NEW CASE RAISES ISSUES REGARDING INCORPORATION OF OWNER CONTRACT TERMS INTO SUBCONTRACTS

Date: August 18th, 2020
Categories: Contracts

In the recent unpublished Washington Court of Appeals decision, Edifice Construction Company, Inc. v. Arrow Insulation, Inc., No. 79407-8-1, 2020 WL 812129 (Wash.Ct.App. Feb. 18, 2020), the Court held that for a subcontractor to be bound by the terms of the owner contract, even if there is clear incorporation language, that the contractor must prove that the subcontractor was aware of the terms of the owner contract. In this case, Edifice (“Contractor”) entered into a contract with Six Degrees Capital Development LLC and Kenneth Woolcott (“Owner”) for the completion of certain residential buildings. The Contractor then contracted with Henderson Masonry Inc., Arrow Insulation Inc., David Rich Hentzel Jr., and Automated Equipment Co. (collectively the “Subcontractors”) to complete some of the work. The subcontracts provided that the Subcontractors were bound by the provisions in the contract between the Contractor and the Owner.

After the project was complete, allegations of construction defects were made by the Owner, and the Contractor sought to require the Subcontractors to arbitrate based on the alleged incorporation of the arbitration clause from the Owner contract into the subcontracts. The Contractor argued that the Subcontractors were bound by the terms of the contract with the Owner, including the arbitration clause, because the subcontracts contained language that expressly incorporated the terms of the Owner contract. The Subcontractors argued they were not required to arbitrate, because they were never given a copy of the Owner contract.

In determining whether the parties incorporated by reference the terms of the Owner contract, the Court looked to whether the Subcontractors had knowledge of and assented to the incorporated terms. Because the General Contractor did not offer any evidence that the Subcontractors knew of or assented to the terms of the Owner contract, the Court ruled that the General Contractor did not meet its burden of showing the subcontracts incorporated the Owner contract terms. Accordingly, the Court found the Subcontractors were not bound by the Owner contract arbitration clause and, thus, they were not required to arbitrate.

The Edifice case stands for the proposition that in order for a subcontractor to be bound by the terms of an owner contract, it is not enough to show that language in the subcontract expressly incorporated the owner contract.  Instead, the contractor must show the subcontractor had knowledge of and assented to the incorporated terms.

Importantly, the Edifice decision is arguably in opposition to a Washington State Supreme Court decision, Washington State Major League Baseball Stadium Public Facilities District v. Huber Hunt & Nichols- Kiewit Construction Company, 176 Wn.2d 502 (2013). The Major League Baseball decision contains an extensive discussion of incorporation of owner contract terms into subcontracts and did not expressly require that subcontractors receive a copy of or be familiar with the owner contract for incorporation to occur.

In the Major League Baseball case, Washington State Major League Baseball Stadium Public Facilities District (“the Owner”) contracted with Huber, Hunt & Nichols-Kiewit Construction Company (“Contractor”) to construct Safeco Field. The Contractor subcontracted some work out to Herrick Steel Inc. and Long Painting Company (collectively the “Subcontractors”). Alleged defects in the Subcontractors’ work were found resulting in several million dollars’ worth of needed repairs. Thereafter, the Owner sued the Contractor to recover the repair costs. In turn, the Contractor sought to recover the costs from the Subcontractors. The Subcontractors moved to dismiss the claims.

The Court in determining whether to dismiss the claims against the Subcontractors looked to whether the language in the Owner contract was incorporated by reference into the subcontracts. The Court explained the general rule is, “if parties to a contract clearly and unequivocally incorporate by reference into their contract some other document, that document becomes part of their contract.” Furthermore, the Court noted, “[i]ncorporation by reference and flow-down provisions in prime contracts that bind subcontractors are enforced by courts ‘in a wide variety of contexts.’”

The Court explained that the flow-down provision in the subcontracts “plainly provided that if Hunt Kiewit is liable to [the Owner] because of the subcontractors’ defective workmanship or materials, then the subcontractors are liable to Hunt Kiewit to the same extent.” Accordingly, the Court found the language in the subcontracts that incorporated by reference the Owner contract was sufficient to bind the Subcontractors to the Owner contract without any mention as to whether the Subcontractors had been provided copies of the Owner contract or that they were familiar with its terms.

Since these two decisions are arguably in opposition to each other, and Edifice is an unpublished opinion of a lower appellate court, there is an argument that the Major League Baseball case still controls.

However, until this issue is further clarified, the safe thing for contractors to do is to send a copy of the owner contract to each subcontractor on every project. The ideal time to do so is before the subcontract is signed. If a copy of the owner contractor is not provided to a subcontractor, the subcontractor should not assume that the terms of the owner contract are not incorporated into its subcontract. However, it might have an argument that this is the case based on the Edifice decision.

Logan Peppin is a lawyer in Ashbaugh Beal’s Construction Law Group. She can be reached at lpeppin@ashbaughbeal.com.