Here's a scenario that has recently played out for one of our clients. Imagine you're a mechanical subcontractor on a large federal job. You have a fixed price contract, but the general contractor has a design-build contract with the government. Also imagine the general contractor isn't doing a very good job and its poor performance is seriously cutting into its profit margin. The general contractor tries to transfer some of the financial pain to its subcontractors; it looks to your company to help out by accelerating work and the general contractor demands that you provide extras. Of course, it promises to pay for them, but never gets around to signing a proper change order. So you make a claim.
Your claim is good and the equities are on your side. You spend a lot of time and money preparing the claim for submission to the general contractor. You establish entitlement, causation and damages. You provide supporting documentation. But the general contractor rejects the claim. The reason: you didn't comply with various contract requirements, including notice, claim documentation and calculation of damages. So even if your claim survives, the general contractor points out, you only get direct labor costs and no overhead or profit.
That's not in your contract, you say. And you might be right, it's not actually written in the contract. Unfortunately, just because it's not written in the actual agreement doesn’t mean it's not part of your contract. Instead of being written in the agreement, many terms are, as we lawyers like to say, "incorporated by reference." In this example, the subcontract incorporates the prime contract by reference, which in turn incorporates certain Federal Acquisition Regulations by reference. And these terms become part of your contract just as if they were actually all written out in the agreement, even though they are not.
This idea of incorporating by reference isn’t just limited to federal jobs. The same thing occurs on most private jobs as well. Often a subcontract will incorporate the terms of the general contract by reference, making the subcontractor subject to the terms of the agreement between the owner and general contractor. This can have a huge impact on your rights relating to things like claims and your obligation to pay liquidated damages, as well as other obligations with regard to site safety and compliance with state and federal laws. It can also significantly affect your warranty obligations. For example, the prime contract might provide a longer warranty than the subcontract, but if the prime contract is controlling, you will be on the hook for the longer warranty.
And then there are industry trade association codes, standards, specifications and guidelines. These can be particularly tricky to track, because more often than not they are referenced only in the specifications. What happens is you end up signing a subcontract that incorporates the prime contract by reference, and the prime contract incorporates the specifications by reference, which incorporate relevant (and sometime not so relevant) industry association standards by reference. This means these standards become part of your subcontract, so it is critical that you comply with them or risk breaching your contract.
If you think this is enough to worry about, there's more. A federal court in Texas recently ruled that a contractor must comply with terms and conditions that were not printed in his contract, but were on awebsite that was referenced in the contract. At first this seemed to be an aberration because the decision involved shipping and therefore was covered by maritime law. But the court cited to enough other cases that suggests there may be a growing trend that it is legitimate, and enforceable, to tell the other party to a contract that it has to comply with terms on a website. I don't know where any particular court will draw a line, and certainly state statutes that dictate how terms must be disclosed will control, but the safe thing to do is to go to the website and review any clauses that might apply to your contract, and object before you sign.
So what is a subcontractor to do? Fortunately, that's the easy part. Read the subcontract. If it incorporates the prime contract, then read it as well, including all exhibits and addenda. Be careful to review the specifications to watch for references to industry association standards. And, for public jobs, become familiar with any state and federal regulations that are incorporated by the prime contract. For federal jobs, certain sections of the FAR will be incorporated by reference, and you should obtain and become familiar with the relevant sections. In short, read everything that is incorporated by reference into your subcontract, even if it's a website.
Michael Callahan is a partner at Stinson Morrison Hecker LLP (the same firm as long-time columnist Susan McGreevy) where he assists clients with all aspects of their construction law needs, including litigation. Contact him at [email protected].