Monitoring the flow

Feb. 8, 2017

An example of general flow-down clauses’ lack of protection

Prime contractors typically use flow-down clauses to insure subcontractors are responsible to the prime contractor in all similar respects as the prime is to the owner.

Flow-down clauses are a more convenient approach than perusing the prime contract for every relevant requirement and physically inserting them into the subcontract. Clearly, those prime contract provisions that bear directly on the subcontractor’s scope of work, such as technical specifications and drawings, fall within the reach of a flow-down provision, but other more general or onerous prime contract clauses may not. This was the case in a recent Virginia decision.

Hensel Phelps Constr. Co. v. Thompson Masonry Contractor, Inc., et al., 791 S.E.2d (Va. 2016) involved a public construction contract for a student health center at Virginia Polytechnic Institute and State University (Virginia Tech). Construction began in 1997 and was substantially completed in 1998. Virginia Tech made final payment to the prime, which in 1999 made final payment to subcontractors.

Many years later, Virginia Tech discovered defective workmanship involving work that had been performed for the prime by three subcontractors. After self-performing the repairs, in April 2012, Virginia Tech asserted a claim against the prime for $7,186,178. The prime demanded that the subcontractors reimburse Virginia Tech, but they refused to do so. In 2014, the prime settled with Virginia Tech for $3 million and filed suit against the subcontractors for breach of contract.

The subcontractors filed motions early on in the litigation arguing that Virginia’s five-year statute of limitations barred the breach of contract claims. The trial court granted the motions and dismissed the case.  The prime appealed to the Supreme Court of Virginia. 

On appeal, the prime argued that the subcontractors waived the five-year statute of limitations by virtue of a general flow-down provision in the subcontracts that required them to assume any and all guarantee or warranty obligations owed by the prime to Virginia Tech. The prime contended that since, pursuant to a Virginia statute, the Commonwealth was not subject to the typical five-year statute of limitations and could bring claims against the prime at any time, the prime similarly could sue the subcontractors beyond five years. 

The Court first recognized the longstanding law of Virginia, which defines “waiver” as “the intentional relinquishment of a known right, with both knowledge of its existence and an intention to relinquish it.” The Court further noted that in order to waive a right, a party must do so expressly in writing or impliedly by inconsistent conduct. There was no allegation of such conduct by the subcontractors so the Court had to determine whether there was an express waiver. 

An express waiver, according to the Court, must reflect both elements: (1) knowledge of the right’s existence; and (2) the intent to relinquish it. The Court held that while the subcontracts incorporated the prime contract by reference, a general incorporation provision is insufficient to constitute an express waiver of a statutory limitations period. 

The prime also pointed to specific phrases in the subcontract that it contended unambiguously demonstrate the intent to waive the statute of limitations including the statement that “[t]he Subcontractor is bound to the Contractor by the same terms and conditions by which Contractor is bound to [Virginia Tech] under the Contract,” and that the subcontractor’s warranty period covers any time “prior to Contractor’s release from responsibility to [Virginia Tech] therefore as required by the Contract Documents.” However, the Court held that these provisions similarly fail to expressly indicate “knowledge of” and “intent to relinquish” the subcontractors’ right to a five-year limitations period because the inapplicability of the statute of limitations to the Commonwealth is not a prime contract provision. Rather, it is set out in a statute. The Court, therefore, concluded that the various identified phrases do not demonstrate sufficient intent to incorporate a waiver of the statute of limitations.

Contractors relying upon general flow-down clauses to flow-down-specific prime contract requirements not directly relating to the technical requirements for a subcontractor’s work do so at their peril. If the prime in this case wanted to level the playing field with the subcontractors, it should have simply included an express waiver of the limitations provision in the subcontract.

About The Author: Caudle is a principal in Kraftson Caudle LLC, a law firm in McLean, Va., specializing in heavy-highway and transportation construction. Caudle can be contacted via e-mail at [email protected].

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