Does an 'Incorporation by Reference' Clause
Always Include the Incorporated Contract's Arbitration Provision?

By John S. Mrowiec

In October, we discussed the dilemma of a party who is prosecuting an upstream claim and defending claims from downstream claimants, both subject to differing dispute forums and, thus, more expense and potential contradictory outcomes.

This month we discuss one Indiana contractor's unsuccessful attempt to arbitrate subcontractors' claims arising from an owner's failure to pay, MPACT Construction Group, LLC v. Superior Concrete Constructors, Inc., 2003 Ind. App. LEXIS 464 (1st Dist., Mar. 26, 2003).

A general contractor and owner entered into a contract for the construction of a travel plaza. The parties use the American Institute of Architects A101 Agreement (1987 edition). That agreement incorporated the American Institute of Architects, General Conditions of the Contract for Construction A201 (1987 edition). The general conditions contain a broad arbitration provision.

The general contractor entered into various subcontracts. The subcontract form did not include an express arbitration clause or any other express provision regarding subcontractors' rights and remedies.

What the subcontracts did provide was an "incorporation by reference" cause as follows:

"Contractor has heretofore entered into a General Contract with Owner…inclusive of, but not limited to the project plans and specifications, schedules, drawings and amendments by addenda…which are hereby made a part of the General Contract between the Owner and the Contractor and are hereby made a part of this subcontract as applicable to the work stated therein, and pursuant to the subcontractor's intent to infer into this subcontractual agreement, with reference to any and all of said work (emphasis by court)."

The owner failed to pay. The general contractor and most of the subcontractors recorded mechanics liens. One of the subcontractors filed suit to foreclose its lien against the owner's property and for breach of the subcontract against the general contractor. The other subcontractors and the general contractor filed various cross-claims.

The general contractor then filed a motion to compel arbitration against the owner and the subcontractors and to stay the litigation pending the outcome of arbitration. After a hearing, the trial court denied the contractor's motion. The denial of a motion to compel arbitration is immediately appealable under both Indiana's Uniform Arbitration Act and the Federal Arbitration Act. The general contractor appealed.

On appeal, the MPACT Construction appellate court had no problem finding that the owner was obligated to arbitrate the dispute with the general contractor under the language of the AIA A201 General Conditions. The question of arbitration with the subcontractors was more difficult.

The general contractor argued that the subcontractors must arbitrate. The subcontracts incorporated the owner-contractor agreement. The agreement, in turn, incorporated the general conditions. They included an arbitration provision.

The subcontractors agreed that the subcontract incorporated the agreement and general conditions, but not in their entirety. According to the subcontractors, those documents were incorporated only as applicable to the specific work performed and not regarding the arbitration provision.

The appellate court viewed the governing legal principles under Indiana contract law to be
The party seeking to compel arbitration has the burden of demonstrating the existence of an enforceable arbitration agreement.

Parties are only bound to arbitrate those issues that by clear language (not by implication) they have agreed to arbitrate.

A document incorporated by reference for a specific purpose becomes a part of the contract only for the purpose specified and for no other purpose.

The MPACT Construction appellate court had to decide whether the phrase "as applicable to the work" limited the incorporation of the general conditions. What did the subcontract mean by incorporating the general conditions as "applicable to the [subcontractor's] work"?

In deciding that question, the MPACT Construction court placed special emphasis on a provision of the subcontract commonly included in construction contracts:

"The Subcontractor acknowledges that he has read the General Contract and all plans and specifications, together with all amendments and addenda thereto, and is familiar therewith and agrees to comply with and perform all provisions thereof applicable to Subcontractor. The intent of the Contract Documents is to include all items necessary for the proper execution and completion of the work. The contract documents are complementary and what is required by any one shall be binding as if required by all (emphasis by court)."

While most in the industry probably view the highlighted language as emphasizing the broad reach of the subcontract's work scope, the court believed the language limited the definition of "work." The MPACT Construction court ruled that the phrase "applicable to the work" limited the incorporation of the general conditions so that the arbitration provision would not apply. The court viewed the incorporation as including only those owner-contractor agreement and general conditions provisions relating to "the specifications and description of the work, as well as its performance, execution and completion."

The result of the MPACT Construction court's appellate decision was that the contractor-owner dispute would be arbitrated and the contractor-subcontractor subcontract dispute and the subcontractor mechanics lien claims would be litigated.

On somewhat similar facts, an Illinois court years earlier reached a different result in Turner Construction Co. v. Midwest Curtainwalls, Inc., 543 N.E. 2d 249 (Ill. 1st App. Dist. 1989).

In Midwest Curtainwalls, a subcontractor claimant wanted to arbitrate a dispute with the general contractor. The general contractor sought to stay the arbitration. The trial court refused to stay the arbitration. The general contractor appealed.

In Midwest Curtainwalls, like in MPACT Construction, the subcontract did not include an express arbitration provision but the owner-contractor agreement did.

The flow-down provision in the Midwest Curtainwalls subcontract read:

"With respect to the Work to be performed and furnished by the Subcontractor hereunder, the Subcontractor agrees to be bound to the Contractor by each and all of the terms and provisions of the General Contract and the other Contract Document, and to assume toward Contractor all of the duties, obligations and responsibilities that Contractor by those Contract Documents assumes toward the Owner, and the Subcontractor agrees further that Contractor shall have the same rights and remedies as against the Subcontractor as the Owner under the terms and provisions of the General Contract and the other Contract Documents has against Contractor with the same force and effect as though every such duty, obligation, responsibility, right or remedy were set forth herein in full. The term and provisions of this Agreement with Subcontractor hereunder are intended to be and shall be in addition to and not in substitution for any of the terms and provision of the General Contract and the other Contract Documents (emphasis supplied)."

The general contractor in Midwest Curtainwalls argued that the incorporation of the rights and remedies of the general contractor into the subcontract related only to the "work to be performed," not to the resolution of disputes between the general contractor and the subcontractor.

The Midwest Curtainwalls court rejected the contractor's argument and held that the dispute must be arbitrated. In the view of the Midwest Curtainwalls court, the limitation of the incorporation to the "work" was meaningless: "the relevant disputes would always arise 'with respect to the work to be performed.'" Thus, the Midwest Curtainwalls court could not conceive of a situation where arbitration would not apply.

Apparently, the contractor arguing before the Indiana MPACT Construction court did not make a similar argument or, if it did, the court ignored it.

No reported Wisconsin court addressed the issue of whether an arbitration provision was incorporated by reference where the reference was in some way limited. One Wisconsin decision held a contractor waived its right to arbitrate and tacitly accepted the premise that an arbitration clause could be incorporated by a general incorporation of an upstream contract, Syring Construction Co. v. Potter, 287 N.W.2d 854 (Wis. Ct. App. Dist. II, 1979, unpublished).

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.