Contracts often incorporate other terms and conditions by reference rather than listing them. This, not surprisingly, can lead to disputes over where to draw the line …

You are about to enter into a contract to carry out construction work and are busy negotiating its terms. You want the contract to incorporate another set of contract conditions by reference: that is, it refers to them without reciting them. This is not uncommon: this could be a subcontract that incorporates all of the main contract conditions insofar as they do not contradict the subcontract terms or, perhaps, you could be negotiating a contract that incorporates by reference a set of standard terms.

So far so good. You commence work on site having agreed the specific terms and conditions that govern your work. Disputes arise with the other party. You turn to the contract. You discover that the terms and conditions you were trying to incorporate have not been agreed. Possibly the main contract was never entered into or perhaps it was never agreed that the standard contract conditions would be incorporated into the contract. What happens now?

This is really an aspect of an old problem that crops up frequently: what are the terms of the contract between the parties? Broadly, there are two approaches. The first of these is what is known as the “blue pencil test”: you look at the contract and try to decide whether it would still work if you simply deleted all references to the other terms and conditions (with your imaginary blue pencil). This was the approach adopted in Nicolene Ltd vs Simmonds in 1953. In that case the letter between the parties accepting an offer to enter into a contract included the words:

“I assume that we are in agreement that the usual conditions of acceptance apply.” There were no such “usual conditions” agreed between the parties. The court decided that in these circumstances these words were meaningless and could be struck out without preventing the rest of the contract from working.

Another approach was adopted in Ove Arup & Partners International Ltd and Another vs Mirant Pacific Construction (Hong Kong) Ltd and Another, 2003. Two contracts were entered into by the parties. The question was whether they incorporated the standard FIDIC model terms. The first contract was for engineering design (the engineering agreement) and the second was for ground investigations (the ground investigation agreement). It is worth concentrating on the ground investigation agreement. This contained, in clause one, a statement to the effect that the ground investigation work described in the agreement would be governed by the FIDIC model services agreement “entered into” by the parties.

The defendant argued that there was no agreement between the parties that the FIDIC conditions would be entered into, and in fact none of the blanks in the FIDIC standard form had been completed. Consequently, the blue pencil test could be used to strike out that part of clause one as meaningless and the rest of the contract could stand.

What are the terms of the contract between the two parties? One approach to the dilemma is what is known as the ‘blue pencil test’

The court, however, found that the defendant had agreed to the ground investigation proposal incorporating the FIDIC terms and the fact that at the relevant time no design agreement using the FIDIC terms had been “entered into” did not justify striking out any reference to it.

The FIDIC terms were clearly identifiable and readily available. Further, clause one clearly showed an objective intention to make an agreement using the FIDIC terms. There was nothing in the FIDIC terms that indicated that they had to be completed or signed in order to make them effective. In other words, if the terms and conditions that are going to be incorporated into your contract can be ascertained and are not themselves the subject of alterations and amendments that have yet to be agreed, and if you can show a clear agreement to enter into a contract on those terms, you can argue that they should be taken to be incorporated.

Perhaps the difference between these two cases is that the reference to the “usual conditions” in Nicolene was so vague that they were not readily identifiable and therefore the court was more inclined simply to strike out the reference – whereas in Arup it was clear what was intended to be incorporated.

Simon Lewis is a partner in solicitor Dickinson Dees in Newcastle upon Tyne.