07 Oct Incorporate by reference: Including supplemental documents in contracts
Last week I was reviewing a couple of contracts. The first was a standard services agreement. It had the typical boiler plate language so that in the case that there was a dispute, it would first be addressed through mediation, and if the mediation was unsuccessful, then arbitration or litigation would take place in the District of Columbia. They were pretty standard terms — nothing out of the ordinary.
The second contract was going to be used in place of some terms in my client’s standard services agreement. Their customer asked for an amendment that says we are referencing and incorporating this other document into this standard services agreement. This is not unusual. You can have a contract that references and incorporates a separate document — that is not the problem. The problem is that the documents were not compatible in some of terms, specifically the dispute resolution boilerplate.
You see, the referenced document said that if there is a dispute between the parties about this referenced document, then the dispute would be resolved in a court in Tennessee, which is where the customer was based.
So, the referenced document will be included in the services agreement as a whole. To understand the entirety of the agreement, a reader (and potentially a court) would have to refer between two documents. Now we have a problem. What if there is a dispute within the reference agreement? That agreement says Tennessee, but the overarching agreement says District of Columbia.
This is what I consider the danger of incorporating documents. When you incorporate multiple documents into a contract you must address the conflicts between the documents themselves in some way.
Does that dispute get resolved according to the referenced agreement or the main service agreement? This is the big question. This is one of those places where a lack of clarity and a lack of thought could result in a very expensive dispute about where a dispute would be heard.
Let’s assume for a moment that the customer feels that subject A and the reference agreement has been breached. They bring a claim in a court in Tennessee. My client makes the argument that the services agreement, which incorporates the reference agreement and subject A, states that any conflict must first be addressed by mediation and then by a court in the District of Columbia.
Now, the parties are going to spend $15,000 to $20,000 each to resolve the dispute about where the dispute is supposed to be heard. That is an enormous waste of resources for both parties not to mention a waste of time for the courts.
The danger here is incorporation by reference. The incorporations need to be extremely clear so that the boiler plate that is incorporated does not contradict the boiler plate that exists in the main agreement.
Here’s another lesson: boilerplate matters even if we don’t think about it. Boilerplate needs to be resolved if you are going to be incorporating any documents.