What is Incorporation by Reference in a Contract?
Previously on our blog, we discussed how more complex contracts allude to other existing contracts and documents. Incorporation by reference is the method of making these alluded-to documents part of a contract, and is often used to save space when parties want to include or reference another legal document or contract into a new contract. To properly incorporate another document by reference, it has to be adequately described in a new contract, and it is good practice also to attach a copy of the referenced document to the new contract to which it is being incorporated.
The concept of incorporation by reference is similar to that of flow-down contract clauses in construction contracts. For example, a flow-down clause is used to bind subcontractors to the general contractor in the same fashion as the general contractor is bound under its contract with the property owner. In the same vein, subcontracts usually incorporate general contracts by reference.
When drafting an incorporation by reference clause, parties have the option to incorporate certain provisions of an existing legal document, or the entire document. If the parties make it clear that only certain provisions are to be incorporated, the incorporation by reference clause should be explicitly clear in its limited scope and purpose. However, if the incorporation clause is very general, this could lead to potential disputes about which provisions to a contract were incorporated. To avoid any confusion, parties should specify exactly which terms are being incorporated.
Any time existing legal documents are incorporated by reference, there is a potential for conflicting terms. It is therefore important that all provisions are reviewed for conflicts, and a contract provision dictating how conflicting terms will be resolved should also be included.
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