Incorporation by Reference
Kegler Brown Construction Newsletter November 1, 1994
It has become typical in the construction industry for prime contract terms to be incorporated into subcontracts by reference, thereby binding the subcontractor to the prime contractor's obligations. This practice has been upheld by many courts recently, resulting in occasional hardship to subcontractors. In a case out of Mississippi, the appellate court determined that when the owner made final payment to the contractor, the subcontractor's claims were also released because of a provision in the prime contract (incorporated into the subcontract by reference) which stated that final payment to the prime contractor constituted a release of all claims.
In a case from Washington, the appellate court ruled that an incorporation clause meant that a subcontractor was bound to arbitration as a remedy if the prime contractor was bound to arbitrate its disputes with the owner.
In view of these decisions, it is more important than ever for subcontractors or suppliers to become familiar with the terms of the prime contract governing the project.