Problematic Construction Contract Clauses: Flow Down

This is the eighth blog post in a series that discusses clauses in construction contracts with the goal of providing awareness of contract terms that often cause difficulties and give rise to claims.

Previous blog posts have addressed problematic contract clauses involving differing site conditions, no damages for delay, changes, coordination, suspension of work, warranty and defects liability, variation in quantity, inspection, and force majeure. This post discusses flow down clauses, and other posts will discuss compensation and payment, weather, escalation, and oral modifications clauses.

Owners often require their general contractors to make subcontractors responsible for the same terms that are contained in the general contractor’s agreement with the owner. These “flow down clauses” are important when the owner’s contract contains problematic clauses such as no damages for delay, differing site conditions, inspection of site, notice, or liquidated damages clauses.

An example of a requirement in a general contract to include a flow down clause in the subcontracts follows:

The Contractor is responsible to ensure that Construction Sub-Contractors comply with all Sub-Contract conditions, none of which shall be of lesser standard, in relation to the achievement of major objectives in the Construction Work, than those applicable to the Contract held by the Contractor. Where the Contract Conditions indicate that information about an activity is required by the Owner, the Contractor will act as the only communication link between Owner and Construction Sub-Contractors.

Another example flow down requirement follows:

ARTICLE 18    SUBCONTRACTS
Contractor may, with Owner’s written approval, subcontract various portions of the Work to one or more Subcontractors acceptable to Owner. Owner may, at its sole option, review and approve any and all subcontract documents. Also, unless otherwise waived in writing by Owner’s Representative (as that term is defined herein), each and every subcontract shall include provisions binding the respective Subcontractor to the same obligations as were undertaken by Contractor pursuant to this Agreement. Owner’s approval of any Subcontractor, or review and approval of any subcontract document shall in no event relieve Contractor of any of its obligations under this Agreement and Contractor shall remain responsible for all subcontracted Work performed hereunder, as though such Work had been performed by Contractor itself.

The owner’s contract may not have a flow down provision. When the general contractor enters a written contract with the owner, it is very common for the contract to contain clauses that are written specifically for the project. It is also common for the general contractor to then use a standard form subcontract when executing various subcontracts on the project. If the general contract and the various subcontracts contain contradictions, this can leave the general contractor in a precarious position.

To eliminate this problem, even if the owner and general contractor’s contract does not contain a flow down requirement, the general contractor should insert a clause in its subcontracts that provides that the subcontractor is bound to the owner in the same way that the general contractor is bound to the owner. An example of such a clause is:

Subcontractor shall assume toward the Contractor all obligations and responsibilities which the Contractor under the General Contract, assumes toward the Owner and Architect.

For example, if the general contract has a provision for no damages for delay and an arbitration clause, but the subcontract is silent on these two clauses, is the subcontractor limited by the no damages for delay clause and subject to arbitration? The subcontractor may argue that it has never seen the general contract, and there can be no meeting of the minds concerning the arbitration and no damages for delay clauses. General contractors are usually reluctant to share the general contract with subcontractors.

Arkansas Bridge Co. v. Kelly-Akinson Construction Co.¹ presents an example of a problem that can occur when the general and subcontractor contracts are inconsistent. In this case, the subcontract contained no specific provision relating to delay; however, the general contract, which was incorporated into the subcontract by reference, contained a no damages for delay clause. The subcontract provided that the general contractor would deliver materials in consecutive order for erection. When the general contractor instead delivered materials out of sequence, thereby causing delay to the subcontractor, the court determined that the no damages for delay clause in the general contract was inconsistent with the delivery sequence provision in the subcontract and allowed the subcontractor to recover for the delay.

By including a flow down provision in its subcontracts, the general contractor may have to provide its contract with the owner to its subcontractors. General contractors are often reluctant to do this. If a general contractor is reluctant to share with its subcontractors its contract with the owner, the best course of action is for the general contractor to make certain that key provisions such as liquidated damages, arbitration, no damages for delay, and time periods for giving notice are consistent between the general contract and the subcontract.

¹    Arkansas Bridge Co. v. Kelly-Akinson Construction Co., 282 F.802 (8th Cir. 1922).

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