Easter & Cavosie :: Attorneys at Law

Built on Principle
Designed for Efficiency


Residential Contracting 101: The “Flow Down Clause”

A “flow-down” clause provides that a subcontractor assumes toward the builder all the duties and obligations the builder has assumed toward the homeowner. Flow-down clauses can create a number of problems. If the clause is interpreted broadly, the subcontractor may have agreed to build the entire home. If the intent of the clause is to impose on the subcontractor only the technical requirements of the contract that apply to the subcontractor’s scope of work, an overly-broad flow-down clause obviously will not accomplish this intent.

In a Nevada case, a contract clause stated that the risk of loss of completed work remained with the builder until final acceptance by the project owner. The clause was incorporated into a subcontract by a flow-down clause. The subcontractor ultimately bore the risk of loss until final acceptance of the home.

And in a Washington State case, a prime contract required the builder to name the owner as an additional insured on the builder’s liability policy. The court held that a general flow-down clause did not impose this obligation on a subcontractor since it was not sufficiently precise to put the subcontractor on notice that this was required.

A few Indiana courts have interpreted flow-down clauses, often with mixed results. In one Indiana case, a contract required the builder to provide the owner with lien waivers prior to receiving payment. The subcontract contained no such requirement, but a flow-down clause incorporated the lien waiver requirement into the subcontract. The lien waiver was held to be a necessary condition to the subcontractor’s right to get paid.

In a 2002 case, the court considered the standard flow-down clause contained in the contract forms promulgated by the American Institute of Architects. The court noted that “a flow through provision is intended to incorporate into the subcontract the provisions of the prime contract which related to the subcontractor’s performance.” The court found that an acceleration claim submitted by the subcontractor was barred by the failure to provide written notice of the claim within the time required by the contract between the owner and builder.

Conversely, the court refused to flow-down for the benefit of a subcontractor a preferential interest rate contained in the prime contract in a 2002 Indiana case. The court determined that the flow-down clause only pertained to the “work” provisions of the prime contract applicable to the subcontractor “and as such do not include the payment provisions” of the prime contract. The court also recognized “a public policy interest in allowing subcontractors to negotiate a price without being constrained by the contractor and owner’s negotiated price and method of payment.”

“Builder beware”!

By: J. Greg Easter

Residential Contracting 101: Incorporation by Reference

Construction contracts come in all shapes and sizes. For commercial projects, the parties often use pre-printed contract forms such as forms promulgated by the American Institute of Architects, the Associated General Contractors, and the Engineer’s Joint Contract Documents Committee. However, there are few generally-accepted contract forms applicable to residential projects, although pre-printed forms used for commercial projects may be modified for use on some residential projects. They may be particularly appropriate for large or complex residential projects.

Most residential contracts are “customized” forms drafted by the attorney for a party. Many disputes have arisen as a result of the failure of the builder to include in the contract all of the essential terms of the transaction or to express the intentions of the parties in clear terms. Other disputes have originated from the failure of the builder to incorporate by reference the plans and specifications that govern the technical aspects of the builder’s work or other documents that were intended to be a part of the deal.

That leads me to Rule #1: All construction contracts should incorporate by reference a set of plans and specifications prepared by an architect, engineer or designer. Where the plans and specifications are incorporated by reference, the builder is bound to comply with the requirements of the plans and specifications. And when the builder strictly complies with the requirements of the plans and specifications, the builder will not be liable for the consequences of defects in the plans and specifications.

Under the doctrine of “incorporation by references”, a separate document may become a binding part of a construction contract by virtue of an express reference to that document in the contract. It is not necessary to attach the incorporated document to the contract, but the referenced document must be in existence and must be reasonably described.

An example: “The Builder shall perform the Work in accordance with the plans and specifications identified in Schedule 1 to this contract.” By referring to the Schedule 1 plans and specifications, and then attaching that Schedule 1 to the contract at the time the contract is signed, the plans and specifications are considered by the law to be as much a part of the contract as if they were physically reproduced in the body of the contract.

“Builder beware”!

By J. Greg Easter

How Can I Limit My Liability For Bad Work Claims?

So how can a contactor limit its liability for bad work claims?

At least in Indiana, the answer depends on the type of project. For most commercial projects, the parties are free to negotiate the period of time the contractor can be held liable for defective or non-conforming work. A disclaimer or limitation of warranties will generally be enforced by the courts as long as the contract language is clear and unambiguous. Courts, however, generally disfavor disclaimer language; even the clearest language may not be enough to disclaim liability for a bad work claim depending on the nature of the claim and the factual circumstances involved.

It gets a bit trickier when the contract both creates and disclaims warranties. An “express warranty” is a representation or promise in a contract that certain facts are true and will remain true – it is not necessary to use words such as “warranty” or “guarantee” in order to create an express warranty. And an express warranty cannot be disclaimed by language disclaiming “all warranties.” Courts will attempt to reconcile the two provisions, usually finding that the express warranty trumps the disclaimer provision.

For example, a statement in a construction contract to the effect that the contractor will perform “in a good and workmanlike manner” creates an express warranty in favor of the owner; a disclaimer of “all warranties” will probably not be interpreted as excluding the “good and workmanlike” warranty created by the express language of the same contract. In other words, if you want to disclaim liability, avoid contractual language that may create an express warranty in the first place.

A contractor’s attempt to limit liability may be frustrated unless the contractor also disclaims “implied warranties,” warranties that are not stated in the contract but are “implied” from the nature of the work or the relationship of the parties. For example, most states, including Indiana, recognize that in performing work and furnishing materials, the contractor impliedly warrants that the work will be performed in a “workmanlike manner.” A disclaimer of “all warranties” probably will not effectively disclaim this implied warranty.

It is a bit more difficult to disclaim warranties applicable to residential projects – homes built for persons who intend to occupy them. Indiana’s “New Home Construction Warranties” statute permits a builder to disclaim all implied warranties only if the builder provides the homeowner with certain express warranties.  In addition, those warranties must be backed by insurance, including completed operations insurance for consequential damages, and the homeowner must sign a disclaimer form entitled “Notice of Waiver of Implied Warranties,” the language of which is set out in the statute.

It should be noted that a valid contractual disclaimer of warranties may not be a winning defense to a third party claim involving property damage or personal injury. These are claims “sounding in tort” (a French word for a legal “wrong”) and the injured party may be able to maintain a claim for “negligence” against a contractor even if the contracting parties agree otherwise. Most contractors are protected against such claims by commercial general liability insurance.

By J. Greg Easter

Reminder: Accrued vacation time must be paid at termination absent a written policy to the contrary.

Today’s Indiana Court of Appeals decision in Shofstall v. International Union of Painters and Allied Trades is a reminder that accrued vacation time must be paid at termination unless the employer has adopted a written policy to the contrary. Such policies are often included in employee handbooks and can preclude payment of vacation time upon termination or otherwise condition payment upon a contingency such as providing and working through a two-week notice.