In L&B Construction Co. v. Ragan Enterprises, Inc., 482 S.E.2d 279 (1997), the Supreme Court of Georgia interpreted a fairly standard “flow-down” provision in a subcontract that incorporated a “no-damages-for-delay” provision from prime contract for contractor-caused delay. The Supreme Court of Georgia concluded that the unambiguous terms of the prime contract and the subcontract barred the subcontractor’s action for delay damages.
The subcontract entered into between L&B and REI contained these 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;”
“Contractor shall have the same rights and privileges as against the sub-contractor herein as the owner in the general contract has against the contractor. Sub-contractor acknowledges that he has read the general contract and all plans and specification and is familiar therewith and agrees to comply with and perform all provisions thereof applicable to sub-contractor;” and
“The sub-contractor 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.”
Before the case reached the Supreme Court of Georgia, the Georgia Court of Appeals had ruled in favor of REI, holding that the clause in the subcontract stating that, in the event of delay caused by L&B, it would owe REI “only an extension of time for completion equal to the delay caused” was ambiguous as to whether the term “only” implied: (1) the length of the extension of time given in the event of delay, or (2) the scope of permitted remedies in the event of delay.
The Supreme Court of Georgia disagreed. The court noted that the “flow-down clause” in the subcontract allowed the contractor to invoke against the subcontractor all of the rights and defenses that the owner would be able to invoke against the contractor. Those rights clearly and unambiguously barred recovery of delay damages.
With regard to the subcontract provision providing that in the event of a delay caused by the contractor, the “contractor shall owe subcontractor therefore only an extension of time for completion equal to the delay,” the court found it unambiguously provided that the subcontractor’s exclusive remedy was an extension of time. Interestingly, the court used the rules of grammatical construction to reach its conclusion. Because in the clause the word “only” directly precedes the phrase “an extension of time,” it was evident to the court that L&B and REI agreed that an extension of time would be REI’s exclusive remedy.
There are many lessons to be learned from this case. Prime contractors obviously want to “flow down” provisions in the prime contract to subcontractors. Otherwise, they could be left potentially liable to a subcontractor for acts of the owner with no right to recover from the owner.
A second lesson to be learned is that grammatical construction matters. The prime contractor could have made clear that the subcontractor was not entitled to delay damages.
Finally, subcontractors should learn that it is important to know what prime contract provisions have been made applicable to them by the “flow-down” provision in their subcontract.
