Incorporation By Reference: Focus On Arbitration Clauses

Judgments in two recent High Court cases dealing with the issue of incorporation by reference of arbitration clauses highlight that clarity is key in terms of contract formation. When seeking to incorporate terms into an agreement, whilst the accepted position is that general words of reference will be sufficient, the same general words should be evident as to the terms to which they relate. Clear as mud....then read on!

INCORPORATION BY REFERENCE – THE BASICS

The completion and execution of a formal written document encompassing all of the agreed terms governing the relationship between parties is something which is more often honoured in the breach than in the observance. The more usual scenario will involve an exchange of correspondence between the parties during which one or both parties may seek to incorporate their standard terms, or those contained within the standard forms of contracts provided by governing bodies such as Engineers Ireland/Royal Institute of Architects of Ireland, into a contract. This is an acceptable and efficient way in which to record the terms of an agreement between parties provided that the essential terms are agreed and the terms incorporated are clear in their effect.

Similarly, conditions usual in a particular trade may be incorporated where both parties are in the trade and aware that conditions are habitually imposed and of the substance of those conditions, even though they may not have been referred to at the time the contract was formed1 . A sequence of emails may be read together even if they do not, strictly, form part of a chain and further, where the later email does not expressly refer to the earlier emails2.

However, parties should note that, in the cases of particularly onerous or unusual terms, the party putting forward the document will be obliged to demonstrate that the relevant term has been brought to the specific attention of the other contracting party. To quote Lord Denning:

"Some clauses which I have seen...would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient."

GENERAL POSITION

The accepted position is that general words of incorporation will be effective to incorporate a term(s) from another contract. In the construction context, the concept of incorporation by reference is often used to incorporate the terms of a main contract into a sub-contract.

In Ireland, the case of James Elliott Construction v. Irish Asphalt3 is instructive. In looking at the incorporation of an exclusion clause which was found within one of the party's standard terms and conditions, Charleton J. applied a test of reasonable notice, noting:

"I approach the matter in that traditionbound way because contracts are based upon what people agree...