Examining Incorporation By Reference Yet Again

October 17, 2013

Construction Law


            The United States District Court of the District of Columbia recently held that a surety was bound by an arbitration provision contained in a subcontract that was incorporated by reference into the performance bond.  In Tower Ins. Co. of New York v. Davis/Gilford, CIV.A. 13-0781 RBW, 2013 WL 4776049 (D.D.C. Sept. 6, 2013), a general contractor entered into a subcontract with a subcontractor to perform work at a private project located in the District of Columbia.  The subcontract contained a disputes clause which stated in part:

Disputes with General Contractor shall be resolved by arbitration in accordance with the rules of the American Arbitration Association and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof…

            The surety issued a performance bond guaranteeing the subcontractor’s work on the project. The performance bond contained an “incorporation by reference” clause which stated that the “Subcontract between General Contractor and Subcontractor is hereby referred to and made a part hereof.”  The bond also guaranteed that, in the event the subcontractor defaulted on the subcontract, “the Surety… after notice of default from the Contractor, will notify the Contractor in writing of its election either to promptly proceed to remedy the default or promptly proceed to complete the work of the Subcontract in accordance with and subject to its terms and conditions.”

            The subcontractor defaulted on the subcontract and the general contractor notified the surety of the default.  Under the provisions of the bond, the surety elected to complete the work under the subcontract.  The general contractor and surety negotiated a written “takeover agreement” that also incorporated by reference the terms and conditions contained in the original subcontract.

            The general contractor initiated arbitration proceedings against the surety regarding the surety’s obligations under the performance bond.  The surety objected to arbitration and filed suit in the District Court of the District of Columbia seeking a declaration from the Court that the surety was not required to arbitrate its claims or defenses.  Additionally, the surety filed a motion to stay arbitration and the general contractor moved for summary judgment.

            The issue before the Court was whether the parties entered into a valid enforceable arbitration agreement based on the arbitration provision contained in the subcontract which was incorporated by reference into the performance bond.  The Court, in analyzing the bond’s “incorporation by reference” clause, applied District of Columbia law which states “when a contract incorporates another writing, the two must be read together as the contract between the parties.” Sheriff v. Medel Electric Co., 412 A.2d 38, 41 (D.C.1980).  Further, the Court in reviewing the contract documents will “examine the document on its face, giving the language used its plain language meaning” to determine whether the language in the document is ambiguous.

            Here, the performance bond executed by the surety stated that the subcontract “is hereby referred to and made a part” of the bond.  The Court stated that “when a document incorporates outside material by reference, the subject matter to which it refers becomes part of the incorporating document just as if it were set out in full.“ BP Amoco Corp. v. NLRB, 217 F.3d 869, 874 (D.C.Cir.2000).  Thus, the Court found that the language contained in the performance bond, which incorporated by reference the terms of the subcontract, was unambiguous and indicated the surety’s intent to incorporate all of the provisions within the subcontract.  As a result, the language of the bond also incorporated the disputes clause in the subcontract.  The surety was bound to the subcontract’s arbitration provision, wherein “disputes with General Contractor shall be resolved by arbitration…” As a result, the surety was required to arbitrate its claims and defenses arising from both the bond and the subcontract.  The disputes clause in the subcontract also applied to any claims brought by general contractor against the surety.  The Court denied the surety’s motion to stay arbitration and granted the general contractor’s motion for summary judgment.

            Incorporation by reference clauses are very common in construction contracts.  Ask yourself if you really know what you agreed to include in your contract when it incorporates by reference another document.  Which contract provision controls if there is an inconsistency between the contracts?  These tend to be the questions asked after there is a dispute between the parties which leaves one scrambling for answers.  To avoid the element of surprise, it is important to carefully review all of the language contained in contract documents and the provisions within them.  By understanding what terms you agreed to under contract, you can know what to expect if and when there is a dispute and you can prepare accordingly. Additionally, an order of precedence clause is another provision that will help you (and the other contracting party) determine which provision applies in case of an inconsistency within the various contract documents.  It is essential to familiarize yourself with the laws of the jurisdictions where your projects are located because not all jurisdictions interpret contract provisions as broadly as the District of Columbia.  Understanding all of your rights and remedies in contract disputes is the best way to protect yourself and your company.