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Incorporation of Terms in a Contract by Reference

Courts and boards have narrowly construed when a contract will incorporate extrinsic terms by reference. A good example of this practice occurred in a recent decision of the U.S. Court of Federal Claims, Peterson Industrial Depot, Inc. v. U.S., 140 Fed. Cl. 485 (2018), where the court denied a contractor’s breach-of-contract claim because the contract lacked the specificity to make outside documents part of the agreement.

In this case, the Army entered into a contract with Peterson Industrial to buy rail services using government-owned tracks. The contract stated in pertinent part:

All parties recognize their responsibility to comply with all applicable federal laws, executive orders, rules, and regulations applicable to a federal installation during the performance of this Agreement . . . . 

The contractor claimed that the Army’s failure to maintain the tracks properly resulted in the derailment of and serious damage to three rail cars. The contractor further alleged that the Army had failed to follow “applicable rules and regulations” for rail safety and maintenance. These rules and regulations were in (1) a February 13, 2008 Department of Defense Unified Facilities Criteria-Railroad Track Maintenance & Safety Standards, (2) a December 2009 report, “Railroad Track Inspection and Repair Recommendations, Tooele Army Depot, Utah,” and (3) a January 2015 report, “Railroad Track Inspection and Repair Recommendations, Tooele Army Depot, Utah.”

The Peterson court held that the above documents were not part of the contract because “the language used in a contract to incorporate extrinsic material by reference [1] must explicitly, or at least precisely, identify the written material being incorporated and [2] must clearly communicate that the purpose of the reference is to incorporate the referenced material into the contract (rather than merely to acknowledge that the referenced material is relevant to the contract, e.g., as background law or negotiating history).” The court indicated that the most reliable method is to state "hereby incorporated by reference" but other language would work if “express and clear.” Because the language at issue did not meet these standards, the court held in favor of the government.

Practice Pointers

1. Statements of work commonly include words to the effect that the project is governed by all “applicable laws and regulations” with no further delineation of those terms. These provisions are not self-defining and the Federal Circuit has long-avoided creating a “wholly new ground of obligation . . . by mere implication. Smithson v. United States, 847 F.2d 791, 794 (Fed. Cir. 1988). When assessing similar language in solicitations, an offeror seeking a better understanding of the proposed contract should consider asking the Contracting Officer to identify those terms. In that way, both parties will be in a better position to assess their rights and responsibilities and to price the contract accordingly.

2. The above case law throws into doubt a mandatory clause used in government construction contracts, FAR 52.236-7, “Permits and Responsibilities.” This clause states that the contractor, without additional expense to the government, shall comply with “any Federal, State, and municipal laws, codes, and regulations applicable to the performance of the work.” This language is virtually identical to the wording the U.S. Court of Federal Claims found wanting in the Peterson case. A further obstacle to the parties’ ability to understand this FAR clause is that it would be a FAR deviation for a procuring official without higher level approval to modify or alter the mandatory FAR wording by spelling out those “applicable” statutes, rules, and regulations. See FAR 1.401(c) (barring the use of any FAR contract clause with “modified or alternate language”). No cases were found considering this argument against FAR 52.236-7.

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© 2019

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Monday, 01 June 2020

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