The Contractor's Side: Flow Down Clause

Flow down clause enforced

Article December 28, 2000
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Subcontract "flow down" provisions can create an interesting legal analysis. In L&B Construction Co. v. Ragan Enterprises Inc., 482 S.E. 279 (Ga. 1997), the court was faced with a question of proper grammar.

L&B Construction Co. (L&B) was the general contractor on a state of Georgia project. Ragan Enterprises Inc. (REI) was the electrical subcontractor. The general contract between L&B and the state contained the following relevant clauses:

"The contractor (L&B) expressly agrees that the contractor’s sole remedy for . . . delay shall be an extension of contract time and that the contractor shall make no demand for damages or extended overhead.

The contractor shall not be entitled to payment or compensation of any kind from the owner for direct, indirect, or impact damages . . . arising because of any hindrance or delay from any cause whatsoever (except those involving fraud and bad faith)."

The subcontract entered between L&B and REI contained these relevant clauses:

"Should subcontractor be delayed in his work by contractor then contractor shall owe subcontractor therefore only an extension of time for completion equal to the delay caused, and then only if a written claim for delay is made to the contractor within forty-eight hours from the time of the beginning of the delay.

The contractor (L&B) has heretofore entered into a general contract with [the owner] . . . and which is now made a part of this subcontract insofar as (it) applies.

Contractor shall have the same rights and privileges as against the subcontractor herein as the owner in the general contract has against the contractor. Subcontractor acknowledges that he has read the general contract and all plans and specifications and is familiar therewith and agrees to comply with and perform all provisions thereof applicable to subcontractor.

The subcontractor agrees to be bound to the contractor by the terms of the contract documents and assume toward the contractor all of the obligations and responsibilities that the contractor by aforesaid document assumes toward the owner."

Subcontractor barred from recovery

REI filed suit against L&B and its surety for breach of contract and resulting damages due to a two-year delay in the project caused by L&B. L&B defended on grounds that REI’s suit was barred by the "no-damages-for-delay" provision in the subcontract. The superior court agreed, noting that flow down clauses are effective to impose on a subcontractor the incorporated duties as set forth in the general contract. When a flow down clause is used in a subcontract, the subcontract need not contain additional language of incorporation in order to impose on a subcontractor duties owed by the general contractor to the project owner.

The court found that the flow down clause in the subcontract states that the contractor shall have the same rights and privileges as against the subcontractor . . . as the owner in the general contract has against the contractor. The only legitimate meaning of this clause is to allow the general contractor to invoke against the subcontractor all of the rights and defenses that the project owner would be able to invoke against the general contractor under the general contract.

‘Only’ an extension

As recognized by the Court of Appeals, the rights and defenses available to the project owner against the general contractor under the general contract clearly and unambiguously barred the recovery of delay damages.

In addition, the court found the subcontractor clause removed any doubt that the subcontractor was bound to the general contractor in the same manner as the latter is bound to the project owner. Because the general contract accords the project owner protection from an action brought by the general contractor for delay damages, it necessarily follows that the subcontract accords the same protection to the general contractor vis a vis the subcontractor.

The court then reviewed the subcontract provision that, in the event of delay caused by the contractor, the "contractor shall owe subcontractor therefore only an extension of time for completion equal to the delay." It found the unambiguous and plain meaning of this clause to be that in the event of delay, the subcontractor’s exclusive remedy is an extension of time for completion of its work.

In construing the contracts, the court relied upon the rules of grammatical construction usually govern, finding the word "only," according to its usual signification, means "solely" or "exclusively." Because in this clause the word "only" directly precedes the phrase "an extension of time," it is evident that L&B and REI agreed that an extension of time would be REI’s exclusive remedy in the event of delay caused by L&B. The Court of Appeals erred by construing this contractual clause to read the word "only" as modifying not the phrase it directly precedes, "an extension of time," but rather the later phrase, "equal to the delay caused."

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