Craig Martin, Attorney with Lamson, Dugan & Murray, discussed several troublesome contract clauses that contractors need to be aware of during his presentation at the Construction Law Seminar held March 10th.
A second clause discussed was the Flow-Down clause. These clauses are sometimes referred to as “incorporation by reference clauses,” “conduit clauses,” or “flow-through clauses.” These clauses pass through to a contracting party those risks and obligations assumed by its contracting partner in a separate contract. In some contracts, the owner requires the contractor to impose upon all of its subcontractors certain obligations set forth in the prime contract. In most instances, the contractor uses the clause in its subcontract, regardless of the owner’s direction, to require its subcontractors to assume the obligations and responsibilities that the contractor has assumed toward the owner. For the contractor, this is a favored mechanism to:
- impose upon its subcontractors the duties and responsibilities assumed by the contractor to the owner
- alleviate the contractor’s exposure to its subcontractors by limiting their damages to those that can be recovered by the contractor from the owner
- provide a means to pass through to the responsible subcontractors the contractor’s damage exposure to the owner
An example of a common Flow-Down contract clause is AIA A201 Section 5.3:
By appropriate agreement, written where legally required for validity, the Contractor shall require each Subcontractor, to the extent of the Work to be performed by the Subcontractor, to be bound to the Contractor by terms of the Contract Documents, and to assume toward the Contractor all the obligations and responsibilities, including the responsibility for safety of the Subcontractor’s Work, which the Contractor, by these Documents, assumes toward the Owner and Architect. Each subcontract agreement shall preserve and protect the rights of the Owner and Architect under the Contract Documents with respect to the Work to be performed by the Subcontractor so that subcontracting thereof will not prejudice such rights, and shall allow to the Subcontractor, unless specifically provided otherwise in the subcontract agreement, the benefit of all rights, remedies and redress against the Contractor that the Contractor, by the Contract Documents, has against the Owner. Where appropriate, the Contractor shall require each Subcontractor to enter into similar agreements with Sub-subcontractors ….
Possible alternative language to consider include:
- Remove the Payment Provisions from the Flow-Down Clause
- Modify the Flow-Down Clause and Insert an Order-of-Precedence Clause
The big issue here, according to Mr. Martin, is “Do you know what the upstream contract says?”
Detailed review of any contract you are considering is very important. Knowing what terms and conditions your contract contains and understanding what they mean is key in assessing your risk with any new project contemplated. You can find more information on this and other topics at Craig’s Construction Contractor Advisor blog.
The information contained in this blog post is for educational purposes only as well as to give you general information and a general understanding of the topic, not to provide specific legal advice. For more specific information on this, please contact Craig Martin, Lamson, Dugan & Murray, LLP, (402) 397-7300.