When you are a subcontractor or subconsultant for a construction project, you are often faced with a contract clause which states something along the lines of:
The terms of the prime agreement between Owner and Contractor [or between Architect and Owner] are incorporated into the subcontract by reference and made a part hereof.
What does this mean?
This common clause is often overlooked by subcontractors and subconsultants who may be spending unnecessary time negotiating the terms of their contract only to have them overridden. A “flow-down” or incorporation clause purports to bind the subcontractor/subconsultant to the terms of the prime contract between the owner and the prime contractor (usually the Project Architect or General Contractor). It may mean that all of the terms of the prime agreement become contractual terms between the subcontractor or subconsultant and the entity which retained it, regardless of what the subcontract actually says.
The most common dispute relating to flow-down provisions relates to dispute resolution. Typically, the prime agreement requires mandatory arbitration, while the subcontract agreement provides for some other dispute resolution procedure, most often a jury trial. Because arbitration is favored, the courts often impose arbitration upon the subcontractor or subconsultant over their objection.
A few courts have drawn a distinction between general clauses – like insurance, dispute resolution, and choice of law typically found in the contract’s miscellaneous sections – and clauses relating to the performance of the work. In those instances, the court generally find that the provisions in the prime contract that directly relate to the scope, quality, character and manner of the work to be performed by the subcontractor/subconsultant are binding and the more general terms are not.
What should you do?
First, read the subcontract carefully. Is there a flow-down provision? Does it purport to incorporate the entire prime agreement into the subcontract? If so, you should ask for a copy of that document and see what the prime contractor agreed to that is now being imposed upon you.
Second, not all of the provisions of the prime agreement apply to your work. As a result, ask the Architect or General Contractor to identify specifically the provisions that it really wants to apply to you. For example, the insurance requirements in the prime agreement will likely be substantially higher than what is needed of you. Seek to limit the application of the prime agreement to specific sections that apply to the work that you are doing on the project.
Third, if you cannot eliminate the clause consider adding “to the extent that such provisions are not inconsistent with the terms of this Agreement” or something similar to limit application of such a clause.
If you have any questions about flow-down provisions, please let us know. The attorneys of Gibbes Burton are passionate about helping professionals and businesses to minimize risk and build success.