Chapter 17 - § 17.3 • INCORPORATION BY REFERENCE ("FLOW-DOWN" CLAUSES)

• Jurisdiction: Colorado

§ 17.3 • INCORPORATION BY REFERENCE ("FLOW-DOWN" CLAUSES)

"Flow-down," "flow-through," or "conduit" clauses are frequently found in construction subcontracts. Their principal purpose is to pass on to subcontractors some or all of the obligations that the general contractors have to the owners. Ideally, the incorporated provisions should apply only to the subcontractor's physical work. However, more comprehensive or loosely worded clauses may add more.

Example 1: The Subcontractor hereby agrees to be bound to the Contractor by the same terms as the Contractor's contract with the Owner and assume toward the Contractor all obligations and responsibilities that the Contractor, by contract, assumes toward the Owner.

Example 2: The Contract Documents are incorporated in this Subcontract by reference, and the Subcontractor and his or her subcontractors will be and are bound by the Contract Documents insofar as they relate in any way, directly or indirectly, to the work covered by this Subcontract. Subcontractor agrees to be bound to Contractor in the same manner and to the same extent as Contractor is bound to Owner under the Contract Documents, to the extent of the work provided for in this Subcontract, and that where reference is made to Contractor in the Contract Documents, and the work or specifications therein pertain to Subcontractor's trade, craft, or type of work, then such work or specification shall be interpreted to apply to Subcontractor instead of Contractor.

§ 17.3.1-Analysis

Flow-down clauses, like the examples quoted above, may substantially and materially expand the terms of what might otherwise appear to be a simple subcontract.

A clause may be limited to those provisions of the general or prime contract that deal only with the contemplated subcontractor's physical work. Such a clause may be acceptable unless one or both of the parties wish to incorporate all of the general/prime contract terms. However, if the flow-down clause reads or may be interpreted to incorporate other provisions of the general contract, such as those dealing with contract administration, changes, indemnities, dispute procedures, claims, allowances, payments, damages, scheduling, and other provisions, the incorporation may be trouble for either the contractor or subcontractor, or both.

For example, the Georgia Supreme Court has ruled that a flow-down clause in its subcontract barred a subcontractor from recovering delay damages because of a no-damages-for-delay clause in the general contract.¹ The Virginia Supreme...