conspicuousness to the test. Some jurisdictions require that such clauses be in bold or capital letters to provide this added element, although in most jurisdictions, “…limitation of liability clauses are routinely enforced in contracts negotiated between sophisticated parties when the nature of the loss is commercial.” Advanced Tubular Products, Inc. v. Solar Atmospheres, Inc., 2004 WL 540019, *4 (E.D. Pa) Limitation of liability clauses are “…common place in the commercial arena.” Id. at *6. They are an accepted way “…of allocating ‘unknown or undeterminable risk’… and are a fact of every-day business and commercial life.” Id. at *6.
This issue also arises in international contracts, and the rule frequently is similar. It is not unusual in the international marketplace to incorporate “standard terms and conditions.” These can be terms and conditions from any applicable FIDIC form, or other standard form used in the industry.* Some jurisdictions refer to the test as to whether the incorporated terms have been “fairly and reasonably” brought to the attention of the other party. See, e.g. Chitty on Contracts para. 12-015 (English law). This seems similar to the “clear reference’ test used in many places in the United States, but it also points out that there could be subtle differences, and the specific test used in any given jurisdiction is important to know when drafting contracts and using the incorporation technique.
* See Critical Path Fall 2007 edition for a discussion of the FIDIC General Conditions.
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