Contractors and the Law
April 1, 2015 by Lauren E. Kristjanson and Jack Finn
A common feature of construction contracts is the incorporation of provisions of the main contract by reference into a subcontract. Two questions arise from this convenient and time-saving practice: What aspects of the main contract are and are not incorporated, and what happens when aspects of the main contract and subcontract conflict?
The first issue is what is or is not incorporated from the main contract by reference into the subcontract. The British Columbia courts have considered this question and concluded it is not always as straightforward as the plain language of the reference clause.
For example, in Daiwood Construction Co. v. Wright Schuchart Construction Ltd. (1992), 3 C.L.R. (2d) 144 (B.C.S.C.), the subcontractor entered into a written agreement with the general contractor to construct and supply structural and architectural concrete work. At the time, there was no contract between the owner and general contractor.
The general contractor advised the subcontractor that the main contract would be the Canadian Construction Documents Committee (CCDC) 2 1982 Stipulated Sum Contract, modified to reflect a “guaranteed maximum upset price.”
As part of the contract between the subcontractor and general contractor, the terms of the main contract were binding on the subcontractor. The subcontract also required that the form of contract between general contractor and owner be the CCDC 2 contract. The actual contract between owner and general contractor included two significant modifications to the standard form contract.
The court held that the additional terms, unknown to the subcontractor, formed no part of its contract with the general contractor. The subcontractor was not informed of the changes to the CCDC 2 contract between owner and contractor.
According to the judge, the subcontractor would not have agreed to sign a subcontract “which would amount to no more than a pig in a poke.”
Likewise, in Foundation Co. of Canada Ltd. v. United Grain Growers Ltd. (1997), 33 C.L.R. (2d) 159 (B.C.C.A.), drawings in the main contract and the subcontract were held not to have been incorporated into the subcontract despite a clause in the subcontract including them and a term that incorporated by reference the terms of the main contract.
In Foundation Co., the issue was that the subcontract and the main contract included an additional set of drawings that was not in the tender. In this case, the negotiations at the tender stages were crucial to the interpretation of the subcontract.
During tendering, the negotiations focused on the terms in the tender, and not in the subcontract. When changes were made, both parties initialed the accepted change on the tender. The court held that the subcontractor and the general contractor’s clear actions in negotiations, creating a pattern of adding and initialing changes in the tender, meant the terms that they did not expressly initial and include, i.e. the additional drawings, were not included in the subcontract by reference or otherwise.
As the two cases above demonstrate, the terms of the subcontract, along with the intent of the parties in making the agreement, is what establishes which aspects of a main contract are or are not incorporated into the subcontract – not just the reference clause.
The second issue is what happens when provisions of the subcontract conflict with provisions of the main contract? The short answer is: poor drafting can lead to liability for contractors against owners and subcontractors. Incorporation by reference will not save a contractor if the terms of the two contracts conflict. In such a circumstance, a contractor could be in breach of one of its contracts.
In other words, a contractor who enters into inconsistent obligations to the owner and the subcontractor cannot rely on one contract as an excuse for breaching the other.
Incorporation of main contracts in subcontracts is certainly a common practice in construction contracts. It is important to remember two key points in order to avoid issues when part of an agreement incorporates another agreement. First, if the subcontract attempts to incorporate the main contract by reference, and the main contract contains unexpected or unknown terms, these terms may not be binding on the parties to the subcontract. Further, it is important to read and understand all obligations that are entered into, as conflicting obligations is not an excuse for breaching one contract in favour of honouring the other.
This article is for information purposes only and may not be relied on for legal advice. Lauren E. Kristjanson is a lawyer at the law firm of Borden Ladner Gervais LLP, practicing in the area of commercial litigation with an emphasis on contract and construction disputes. Jack Finn is an articling student at Borden Lander Gervais LLP.