What is Flow Down?
How do you legally define it?
What are the important elements you should know!
In this article, we will break down the legal definition of Flow Down so you know all there is to know about it!
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Table of Contents
Understanding Flow Down
A flow down clause (also known as a flow down, pass-through or conduit clause) is a contractual clause where a contracting party “flows down” contractual terms and conditions it has to another party in a separate contract.
In other words, a flow down clause is to bind a subcontractor to the terms and conditions of another contract (the prime contract) entered into between a general contractor and a client.
For example, in a construction contract, a general contractor will have a contract with a property owner.
In turn, the general contract will hire the services of a subcontractor in a separate contract that does not involve the client.
However, the general contractor will include a flow down provision to bind the subcontractor to the same terms and conditions as it is legally bound with the property owner.
In the end, using flow down provisions, the chain of service providers will be legally aligned and will all have to observe the same legal conditions to satisfy the end client.
Flow Down definition
What is the meaning of flow down and how do you define it?
A flow down clause is a contractual provision where a contracting party (prime contractor) legally binds another party (subcontractor) to the terms and conditions of contract (the prime contract) between the prime contractor and a third party (client).
When a prime contractor binds the subcontractor to all the terms and conditions of the prime contract, we call that a “back-to-back” flow down arrangement.
When only parts of the prime contract obligations are passed through to the subcontractor, when we have a partial flow down.
In the context of flow downs, it’s important for the parties to clearly negotiate and define the scope of the obligations.
In the context of a subcontractor, in most cases, “flow-down” obligations tend to involve terms relating to:
- The actual scope of work to be performed
- Deadlines or project milestones
- Dispute resolution mechanics
- Payment requirements
- Change orders
- Timing of notices
- Damages caused by delays
- Insurance requirements
- Warranty obligations
For instance, a general contractor may indicate that it will pay the subcontractor when the end client pays for the services rendered.
As such, the general contractor is flowing down its payment obligations with the client to the subcontractor.
Similarly, if the general contractor and the client have agreed on the governing law and venue, it may be important for the general contractor to impose the same governing law and venue to the subcontractors to avoid litigation in multiple jurisdictions.
Limitation of liability
Contracting parties tend to prefer having less liability than more!
Having said that, when a company imposes flow down obligations on another, such provisions may go through extensive negotiations.
On the one hand, you have a party (prime contractor) who has signed a contract with another (client).
To get the job done, the prime contractor needs the support and services of other experts, specialists and service providers (subcontractors).
Subcontractors are not thrilled with the idea of taking on the prime contractor’s responsibility when they will work on parts of the project.
As a result, subcontractors will want to limit their liability and risk when agreeing to a flowdown.
Flow down clause example
Let’s take a construction contract as an example of a situation where you may see subcontractor flow down clauses.
Let’s say May owns a piece of land and she intends to build a cottage.
To that effect, Mary retains the services of a contractor, John.
John signs a contract with Mary to build a cottage for her (prime contract).
Mary and John agree on the following terms:
- Mary will pay John when the project advances by tranches of 20%
- They will resolve their disputes through arbitration
- John provides a 2-year warranty on all the work
Although John can handle most of the construction project, his company does not have the expertise to lay the foundation and do the electrical work.
For that, John signs a contract with Suzanne for the foundation and Bill for the electrical work.
In Suzanne’s contract with John (subcontractor agreement), John includes flowdown clauses to pass on some of its obligations with Mary.
John flows down the arbitration dispute resolution along with the 2-year warranty obligations found in the prime contract.
With Bill, John passes through the payment obligation, dispute resolution and warranty obligations.
In the end, John is responsible for the entire project towards Mary as the prime contractor, Suzanne is responsible towards John for the foundation agreeing to some of the prime contract obligations and Bill is responsible for the electrical work.
Here is a sample flow down clause:
The Subcontractor shall be bound by the terms and conditions set forth in the Contractor’s agreement with the End-Client (“Prime Contract”) and such terms are incorporated herein by reference with the necessary adaptations. In the event of a conflict between the terms and conditions of the Prime Contract and the present Agreement, the terms and conditions of the Prime Contract shall prevail.
So what is the legal definition of Flow Down?
Let’s look at a summary of our findings.
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