The recent English case of Imtech Inviron Ltd v Loppingdale Plant Ltd1 provides a timely reminder of the dangers of adopting a simple "by reference" approach to drafting back-to-back contracts.
This was an application for summary judgment to enforce an adjudicator's decision that directed the defendant, Loppingdale Plant Limited ("LPL"), to pay the claimant, Imtech Inviron ("Inviron"), approximately £650,000. The dispute arose out of work carried out at Stansted Airport. Stansted entered into a framework agreement (the "Principal Contract") with LPL, and LPL in turn subcontracted work to Inviron under a series of purchase orders (collectively referred to as the "Subcontract"). The adjudicator's decision related to an unpaid sum pursuant to an interim payment application under the Subcontract.
The issue in dispute was as to whether the adjudicator was validly appointed under the terms of the Subcontract. LPL contended that pursuant to the back-to-back wording of the Subcontract, the appointment of the adjudicator was to be in accordance with the relevant provisions of the Principal Contract, i.e. the adjudicator was to be one of three named persons failing which he was to be appointed by the Institution of Civil Engineers. However, the adjudicator who had decided the dispute was not any of these persons.
The Subcontract contained the following back-to-back wording:
"1.3 The Subcontractor shall be deemed to have read the Principal Contract and to be fully aware of the obligations, risks and liabilities assumed by LPL under them. The Subcontractor shall perform and assume, as part of his obligations under this contract, LPL's obligations, liabilities and risks contained within the Principal Contract that relate to the carrying out of the Task Order and/or Purchase Order as if they were expressly referred to in the subcontract as obligations, liabilities and risks of the subcontractor, all things being equal … 1.4 In the event of conflict between the terms and conditions of the Principal Contract and these Terms and Conditions the former shall take precedence …"
Clause 1.23 of the Subcontract contained specific provisions as to the application of the liability insurance and indemnification clauses of the Principal Contract, but not as to adjudication.
The jurisdiction clause of the Subcontract stated:
"1.25 The contract shall be governed by English Law and the Subcontractor consents to the exclusive jurisdiction of the English Courts in matters regarding the Subcontract except to the extent that LPL invokes the jurisdiction of the Courts of any other country".
Inviron argued that the obligations referred to in clause 1.3 of the Subcontract as being "mirrored" in the Subcontract concerned primary obligations relating to the work to be carried out and how it was to be done, as opposed to secondary obligations such as those relating to insurance and indemnities. By contrast, clause 1.23 made specific provision for Inviron's compliance with certain specified secondary obligations being liability, insurance and indemnification; adjudication was not referred to. Inviron argued that clause 1.23 would not have been necessary if those obligations were covered by clause 1.3.
As a matter of construction, therefore, submitted Inviron, clause 1.3 only concerned primary obligations. As no specific provision had been made for adjudication in clause 1.23 the adjudication provisions of the Principal Contract did not apply to the Subcontract.
Inviron noted that the Subcontract jurisdiction clause was different to the jurisdiction clause in the Principal Contract. Inviron submitted that this shows that it could not have been the intention of the parties that the jurisdiction clause in the Principal Contract was to be carried over into the Subcontract restrictive, and therefore requires clear words if it is to be imposed on the subcontractor.
In support of its arguments on the incorporation of terms, Inviron relied on the case of Habas Sanai v Sometal SAL2. That case concerned arbitration clauses and concluded that it must be clear that the parties intended to incorporate a dispute resolution clause in a subcontract for it to be applicable to it. Furthermore, there is a particular need to be clear that the parties intended to incorporate the arbitration clause when the incorporation relied upon is the incorporation of terms of a contract made between different parties, even if one of the parties is a party to the contract in issue:
"In such a case, it may not be evident that the parties intended not only to incorporate the substantive provisions of the other contract but also provisions as to the resolution of disputes between different parties, particularly if a degree of verbal manipulation is needed for the incorporated arbitration clause to work …"3
Inviron submitted that a degree of "verbal manipulation" would be required to carry over the dispute resolution provisions of the Principal Contract into the Subcontract. The definitions of the Principal Contract made it clear that it was only a party to that agreement who had a right to refer a dispute to adjudication in accordance with its terms. The definitions would have to be ignored or rewritten if the Principal Contract adjudication provision was to be carried over into the Subcontract.
The court accepted all of Inviron's submissions. The court considered that it was "far from evident" that the parties intended the Principal Contract adjudication provisions to be incorporated into the Subcontract and awarded summary judgment in the terms sought by Inviron.
This recent case is a salutary reminder of the need to take care when drafting back-to-back subcontracts, and particularly so if the intention is to incorporate the main contract dispute resolution provisions into the subcontract. Both the Habas case and this one indicate that, in many cases, it may be necessary to make a specific provision as to dispute resolution, rather than simply adopting a "by reference"