There are some contract provisions that we see so often that we occasionally stop actually reading them, stop actually thinking about them, and just mentally check the provision off our list of things we expect to see in the contract. They fall into the catchall description “boilerplate,” and indeed often populate a section of the contract referred to merely as “Miscellaneous.” While this is obviously not a best practice, it’s also fair to say that some terms (like integration clauses) are virtually never negotiated, and therefore not worth as much time and attention as others. To paraphrase George Orwell, all contract clauses are equal, but some are more equal than others.
One clause that is often treated this way is the flow-down provision, which usually reads something like “We shall have all rights, remedies, powers, and privileges as, to, or against You which the Owner has against us. To the extent that the Subcontract Documents relate in any respect, whether directly or indirectly, to your scope of work under the Subcontract, You agree to be bound to us in the same manner and to the same extent as we are bound to the Owner.” While such clauses are, indeed, common-place, the reality is that they would frequently benefit from far more fine-tuning than they actually receive. One size does not fit all.
Consider dispute resolution proceedings. On public contracts, dispute resolution between the prime contractor and the owner is virtually always litigation in a local court. A smart prime contractor wants a far more nuanced approach to dispute resolution with its subcontractors. Indeed, very often, a smart prime contractor wants an array of options made available to it, to be chosen as appropriate given the nature of the dispute. Disputes solely between the prime and a sub can be resolved via arbitration, whereas any dispute that the prime believes involves the owner must be resolved via the process outlined in the prime contract, and the sub agrees to be joined to any litigation with the owner in the event that the sub’s work is implicated in that litigation. Such provisions are reasonably common, but often run directly afoul of the flow-down provision, which would mandate litigation in all disputes between the prime and the sub, because litigation is mandated in all disputes between the prime and the owner.
Conflicts like these are often addressed (or intended to be addressed) via an order of precedence clause, which exists to explain which document (the prime contract or the subcontract) governs in the event the two are in conflict. But this solution only masks the real problem: the best order of precedence is not necessarily the same in all situations. With respect to some kinds of clauses (like dispute resolution), the prime contractor usually wants the subcontract terms to supersede the prime contract terms. With respect to other kinds of clauses (like the sort of documentation that must be submitted to obtain a progress payment), the prime contract frequently wants the prime contract terms to supersede the subcontract terms. Therefore, a typical blanket order of precedence clause (“in the event of any express conflict between the terms of this Subcontract and the terms of the Prime Contract, the terms of this Subcontract shall prevail[,]”) will not work. Even worse is the attempt to use “higher, stricter, or better” order of precedence language—which form of dispute resolution requires the higher, stricter, or better performance?
Sadly, the only solution to this problem, like so many problems in life, is thoughtfulness and hard work. Post-contract award, and prior to entering into subcontracts on a project, the prime contractor’s project management and risk management staff need to sit down and have a thoughtful discussion about which prime contract terms ought to flow down, and which should be superseded by the subcontract terms. A simple work product that can be produced in such a meeting is a “flow down chart” that identifies each of the prime contract terms and indicates (via the use of a check-a-box graphic, if so desired) which terms flow down versus which are superseded by the subcontract terms. That chart can then be made part of the subcontract documents.
So, the next time a contract comes across your desk, take a moment to really think about those few, forgotten, but proud terms in the back of the contract. Some of them represent opportunities to add real value, so long as you pause for a moment, and don’t just go with the flow.