Flow-Down Clauses and Waivers—a Subcontractor’s Nightmare?

Flow-down clauses are common in subcontracts, particularly when the project involves several tiers of contractors. A flow-down clause incorporates various terms of the upstream contracts into the subcontract, even if the subcontractor has not reviewed the upstream contract.  And, the incorporated clauses can act as a waiver of a subcontractor’s claims.  Are you reviewing your flow-down clauses and all everything that they reference? The impact of a flow-down clause was recently discussed in a case out of Washington state involving the Seattle-Tacoma International Airport. The prime contract, between the airport and the general contractor, contained a multi-step dispute resolution process, including meet and confer, engaging a dispute resolution board, mediation and then litigation. The flow-down clause in the general contractor’s subcontract required all subcontractors and sub-subcontractors to participate in the multi-step dispute resolution process. The subcontract further provided that the subcontractor would not take, or will suspend, any other action or actions and will pursue no independent litigation pending final determination of any dispute resolution procedure between the airport and the general contractor.Disputes arose on the project and the general contractor presented both its own claims, and those of the subcontractors to the airport, through the multi-step dispute resolution process. Around the same time, a sub-subcontractor filed suit against a subcontractor and the general contractor seeking payment for work it performed on the airport project. The subcontractor and general contactor moved to stay the sub-subcontractor’s claims because they were being addressed in the general contractor’s claims against the airport. The trial court agreed, finding that the sub-subcontract’s flow-down clauses waived the sub-subcontractor’s right to pursue the little Miller Act claims independently. This does not mean that the sub-subcontractor lost its claim, but it does mean that the sub-subcontractor must present its claim with the general contractor against the airport.

Take away: When you are reviewing your subcontracts, make sure to look for the flow down clause. If the subcontract does have a flow down clause, also make sure you review the contract between the general contractor and the owner to make sure you know how it impacts your rights to pursue a claim. Let us know if you need an experienced construction attorney to review your flow-down clauses.