Construction Contracts: Incorporation by Reference

Plaintiff was a second tier subcontractor providing insulation to defendant, the mechanical subcontractor ("JWP") on the construction of the Veterans' Affairs Hospital ("VA Hospital"). JWP, in turn, had a contract with the prime contractor to provide the mechanical work on the project. JWP also had a payment bond from the other defendants to indemnify JWP for payments made to any claimants for costs and expenses resulting from the performance of the JWP subcontract. Plaintiff sued JWP and its sureties alleging breach of contract, brief of express and implied duties, unjust enrichment and payment pursuant to the payment bond in order to recover what it considered to be excessive costs for the work performed on the project.

Defendants brought a motion to dismiss for failure to state a claim upon which relief may be granted, asserting that the action was improper because PCI had not exhausted administrative remedies available to it before bringing suit, as required under the various contracts. The Court granted defendants' motion finding that, first, the PCI subcontract by its terms incorporated the dispute provisions of the JWP subcontract and, in turn, that the JWP subcontract contained a provision adopting or incorporating the dispute clause from the prime contract, which required disputes to be resolved pursuant to the Contract Disputes Act of 1978 (41 U.S.C. 601) by submitting in writing any such claims to the contracting officer for a written decision and thereafter by appealing any contested issues to the VA Board of Contract Appeals or the Court of Federal Claims. In so holding, the Court held that the dispute resolution provisions do not have to be set forth expressly in the subcontract but can be incorporated by reference. The Court also found that cases under the Miller Act which hold that general incorporation language in a subcontract is insufficient to bind a subcontractor to the disputes clause of the general contract were inapplicable in the instant case because the payment bond provided by JWP and its surety was not statutorily required and therefore not subject to the Miller Act. The Court held in the absence of legislative direction or controlling precedent it would not extend the Miller Act rationale to this non-Miller Act case. The Court further held that the plaintiff could not recover under the payment bond without exhausting its administrative remedies because although the payment bond does not expressly incorporate the provisions of the JWP subcontract, it clearly incorporated those terms by reference to the JWP subcontract. Finally, the Court held that even though not all the claims raised by the plaintiff could be resolved by the administrative process such process was neither inadequate or futile. Upon completion of the contractual remedies, plaintiff would still be entitled to raise any claim it had against JWP and/or the prime contractor which were not addressed during the administrative process.

Performance Contracting, Inc. vs. Seaboard Surety Company, et al., Case No. 97-71042, E.D. Mich, 9/29/97, Zatkoff, L.P. (dkt #15).
This article was written by William F. Frey, a partner in our Litigation Department, and previously appeared in the January 1998 edition of the Michigan Bar Journal.