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Most standard form building contracts provide for the
incorporation of the main contract into the subcontract. For
instance, GC 3.7.1 of the CCDC 2 Stipulated Price Contract requires
the contractor to incorporate the terms of that contract into all
agreements with subcontractors and suppliers. But what effect does
an Incorporation by Reference clause in the subcontract have? In
1510610 Ontario Inc. v. Man-Shield (NOW) Construction
Inc, the Ontario Superior Court recently held that it
does not mean that an obligation to post security for lien claims
contained in the main contract is incorporated into the
subcontract.
The Background
The main contract between the owner and Man-Shield required
Man-Shield to post security for and discharge any liens that were
registered. Man-Shield entered into a subcontract with 1510610. The
subcontract referred to the main contract as "forming or by
reference made a part of this Subcontract, insofar as applicable,
generally or specifically, to the labour and materials to be
furnished and work to be performed under this Subcontract."
The subcontract stated that, in the event of any discrepancy
between the subcontract and the main contract, the terms and
conditions of the subcontract were to apply.
Man-Shield had asked 1510610 to sign a subcontract which
contained an express provision requiring 1510610 to post security
if its sub-trades liened the project, and 1510610 had refused to
execute that contract.
When liens were filed by, among others, a sub-trade of 1510610,
the owner demanded that Man-Shield provide security and discharge
those liens, and Man-Shield did so. Man-Shield then applied to the
court for an order requiring 1510610 to take over this
responsibility and post security to replace the security provided
by Man-Shield with respect to the lien filed by the sub-trade of
1510610. The Ontario court dismissed that application.
The Ontario court held that "the extent to which the terms
of a principal contract are incorporated by reference into a
subcontract is a question of construction of the subcontract. The
mere existence of an incorporation by reference clause in the
subcontract did not automatically incorporate everything in the
main contract."
The court held that, for such a significant obligation as
providing security for liens to be incorporated into the
subcontract, more precise language was necessary. In arriving at
this conclusion, the court particularly relied upon the fact that
1510610 had been requested, and had refused, to execute a contract
containing just such an obligation; and the fact that the
incorporation by reference provision was prefaced with the words
"insofar as applicable, generally or specifically to the
labour and materials to be furnished and work to be performed under
this Subcontract." In light of these facts, the court was not
satisfied that the parties intended the lien security obligation in
the main contract to be incorporated into the subcontract.
This decision highlights the need for parties to building
contracts to carefully consider what they intend by an
Incorporation by Reference clause. These clauses are dangerous for
subcontractors because they may impose unforeseen obligations
arising from the main contract which they had no part in
negotiating. Courts have been sensitive to this issue and have been
reluctant to apply these clauses, holus bolus. This
reluctance is clearest when the subject matter is not directly
related to the physical prosecution of the work. In other
circumstances, the courts may insist upon objective proof that the
parties really intended such incorporation. The Man-Shield
decision is just a recent example of that reluctance.
See Heintzman and Goldsmith on Canadian Building
Contracts, 4th ed., Chapter 7, Part 1
Construction Contracts - Subcontracts - Interpretation -
Incorporation by Reference
1510610 Ontario Inc. v. Man-Shield (NOW)
Construction Inc, 2012 ONSC 302
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