Dangers of AIA 401 Incorporation Clause
INCORPORATION BY REFERENCE
Contractors are generally familiar with “AIA Document A-401: Standard Form of Agreement between Contractor and Subcontractor." If left unaltered, Article 1 of AIA-401 contains what is known as an "incorporation clause." By way of specific reference to the prime contract between the owner and general contractor, all of the terms and conditions contained in the prime contract are made "fully a part of the subcontract as if attached to" the A-401 itself. Given such language, contractors might assume that the indemnification and insurance requirements contained in their prime contract "pass on" to their respective subcontractors. The recent case of Perasud v. Bovis Lend Lease, Inc. 93 A.D.3d 831 (2d Dept. 2012), holds that they do not.
The plaintiff in Perasud was an electrician who worked for a sub-subcontractor on a construction project in New York. Plaintiff was injured on the job and sued the contractor and subcontractor under applicable Labor Law provisions. Although plaintiff's employer was immune from suit by plaintiff [plaintiff did not suffer a "grave injury" under the Workmen's Compensation Law] the general contractor and subcontractor who employed the electrical company brought cross-claims against the electrical company for indemnification and for breach of contract. Specifically, the GC and Sub argued that, as the sub-subcontractor's agreement contained an "incorporation clause," the insurance requirements and indemnification provisions of the prime contract were applicable to the sub-subcontractor.
The Appellate Court was quick to remind the contractors, however, that "under New York law, incorporation clauses in a construction subcontract, incorporating prime contract clauses by reference into a subcontract, bind a subcontractor only as to the prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor." As indemnification and insurance requirements do not relate to scope or quality of work, they are not incorporated by reference into the sub-subcontract. In addition, a prime contract’s arbitration and mediation provisions generally do not pass on to the sub contractor via an "incorporation clause." See Wonder Works Construction Corp. v. R.C. Dolner, Inc., 73 A.D.3d 511 (1st Dept. 2010).
From a practical standpoint, the limitations of incorporation clauses can result in serious headaches for the unwary contractor. Although the contractor may have obtained insurance and agreed to indemnify certain parties, as was required by the prime contract, that insurance may not fully cover subsequent damage to person(s) or property at the jobsite. If the damage was caused by the subcontractor, the contractor will look to it to pick up the costs. However, if the subcontract merely incorporated the terms of the prime contract, and contained no further insurance nor indemnification requirements, the contractor may be left holding the bag.
The take away is a simple one: Contractors and subcontractors entering into agreements with their subs must not rely solely upon AIA Standard Clauses for adequate protection. At the very least, contractors should specifically set forth those terms of the prime contract to which they seek to bind the subcontractor. In addition, many prime contracts obligate the general contractor to secure additional insurance coverage from all of its subcontractors, policies which must name the owner as an additional insured. The requirement that these policies be procured, and that they name the owner as an additional insured, must be spelled out specifically in the subcontract agreement in order to be enforceable.