Don Gregory, Director + Chair, Construction Law Practice

Almost all subcontracts these days contain “flow-down” clauses that purport to incorporate the obligations of the prime contract upon the subcontractor. Questions often arise as to whether the provisions of the subcontract or the prime contract control in the event of a conflict.

A case of first impression in New Mexico dealt with a prime contract that limited the prime’s recovery against its subcontractor architect to whatever sums it could recover against the architect’s errors and omissions policy while the subcontract itself contained no such limit.

The language of the subcontract provided that it would control unless the prime contract imposed a greater requirement. The Court found that the open ended liability of the subcontract imposed a greater burden on the architect, and therefore controlled. Centex/Worthgroup, LLC v. Worthgroup Architechs, L.P., 365 P. 3d 37 (2015). The subcontractor architect was left exposed for almost $7 million in redesign and repair damages.

The Court cited several cases which have held that specific language in a subcontract controlled over a general “flow-down” clause purporting to shift the prime contract obligations downstream to the subcontractor.

The lessons learned from this case are that:

1. Precedent provisions imposing the “higher” standard or “greater” requirement are enforceable and pose risks for those performing work downstream in the event of a conflict between the prime contract and the subcontract;
2. Where a subcontract says that it controls over conflicting provisions of the prime contract, a general “flow-down” provision cannot trump the specific language of the subcontract; and
3. All parties must carefully consider how a “flow-down” clause purporting to pass through prime contract obligations relates to an order of precedent clause in the subcontract in the event of a conflict. The resolution of that conflict can have great ramifications for the parties.