This is the sixth post in our “Top 10 Construction Contract Provisions” series, which covers the topic of “flow-down” clauses. Please see our previous posts discussing: Price and Payment, Liquidated Damages, Consequential Damages – Part I and Part II, Indemnity, and Scope of Work Clauses.
“Flow-down” provisions are ubiquitous in the construction industry. All major model subcontracting agreements included some type of flow-down provision.[i] Essentially, these clauses identify rights, responsibilities, and remedies that the general contractor owes to the owner, and applies them between the general contractor and the subcontractor. For instance, if the prime contract contains a no?damage-for-delay clause exempting the owner from liability to the general contractor, a flow?down clause will exempt the general contractor from liability to the subcontractor for the same. Although similar to “incorporation by reference” provisions, flow-downs can impart obligations that may or may not be explicitly written into a contract. In the example above, a flow-down provision would not have to mention the no-damage-for-delay clause by name to bind the subcontractor under it.
Because of their power, any party entering into a contract using flow-downs should be aware of at least a few considerations that come with their use. First, flow-down provisions cannot be too broad as applied to a subcontractor, or they will be deemed unenforceable. Second, flow-downs can put terms from separate contracts in tension with one another, greatly increasing party confusions and risk of litigation. Finally, when the Miller Act or Little Miller Acts are involved in a claim, generalized flow-down provisions may not hold a subcontractor to the result, or even the process, detailed in a prime contract dispute resolution provision.
A. Ensuring Enforceable Flow-Downs
To ensure enforceability, a flow-down clause should limit itself only to provisions in the prime contract that are applicable to the subcontractor’s work. Flow-downs have been deemed unenforceable where a subcontractor was only responsible for part of a project, but the provision sought to impart all the rights and responsibilities in the prime contract that the general contractor held to the owner.[ii] Thus, best practice is to employ language limiting flow-downs to “any dispute or claim between Contractor and Owner which directly or indirectly involves the Work performed or to be performed by Subcontractor” to ensure enforceability.[iii] If parties desire, they can always limit flow-down provisions further than this. For instance, parties could limit flow-downs to only those prime contract rights and responsibilities directly affecting the performance of the subcontractor’s work.[iv] But parties must be aware that when defining the scope of flow-down provision, courts will turn to the plain language of the clause first, and overly-expansive clauses are subject to unenforceability.
B. Be Wary of All Involved Contracts and Their Terms
Because flow-down provisions are used in scenarios with multiple contracts, parties, and risk considerations, they can unintentionally bring terms from the prime contract into tension with terms from the subcontract. Returning to our no-damage-for-delay example above, in Georgia, a subcontractor was allowed to claim delay damages against the general contractor despite the prime contract’s no?damage-for-delay provision and a corresponding flow-down provision in the subcontract.[v] The subcontract had inconsistent terms which “flowed-down” the no-damage-for-delay provision while explicitly allowing the subcontractor to claim delay damages against the general contractor. In that case, the subcontract had a “precedence clause” detailing that any discrepancies between contracts would be governed by the express terms of the subcontract. Even with that clause, the case went through to appeal. While catch-all precedence clauses can help limit the risk of litigation, they are no substitutes for carefully drafted agreements ensuring prime contract and subcontract terms are not brought into tension by flow-down provisions.
C. The Effect of Miller / Little Miller Acts on Dispute Resolution Flow-Down
General contractors may wish to flow-down the remedies available under a prime contract, especially where remedies are limited by specific dispute resolution provisions. For example, the general contractor may wish to hold a subcontractor to the result of the prime contract’s dispute resolution process. Alternatively, the general contractor may try to force the subcontractor through the prime contract’s dispute resolution process instead of allowing a claim in court. This is allowed, but becomes complicated where Miller / Little Miller Acts are involved. When present, Washington courts will not allow a generalized flow-down provision to force a subcontractor to abandon its statutory rights to a remedy provided by these acts (i.e. claiming on a performance bond).[vi]
However, courts will enforce express waivers of Miller or Little Miller Act protections.[vii] An example of explicit waiver is found in the AGC Subcontract:
Subcontractor agrees to be bound by the procedure and final determinations as specified in the Main Contract and agrees that it will not take, or will suspend, any other action or actions (including but not limited to any arbitration(s) or action(s) commenced pursuant to the Federal Miller Act, state lien statutes, Bond or Retainage Act(s)) with respect to any such claims and will pursue no independent litigation with respect thereto, pending final determination of any dispute resolution procedure between Owner and Contractor.[viii]
Thus, even if a subcontract includes a flow-down provision that purports to waive its claim on a performance bond, the subcontractor may still have a claim.
COMMENT: Flow-down provisions are commonplace in today’s construction industry, but their use is subject to stylized rules and numerous considerations that change with each new drafting. They can also be powerful tools during negotiations, both for general contractors and their subcontractors, because of their ability to allocate risks and defenses. Careful consideration should be given to any flow-down provision in order to appropriately apportion risks while limiting exposure to future litigation.
[i] American Subcontractors Association, Inc., What Is “In” the Contract: Flow-Down Issues 10 (2004).
[ii] Wash. State Major League Baseball Stadium Pub. Facilities Dist. v. Huber, Hunt & Nichols-Kiewit Constr. Co., 176 Wn.2d 502, 521-22, 296 P.3d 821 (2012).
[iii] The Associated General Contractors of Washington, Subcontract Form 12 (2009).
[iv] Major League Baseball Stadium Pub. Facilities Dist., 176 Wn.2d at 520-21 (citing Topro Services, Inc. v. McCarthy Western Contractors, Inc., 827 F. Supp. 666, 667 (D. Colo. 1993)).
[v] Atl. Coast Mech. v. R.W. Allen Beers Constr., 264 Ga. App. 680, 592 S.E.2d 115 (2003).
[vi] Major League Baseball Stadium, 176 Wn.2d at 523-26.
[vii] Id. at 525.
[viii] The Associated General Contractors of Washington, Subcontract Form 13 (2009).