Flow-down, or pass-through, provisions are among the most important provisions in all subcontracts, at least from the perspective of general contractors. These classic risk-transfer provisions provide that the subcontractor will be bound to the general contractor in the same fashion that the general contractor is bound under its contract with the owner. (As a practical matter, general contractors must provide access to the owner contract in order for the flow-down provision to be enforceable against the subcontractor. Prudent general contractors ought to redact sensitive information, including business terms (like their fee and other aspects of the deal) and bank wire transfer information.) These provisions are often accompanied with language throughout the subcontract that dually requires the subcontractor to follow the prime contract between the owner and the general contractor, in the event there exists a conflict or gap between provisions in the subcontract and the prime contract. For example, a prudent general contractor could draft a notice provision that requires a subcontractor to submit notice in writing within a desired amount of days and include the language “unless the General Contract Documents require notice sooner.” In short, flow-down provisions are a nice backstop for general contractors to ensure that they are following the requirements set forth in their contracts with the owner.
However, even the best of backstops have their limits – and
such limits often come to light in the face of agreements to arbitrate. In a
recent flow-down showdown, the California Court of Appeals illustrated these
limits when it refused to enforce an arbitration agreement that was flowed-down
from a prime contract. See Remedial
Construction Services, LP v. AECOM, INC., 65 Cal. App. 5th 658, 666 (Cal.
App. 2d Dist. 2021). There, the subcontract incorporated by reference a prime
contract that included an arbitration agreement and required, like all
flow-down provisions do, that the subcontractor assume towards the general
contractor “all obligations and responsibilities contained in the Prime
Agreement.” Notably, the subcontract itself did not contain an agreement to
arbitrate. The court thus found that since “[t]he Subcontract [did] not
evidence an intention, clear or otherwise, for arbitration of disputes,” the
agreement to arbitrate was unenforceable against the subcontractor in its
disputes with the general contractor.
In the event your agreement lacks a clear agreement to arbitrate, courts,* like those in Remedial Construction Services and Wonder Works, must determine the scope of the arbitration clause at issue, so as to determine what the parties actually agreed to do. The Federal Arbitration Act (or “FAA”) provides a liberal policy of promoting arbitration because it was drafted to override the then long-standing judicial hostility towards arbitration and to make arbitration agreements “valid, irrevocable, and enforceable.” 9 USC § 2; Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24 (1983) (noting that courts are to “rigorously enforce agreements to arbitrate.”) So, on the one hand, if a court determines that an arbitration clause exists, “any doubt concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.” Id. at 24. However, it is “equally clear that the ‘federal policy alone cannot be enough to extend the application of an arbitration clause far beyond its intended scope.’” Fuller v. Gutherie, 565 F.2d 259, 261 (2d Cir. 1977). “After all, the purpose of the FAA ‘was to make arbitration agreements as enforceable as other contracts, but not more so.’” Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967). Thus, on the other hand, arbitration cannot be compelled unless it is found that both of the parties (1) agreed to arbitrate and (2) intended the arbitration clause to cover the particular dispute. Another way to avoid being a party to the arbitration agreement is to assert that you lack the ability to pay. In such scenarios, there is a possibility that the fees of an arbitration (like the institutional ones and the ones going to the tribunal, but not the legal fees) might provide a basis for invalidating an arbitration agreement in its entirety. In other words, the right to be heard trumps the federal policy favoring arbitration.
Author Lexie
Pereira is a JD/MBA candidate at Boston College Law School and Carroll
School of Management graduating in Spring 2022 and studying to become a
litigator, with a specialty in construction law. Currently, she works as a Law
Clerk at Consigli Construction Co., Inc., serves on the Editorial Team of the
ABA’s Forum on Construction Law’s Dispute Resolver blog, and acts as the
Student Liaison of the ABA's Forum on Construction Law. At school, Lexie is the
President of the Real Estate Law Society and the President of the
Eagle-to-Eagle Mentoring Program. Lexie grew up in the construction industry
and has spent time working as an estimator, field engineer, laborer, and, of
course, in the legal capacity at Consigli and formerly Hinckley Allen and Pillsbury
as a Summer Associate. After graduation, she will be joining Pillsbury
Winthrop Shaw Pittman LLP as an Associate.
Contact Lexie: pereirle@bc.edu | https://www.linkedin.com/in/lexie-pereira/
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