Flow-Down Indemnity Clauses in Construction Contracts
by William “Bill” Gardner
Like all contracts, construction contracts involve the proper allocation of risk. Owners typically require indemnity from general contractors for certain events. In turn, general contractors often employ “flow-down” clauses to transfer those indemnity obligations to subcontractors performing the work.
A “flow-down,” “flow-through” or “pass-through” clause is a contractual provision that incorporates by reference the terms of the prime contract into the subcontract. A typical flow-down clause reads: “Subcontractor assumes all obligations and responsibilities that the Contractor assumes toward the Owner for Subcontractor’s part of the Work.” Limitless variations on the wording of a flow-down exist. Some flow-down clauses list the prime contract as an exhibit or addendum to the agreement between the prime contractor and subcontractor.
In theory, a general flow-down clause causes all obligations and duties owed of the general contractor to “flow-down” to the subcontractor. However, in complex construction litigation, the issue of whether a flow-down clause can effectively bind a subcontractor to an indemnity provision of the prime contract frequently arises.
Texas courts generally apply flow-down clauses to obligations directly related to the scope, quality and character of the subcontractor’s work. However, when faced with the argument that a flow-down clause incorporates an upper-tier indemnity provision into a lower-tier contract, courts most often strictly construe the flow-down clause, making it ineffectual to support indemnity between the lower-tier parties.
Mere reference to another document does not incorporate the entire document when the language used in the clause does not indicate the parties’ intent to do so. No particular language is required to incorporate a document by reference. All that is necessary is that the parties’ intent is plainly expressed. Therefore, to effectively flow indemnity obligations to a subcontractor, the subcontract should specifically reference or incorporate the indemnity obligation to demonstrate the parties’ intent to be bound.
For example, in LeBlanc v. Gulf Bitulithic Co., a subcontractor signed a subcontract containing a clause binding it “to the terms of the general conditions, drawings, specifications, addenda and alternates and to assume toward the Contractor all the obligations and responsibilities that the Contractor assumed…toward the Owner, insofar as they are applicable to the Sub-Contractor.” Because the terms of the prime contract were incorporated only as they were applicable to the sub-contractor, the Twelfth District Court of Appeals found that the parties did not intend to incorporate all provisions of the prime contract. Because the prime contract’s administrative indemnity clause had no relation to the subcontractor’s work, the Court found that the indemnity obligation was not effectively incorporated into the subcontract and no indemnity obligations were owed to the general contractor.
Even if indemnity obligations are intended to flow-down to a subcontractor, enforceable indemnity provisions must comply with Texas’ new anti-indemnity act. This legislation is codified as Chapter 151 of the Texas Insurance Code and is referred to colloquially as the “Texas Anti-Indemnity Act.” The Act generally prohibits upstream parties from receiving indemnification from downstream parties (such as a subcontractor) when the upstream party, (such as a general contractor) is negligent.
The Act applies to original construction contracts entered into on or after January 1, 2012. The Act’s application to a particular construction contract is determined by when the parties entered into the “original contract.” If the prime agreement is entered into before January 1, 2012, then the Act is inapplicable to subcontracts entered into later in 2012.
However, the Act does not apply to all construction contracts. Section 151.105 lists twelve exclusions that render the Act inapplicable. While a complete discussion of the Act’s exclusions is beyond the scope of this article, two stand out. First, the Act does not apply to construction contracts for a single-family house, townhouse, duplex, or land development related thereto. Second, the Act does not apply to municipal public works projects.
Finally, section 151.103 contains a separate statutory exclusion for employee injury and death claims. Section 151.103’s exclusion states that the Act does not apply to agreements requiring the indemnification of a party for a claim of bodily injury or death of an employee of the indemnitor or its subcontractor of any tier. Therefore the indemnity regime for wrongful death and injury claims for an indemnitor’s employees remains unchanged by the Act.
Accordingly, contractors must ensure that the intent to bind subcontractors to flow-down indemnity provisions is evident in their subcontracts and that indemnity provisions in construction contracts comply with the Texas Anti-Indemnity Act.
William “Bill” Gardner is an associate at Macdonald Devin, P.C. and can be reached at firstname.lastname@example.org.