A Powerful Contract Provision
by Gabriel Pinilla, Cotney Attorneys & Consultants
(Editor’s Note: Gabriel Pinilla is the managing partner of Cotney Attorneys and Consultants’ Denver, Colorado, office. He is a seasoned, results-oriented business and construction law and litigation attorney. Pinilla’s practice encompasses state and federal court litigation from pre-trial through the appeals process, as well as serving clients with negotiation and transactional needs. For more information, go to www.cotneycl.com.)
Most construction contracts include a flow-down clause, which may also be called a conduit or pass-through clause. This type of clause states that subcontractors are contractually bound to their general contractor in the same manner that the general contractor is bound to the property owner under the prime contract. Despite such a simple definition, a flow-down clause is one of the most powerful provisions in a contract.
The flow-down provision is intended to protect all parties by clarifying that a subcontractor’s obligations to a general contractor are the same as those of a general contractor to an owner. The specifics may involve a timeline for the work to be completed and a description of the scope of work.
The principal purpose of a flow-down provision is to preserve consistency between the obligations that the general contractor has with the owner and the obligations the subcontractor has with the general contractor. No general contractor wants to be liable to the owner due to substandard sub-trade work unless that contractor has the right to forward the liability to the subcontractor. However, the legal ramifications of flow-down clauses can be significant.
Flow-down clauses may also include stipulations about payment, delays, and dispute resolution. For instance, the clause may incorporate a pay when paid provision, meaning that a subcontractor will receive payment only after the general contractor receives payment from the owner. Also, if the general contract includes a no damage for delay provision, which prevents the general contractor from filing claims against the owner, the subcontractor may be prevented from filing claims against the general contractor. Further, if the general contractor and owner are resolving a dispute via arbitration, a subcontractor may be obligated to use arbitration for disputes as well.
Parties That Benefit
In most cases, the owner benefits from the subcontractor having the exact requirements and obligations that the general contractor has. General contractors may also benefit since the clause mandates the subcontractors’ obligations, but likely does not include any responding obligations from the contractors to the subcontractors. Subcontractors may try to limit or dispute their responsibilities, especially if their work on the project is narrow. They may also request that a similar, reciprocal obligation from the general contractor be added to the contract.
Pitfalls to Avoid
Contractors and subcontractors should use caution with flow-down clauses in any contract they sign. It is critical that they understand what responsibilities will flow down and how that can impact them. If the clause is too general or broad, it may not be enforceable.
More importantly, some jurisdictions will not enforce flow-down clauses unless the subcontractor can be shown to have knowledge of and to have accepted taking on the obligations intended to flow down. Unless it can be shown that the subcontractor was provided with a copy of the prime contract, a detail that is often overlooked by general contractors, imposing flow down provisions in those jurisdictions will be difficult if not impossible.