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Where a subcontract contained an “incorporation by reference” clause, expressly incorporating the terms of the prime contract between the general contractor and project owner, the “waiver of consequential damages” clause of the prime contract flowed down to the subcontract and barred the sub from recovering any consequential damages when it was terminated.  In Costa v. Brait Builders Corporation, 972 NE 449 (Mass. 2012), the same decision that held the subcontractor’s release of bond rights was unenforceable, the court found that the prime contract language clearly flowed down and that the waiver of consequential damages clause was enforceable to prevent the subcontractor from recovering lost profits, loss reputation costs, attorneys fees, etc. – all of which had been awarded to the subcontractor by a jury.

The prime contract provided in relevant part as follows:

 “The Subcontractor agrees to be bound to the Contractor by the terms of the [general contract] and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the awarding authority….”

 The article of the prime agreement that flowed down to bar consequential damages provided the following:

 “The Contractor waives Claims against the Owner for consequential damages arising out of or relating to this Contract.  This includes: (1) damages incurred by the Contractor for … losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.”

 In holding that the waiver was applicable to the subcontractor and barred its recovery of consequential damages, the court explained that “flow down” clauses “are an acceptable and common method for general contractors to limit risk.”  The court also stated that it saw no special policy reason to create an exception to flowing down waiver of consequential damages clauses and that indeed “there may be good reason for the parties in construction contracts to exclude such damages.”

Making a point that should be obvious to risk managers, attorneys, and insurance brokers,  who review contracts for their firms and clients, the court stated: “Subcontractors, particularly those with substantial industry experience … are well advised to examine both their own subcontract and any provisions that might be incorporated from the general contract, before agreeing to them.”

Comment:  The point about the importance of reading the prime contract before signing a subcontract that incorporates its terms cannot be overemphasized.  A subcontractor might go to a lot of effort to negotiate reasonable terms and conditions in its subcontract only to later learn that those are trumped by onerous conditions that are flowed down from the prime contract.  It is therefore, imperative to review the prime contract during negotiation of the subcontract, and take exception to terms and conditions of the prime and that are deemed unacceptable.

 

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 15, No. 2 (Feb 2013).

Copyright 2013, ConstructionRisk, LLC