Subcontractors need to make sure that they are aware of all of the terms they are agreeing to in the subcontract. Many subcontracts contain so called “flow down” or incorporation by reference clauses, which incorporate the terms of the general contractor-owner agreement and bind the subcontractor to the general contractor to the same terms that the general contractor is bound to the owner. Plum Creek Wastewater Auth. v. Aqua-Aerobic Sys., Inc., 597 F. Supp. 2d 1228, 1233 (D. Colo. 2009)(“Flow down clauses are designed to incorporate into the subcontract those provisions of the general contract relevant to the subcontractor’s performance.”)
Because flow down clauses incorporate language appearing in a separate document – the general contract – it is important for subcontractors to review the general contract in addition to the subcontract to fully appraise itself of the terms to which it is agreeing. A subcontractor is bound to obligations relating to the subcontractor’s work which appear in the general contract, although the terms do not necessarily appear in the subcontract itself.
Article 2 of AIA Form 401-2007, “Standard Form of Agreement Between Contractor and Subcontractor,” provide an example of a typical flow down clause.
The Contractor and Subcontractor shall be mutually bound by the terms of this Agreement and, to the extent that the provisions of AIA Document A201-2007 apply to this Agreement pursuant to Section 1.2 and provisions of the Prime Contract apply to the Work of the Subcontractor, the Contractor shall assume toward the Subcontractor all obligations and responsibilities the Owner, under such documents, assumes toward the Contractor, and the Subcontractor shall assume toward the Contractor all obligations and responsibilities which the Contractor, under such documents, assumes toward the Owner and the Architect. The Contractor shall have the benefit of all rights, remedies and redress against the Subcontractor that the Owner, under such documents, has against the Contractor, and the Subcontractor shall have the benefit of all rights, remedies and redress against the Contractor that the Contractor, under such documents, has against the Owner, insofar as applicable to this Subcontract. Where a provision of such documents is inconsistent with a provision of this Agreement, this Agreement shall govern.
By not reviewing the general contract, a subcontractor through a flow down clause may unwittingly agree to terms that arguably have nothing to do with its work. Terms that an unsuspecting subcontractor may be agreeing to via a flow down clause include termination clauses, claims processing clauses, indemnification clauses, and dispute resolution clauses.
Therefore, before signing a subcontract that contains a flow down clause subcontractors should insist on reviewing the general contractor agreement which the flown down clause is incorporating by reference.
Wally Zimolong
Wally represents contractors (and subcontractors) and developers. His clients build and develop residential, commercial, and industrial properties nationwide. Wally enjoys working with the owners of the businesses he represents because they tend to be entrepreneurs and all around interesting people.
