By its very nature, the incorporation clause is intended to impose upon a subcontractor the same liability as the prime has to the owner. This obligation is especially important in the context of disputes in litigation involving the owner, prime, and subcontractor. Unless a prime can insist that the same court or arbitrator decide both the primeowner dispute and the subcontractorprime dispute, the intended effect of the incorporation clause may be emasculated by inconsistent results achieved by different forums. In an extreme case, a literal reading of the incorporation clause may actually deprive a subcontractor of a forum as occurred in 3A Indus. V. Turner Constr., 71 Wn. App. 407, 869 P.2d 65 (1993). 3A Industries involved the State of Washington McNeil Island Corrections Center project, where 3A was a subcontractor to Turner. During the course of the project, 3A filed claim against Turner for damages for delays and interference caused by Turner’s mismanagement of the project. 3A sued Turner’s payment bond pursuant RCW 39.08 (Washington’s “Little Miller Act) and sued to foreclose against the retainage pursuant RCW 60.28. 3A’s subcontract contained no arbitration clause. Turner and its surety moved the court to stay the
litigation, asserting 3A was obligated to arbitrate the dispute pursuant to the incorporation clause of the subcontract. 3A argued it did not agree to arbitrate its statutory claims and that the remedies it owed Turner pursuant to the incorporation clause were limited to those relating to the scope, quality or manner of 3A’s performance of work. The trial court agreed with 3A, but the Court of Appeals found that the “rights and remedies” incorporated the subcontract included the duty of 3A to arbitrate its statutory claims with Turner if Turner so demanded. The Court of Appeals distinguished a long line of Federal Miller Act cases requiring that waiver of the right to sue against the bond in court must be express and not merely incorporated by reference, and found that the incorporation of an arbitration clause was substantially different than incorporation of a federal disputes clause in federal cases. Although there can be no dispute that parties can agree to arbitrate, the problem this case creates for subcontractors is that—despite the valuable protections afforded by statue of a subcontractor’s right to sue the bond and retainage in court—the agreement to arbitrate can be inferred from the upper tier incorporation clause. This decision is particularly
disturbing as the subcontractor’s claims were against Turner and arose from the subcontract, not from the general contract. Because incorporation by reference clauses/flow-down clauses are seen in most subcontracts today, careful consideration should be given to them in order to appropriately apportion risks while limiting exposure to future litigation. If subcontractors are unsure about how their rights are limited or what obligations and risks they are accepting by agreeing to an incorporation clause, it is recommended that they seek legal counsel’s advice as it can potentially change all the critical provisions in the subcontract. Masaki James Yamada is a partner at Ahlers Cressman & Sleight PLLC. His practice focuses on matters involving complex construction claims, construction contracts, construction L&I issues, construction defects, and related insurance matters. His practice also includes commercial real estate and communications law (i.e. cell towers). Yamada regularly represents general contractors, subcontractors, developers, business and property owners, and design professionals. He can be reached at (206) 529-3015 or masaki.yamada@acslawyers.com.
the disparate nature of such laws as among different states, and the importance of carefully reviewing indemnity provisions on a state-by-state basis and with experienced local counsel. Understanding indemnity principles is an important skill for all subcontractors seeking to protect themselves in the event of third-party claims relating to their work or the work of an indemnitee party. Joseph Sweeney, Esq., and Scott Mangum, Esq., are shareholders with Sweeney, Mason, Wilson & Bosomworth, Los Gatos, Calif. Since 1978, Sweeney has focused on construction and real estate law, both
transactional and litigation. He has successfully represented owners, developers, general contractors, subcontractors, material suppliers and design professionals in multiple aspects of construction law issues through negotiations, disputes, mediations, arbitrations and trials. He can be reached at (408) 356-3000 or jsweeney@smwb.com. Mangum assists his clients in a variety of litigation matters, focusing primarily on construction and real estate disputes. He can be reached at (408) 356-3000 or smangum@smwb.com. SMWB would like to thank Brian Carroll for his input regarding this article, specifically relating to Texas law.
Indemnity Provisions (continued from page 19) construction contracts pertaining to single-family homes, townhouses, and duplexes; (10) municipality public works projects; (11) joint defense agreements entered into after a claim is made. Section 151.104 states that any provision or coverage endorsement in a non-exempted construction contract requiring the purchase of additional insured coverage under an insurance policy with a scope of coverage to cover the other party’s own negligence is void and unenforceable to the extent that it requires coverage for such negligence. A comparison of the Texas and California indemnity laws underscores
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