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Subcontracts frequently incorporate by reference the terms of the prime contract.

Tuesday, August 03, 2004 02:32 pm

 
Subcontracts frequently incorporate by reference the terms of the prime contract. Commonly referred to as "flow-down clauses,"these provision state that the subcontractor assumes toward the prime contractor all the duties and obligations the prime contractor has assumed toward the project owner.

Flow-down clauses are generally effective and enforceable with regard to the applicable aspects of the technical requirements, the definition of the subcontractor's work. Questions arise, however, regarding the incorporation of other terms of the prime contract. The issue arises most frequently with regard to clauses that purport to disclaim or limit liability and clauses that define or limit available dispute resolution mechanisms.

Disclaimers Incorporated

Courts frequently enforce incorporation by reference clauses in subcontracts in accordance with their literal terms, ruling that the subcontractor is bound by the same exculpatory language the prime contractor agreed to in its contract with the project owner.

In one case, the Georgia Supreme Court enforced against a subcontractor a no-damage-for-delay clause found in the prime contract. "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."L & B Construction Co. v. Ragan Enterprises, Inc., 482 S.E.2d 279 (Ga. 1997); CCM July 1997, p. 3.

Similarly, a no-damage-for-delay clause in a prime contract was incorporated by reference into a subcontract through a broad flow-down clause. A New York court rejected the sub's argument that express language in the subcontract superseded the delay damage disclaimer. Burt Welding & Automotive Repair, Inc. v. U. W. Marx, Inc., 707 N.Y.S2d 548 (N.Y.A.D. 2000); CCM August 2000, p. 3.

And a Massachusetts court also ruled that a delay damage disclaimer, mandated in the prime contract by a public works statute, was incorporated by reference into a subcontract. B. J. Harland Electrical Co., Inc. v. Granger Brothers, Inc., 510 N.E.2d 765 (Mass.App. 1987); CCM October 1987, p. 3.

When a project owner disclaimed responsibility for the [...]

 
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