Construction subcontracts prepared by contractors generally contain flow-down provisions binding subcontractors to terms in the contractors’ master agreement with the owner. Their purpose is to ensure that the obligations of the contractor to the owner are mirrored in the subcontractors’ obligations to the contractor.
A good example of the benefit of a flow-down provision is where the contractor is to be paid based on the cost of the work. In this circumstance, the owner will generally retain the right to audit the project’s records of time and materials. The contractor must ensure that its subs are required to produce the same records.
A more pervasive example is in the master agreement’s dispute resolution clause. Frequently, the master agreement will bind the contractor to first mediate and then arbitrate a dispute with the owner. Rare is the construction dispute which only involves those two parties. Generally an owner’s assertion of a claim against a contractor will involve performance by one or more subs. With multi-party claims, it is vital to a fair and efficient resolution that all parties be required to participate in the proceeding.
Without a flow-down provision in subcontracts, a contractor can easily land in a nasty pickle. In one case, a developer hired a contractor for a massive project converting a century-old structure into modern offices. The developer required arbitration of all disputes in the master agreement. The design-builder in this case mandated dispute resolution through arbitration in its subcontract with the architect. A dispute arose regarding the design and construction of certain structural elements. The developer filed its claim for arbitration against the design-builder, who promptly brought the architect in as a party.
However, the design-builder had subcontracted with another key player by means of a subcontract form lacking a flow-down provision. Predictably, that subcontractor refused to participate. The design-builder was thus potentially exposed to arbitrating the claim with two parties, while litigating it in court with a third. Such a course of action would have run the risk of differing and conflicting results. Facing the added exposure and risk, the design-builder settled the claim on considerably less advantageous terms than it might otherwise have obtained.
From the perspective of the subcontractor, the language used in flow-down provisions has significant implications. Expansively drafted, they have the potential to pass through all obligations owed to the owner. In addition, broadly written flow-down clauses have been interpreted to provide the contractor with defenses for its own misconduct, not involving the owner. For example, a “no damage for delay” provision in a master agreement protects the owner from liabilities arising out of delays it causes. In one case, it was the contractor who caused long delays through ineffective management. It was able to argue that a subcontractor was only entitled to an extension of its time for performance, and not an award for the damages it suffered.
It is clear that flow-down provisions are vitally important for a contractor’s ability to successfully manage a project. It is also clear that all parties will fare better if these provisions are carefully crafted with an eye on balanced protection of all interests.« Back to news