Arbitration Trifecta, Part 1: Flow-Down Provisions & Contract Inconsistencies
Takeaway:
The Court found that the terms of a construction subcontract conflicted with the prime contract and applied the subcontract’s order of preference clause.
The main takeaway, however, is that subcontractors should apprise themselves of any flow-down provisions contained in their subcontracts.
The Maryland Court of Special Appeals recently issued three unreported opinions addressing arbitration. The first, found here, is Willow Construction LLC vs. The John R. Crocker Company, which addressed often overlooked flow-down clauses in subcontracts. While the Court noted the general applicability of flow-down clauses, it ruled with the subcontractor and agreed that the subcontract – not the prime contract – governed the dispute resolution process.
As an aside, nearly every subcontract the firm has reviewed contained flow-provisions imparting on the subcontractor the same obligations that the prime contract (between the owner and general contractor) imparts on the general contractor. Again, in nearly every subcontract reviewed, the subcontractor was not aware of those requirements and had not reviewed the prime contract and any incorporated documents.
The facts in the Willow case are straightforward. The owner, general contractor and subcontractor all utilized typical AIA forms, among them, AIA A133 (Owner and Construction Manager), A210 (General Conditions) and A401 (Contractor and Subcontractor). The General Conditions required the Contractor to submit a claim to the initial decision maker (defaulted as the architect) as a condition precedent to proceeding to mediation, which was the next step in the dispute resolution process before arbitration. The Subcontract (and the General Conditions) imposed these owner-contractor requirements on the Subcontractor unless the Subcontract had an inconsistent provision.
You can probably guess where this is going. The Subcontract only had a two-step dispute resolution process – mediation and then arbitration – and did not require the Subcontractor to first present its claim to the initial decision maker, which the Prime Contract and General Conditions did.
The Court ruled that the two documents were inconsistent and applied the Subcontract’s order of preference clause to apply the two-step dispute resolution process found in the Subcontract. While the analysis is rather simple, this should be a good lesson to subcontractors to not ignore flow-down provisions and familiarize themselves with any other binding documents.