Legal Specs: The hidden pitfalls of reference clauses in trade contracts

It is common for trade contracts to incorporate “by reference” the terms and conditions of the prime contract. While these reference clauses are frequently used, the consequences of doing so are rarely appreciated and can be dangerous where the trade has not fully considered the obligations imposed by the prime contract.

Interpretation by the court

The general rule of interpretation is that a trade contractor is bound by the terms of the prime contract only to the extent that the term incorporating the prime contract is explicitly set out in the trade contract. Where the term purporting to incorporate the prime contract is ambiguous, the court will look at the trade contract to determine “on its face” whether incorporation by reference was intended. The court will also consider the intentions of each party to be bound by the term as demonstrated by their actions and correspondence.

What if the trade contractor never even sees the prime contract?

The prime contract is rarely attached to bidding documents, and the tight timelines involved in the bidding process do not always allow trade contractors to investigate documents not related specifically to their work. The commonly resulting situation is that despite incorporation by reference language in the trade contract, the trade contractor has never been provided with a copy of the prime contract nor reviewed any of its terms.

If the trade contractor was not, at a minimum, given access to the prime contract or at least the relevant sections of it, a court may decide that it was not incorporated into the agreement at all. Similarly, where the trade contractor is given only parts of the prime contract, the trade contractor may succeed with the argument that the incorporation by reference is restricted to only those portions of the prime contract actually provided to it.

On the other hand, where the prime contract is available for review, courts have held that a trade contractor is obligated to make further inquiries into obtaining a copy of it for review. If that is not done, the trade contractor may well be bound by the prime contract including any applicable burdensome terms or conditions.

Best practices

What is the best way to avoid problems with incorporation by reference? At a minimum, a trade contractor should be provided with a copy of the referenced prime contract to review if it is not already appended in its entirety to the trade contract. Better practice would be to attach the specific prime contract terms desired to be incorporated into the trade contract.

Ultimately however, best practice is to avoid incorporating terms and conditions by reference altogether and include within the body of the trade contract those terms of the prime contract that are specifically desired to be incorporated. The use of a self-sufficient trade contract that contains the relevant terms of the prime contract will avoid conflict on this issue altogether.

Norm Streu is executive vice-president, NCM Development, Nexii Building Solutions. Christopher Hirst is managing partner at Alexander Holburn LLP.