But I Never Saw That Document: The Perils of Incorporation by Reference Provisions

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But I Never Saw That Document: The Perils of Incorporation by Reference Provisions
By Dalene A. Radcliffe, Lee/Shoemaker PLLC

Before entering into a new contract, the prudent design professional should always review the proposed terms and conditions. This is necessary to understand both the required scope of services and the risks associated with a project. Often, a proposed contract includes an “incorporation by reference” provision, referencing other documents. For example, a prime contract on a hospitality project may "incorporate by reference” a hotel brand’s design standards and a subcontract on that project may “incorporate by reference” the terms and conditions of the prime contract (and those same design standards).

When a contract incorporates by reference another document, good risk management requires obtaining and reviewing those referenced documents. Why? Because courts across the country will assume that – by signing a contract with an incorporation by reference provision – the design professional agreed to be bound by those referenced documents – even if those referenced documents were not provided to the design professional at the time of contracting! This article discusses how to reduce the risks associated with incorporation by reference provisions.

Incorporation by Reference Provisions

Any design agreement can incorporate by reference other documents and they often do. For example, Section 13.2 of the AIA Document B101-2017 leaves “blanks” to be filled in to identify documents to be incorporated by reference into the contract, including (i) a Building Information Modeling and Digital Data Exhibit, (ii) exhibits, and (iii) other documents. Most government contracts incorporate numerous clauses by reference, and the Federal Acquisition Regulation (FAR 52.107) directs contracting officers to insert specific FAR provisions into solicitations and contracts in order to incorporate those provisions by reference.

Referencing extrinsic documents in a contract allows the contracting parties to easily expand the terms of the contract beyond the four corners of the contract. A common type of incorporation by reference provision is the “flow down” clause. It is common practice in the construction industry to have a set of interrelated contract documents and for there to be a flow down provision pursuant to which the conditions of the contract between the owner and design professional will apply to the contracts entered into between the design professional and its subconsultants.

Incorporation by Reference Provisions May Bind You to Unanticipated Obligations

Most jurisdictions consider the parties to construction industry contracts to be sophisticated parties. As such, courts are unlikely to excuse a party for failing to review the documents referenced in a contract. Because incorporation by reference provisions are commonly utilized in the construction industry, courts in general will uphold incorporation by reference provisions absent evidence of fraud. A party’s failure to read a contract, or failure to review an incorporated document, before signing the contract will not affect its binding force – courts presume that the parties have read and understood the terms of the contract. As such, the prudent design professional should assume that the provisions contained in the design agreement and the provisions from extrinsic documents that are incorporated into the design agreement will be enforced by a court of law.

Mitigate the Risk

When reviewing a new contract, the prudent design professional should obtain and review all documents incorporated by referenced into the contract. The first (and best) way to mitigate risk is to understand the obligations being assumed under a contract.

On occasion, an incorporation by reference provision can create an apparent conflict or ambiguity between a provision in the contract and a provision in the incorporated document. An order of precedence clause (identifying how to resolve such an apparent conflict or ambiguity) can create (or avoid) unintended risk. If an order of precedence provision makes an incorporated document more important than the specifically negotiated terms of the design professional’s contract, this can create increased risk for the design professional.

To mitigate the risk associated with the binding effects of incorporation by reference provisions, the prudent design professional should consider the following:

• Obtain a copy and review all of the documents referenced in the design agreement that include industry standards and legal terms.

• During the negotiation phase of contract review, make sure that the purpose of the documents that are incorporated by reference is expressly identified and limited in the design agreement to avoid a broad application of the terms contained in the extrinsic document.

• Pay particular attention to clauses that provide an order of precedence while attempting to avoid inconsistencies.

• Ensure that the provisions in your subconsultant agreement are consistent with those provisions contained in the Design Agreement and documents incorporated by reference in the Design Agreement to avoid conflicting terms.

Not only will this process help to mitigate risk, it may also allow you to leverage an incorporated document to your benefit (e.g., incorporating your proposal along with the favorable terms and conditions you may have developed when working with your own lawyer).

Conclusion

Before entering into a design agreement, it is critical to review and understand the contract provisions that are incorporated by reference into the design agreement to avoid waiver of favorable contract terms and otherwise legal rights. If you fail to consider documents incorporated by reference, you may find yourself facing unanticipated (but avoidable) exposure to claims not accounted for in your fee.

Dalene A. Radcliffe is a lawyer at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals in DC, Virginia, and Maryland. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.

Lee/Shoemaker PLLC is an Educational Program Sponsor of AIA Potomac Valley.