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Stream-down clauses are a ubiquitous a part of the settlement between prime contractors and subcontractors, to the purpose that events typically signal them with out giving them a cautious learn.
However they’re not all the time as efficient as they could possibly be, particularly when misunderstood or under-explained, in line with attorneys.
And whereas these clauses may be exhaustive — authorities building contracts may be particularly cumbersome — they’re hardly ever encompassing sufficient to guard GCs from the actions of subs who fall off monitor.
How flow-downs work
Stream-down clauses are blanket provisions that make sure the phrases and circumstances agreed to by a GC and proprietor apply to subcontractors as effectively. It’s a means for a normal contractor to handle danger and cut back the possibility of disputes.
“Basically all the obligations which are owed from the overall contractor to the proprietor at the moment are mirrored to subs,” stated lawyer Phillip Parham, affiliate at Jones Walker in Atlanta.
Phillip Parham
Courtesy of Jones Walker
Whereas exactly which obligations are flowed down can differ, typically they embody almost each side of the prime settlement between the proprietor and normal contractor, Parham stated.
“On this state of affairs, usually talking, the insurance coverage protection phrases would move down, the requirement to comply with state and federal legal guidelines would move down, and plenty of others,” he stated.
That might additionally embrace accountability to conduct on-site investigations concerning the undertaking’s web site circumstances, size and breadth of guarantee that the subcontractor is required to offer, liquidated damages obligations and even the scope of the subcontractor’s indemnification obligations towards the overall contractor, he added.
Though flow-down clauses are customary in contracts between GCs and subs, they shouldn’t be the one authorized safety for prime contractors, legal professionals say. Counting on blanket flow-down clauses is like sending a soldier into battle with only a helmet, stated Parham.
“The flow-down provision in and of itself just isn’t sufficient to handle all of the circumstances that will occur between the subcontractors and GC that set off obligations from the contractor to the proprietor,” he stated.
William Wilson
Courtesy of Robinson+Cole
However maybe attributable to the truth that they’re just about customary, subcontractors additionally typically don’t learn or perceive the duties that flow-down clauses foist upon them, stated William Wilson, a business lawyer at Robinson+Cole based mostly in Hartford, Connecticut.
“They only signal it,” he stated, which may result in issues for each the sub and GC when a battle arises.
Potential drawback areas
If a sub doesn’t perceive its duties to alert the GC of a attainable delay, for instance, the GC could not then notify the proprietor inside the timeframe stipulated of their contract, stated Parham. That may lead the GC to being on the hook for the delay.
There are another widespread areas the place GCs could also be tripped up on a flow-down clause in the event that they’re not tailor-made to the particular undertaking, he added.
The commonest is inconsistent discover provisions.
For instance, a GC could also be obliged to inform an proprietor of any claims for added compensation inside seven days of the occasion that causes the declare. However the subcontractor’s flow-down clause would possibly say the requirement is 10 days. Now what?
One other occasion is likely to be when a flow-down clause features a 48-hour discover interval. However what about an occasion that occurs on a Friday? Are the sub and GC negotiating over the weekend to current to the proprietor on Sunday?
“You’ve received a very huge space of publicity there,” stated Parham. “It’s a two-front warfare the place you’re liable to the subcontractor however the proprietor is not liable.”
How GCs can defend themselves
GCs can take some steps to be sure that, if a dispute comes up, they’re protected past the provisions of the flow-down clause.
“Having litigated numerous these contract instances, it may be complicated if you simply say ‘We’re going to include all of the phrases of the prime contract,’” stated Wilson. “They typically battle, they usually’re not clear on who’s accountable for what, and whether or not that may lengthen the GC’s duties to the sub.”
For instance, a dispute decision provision within the prime contract would possibly name for arbitration, whereas the subcontract may name for litigation.
Contractors ought to search for these forms of misalignments upfront, so that they’re not arguing over them later, when a dispute has already created stress between the events. “Higher to resolve it multi function venue if attainable,” Wilson stated.
‘Order of precedence’
Parham additionally recommends that GCs pay cautious consideration to what’s known as “the order of precedence” listed in paperwork. That language clarifies which clauses or gadgets take priority over others. For instance, a tailor-made modification to a kind contract may need a better precedence than the unique, boilerplate language.
Additionally be sure that the flow-down provisions from the prime contract and subcontract agree. That’s important for guaranteeing your subs perceive what you anticipate of them.
“So the place a flow-down clause exists in a subcontract, a subcontractor must overview each the subcontract itself and the prime contract to know your complete scope of its obligations towards the overall contractor,” he added.
That doesn’t imply conflicts received’t occur. “There’s nonetheless going to be disputes,” Parham stated, however ensuring an order of precedence is in place places a GC in a greater spot.
Necessary flow-downs in federal contracts
GCs who’re doing federal authorities work, nevertheless, ought to remember the fact that they typically can’t tailor the flow-downs set out of their contracts.
As a substitute, they and their subs are sure by the flow-down clauses set out in GSAR 52.244-6, which is a federal acquisition regulation required by subcontracts for business services and products.
Merle DeLancey
Courtesy of Clean Rome
Some clauses may not appear related to the job at hand, however they’re nonetheless required, stated lawyer Merle DeLancey, companion at Clean Rome based mostly in Washington, D.C.
For instance, one clause requires privateness coaching for contractors performing non-public safety capabilities outdoors of the USA, which is included even on jobs taking place inside the nation.
“That’s a compulsory flow-down and it’ll don’t have anything to do together with your job,” Delancey stated. But when a GC and its subs (and their subs) wish to do authorities work, they should comply with it.
GCs can be sure that their subs perceive that such clauses are necessary even when they are going to by no means have an effect on their jobs — and that the GC can’t negotiate with the prime, as a result of the prime is the U.S. authorities.
“You need to learn these fairly intently as a result of you might have simply purchased your self some compliance obligations that you simply usually wouldn’t have,” Delancey stated.
