This section discusses key provisions of the contract between prime contractor and subcontractor.
(1) Incorporation by reference/now-down/conduit clauses
Most subcontracts contain some version of what is termed a "conduit," "flow-down," or "incorporation by reference" clause. Such a clause incorporates terms of the prime contract between the owner and prime contractor and makes them generally applicable to the subcontract. True conduit clauses usually go further, and purport to bind the prime
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contractor and subcontractor to each other by the same terms which bind the owner and the prime contractor. An example of such a clause is found in the Associated General Contractors (AGC) of Washington Subcontract, Subcontract General Conditions "¶A (2009 ed.), which states:
It is agreed that Subcontractor will assume toward Contractor all obligations and responsibilities which Contractor has assumed under the Main Contract to the extent of the Work herein subcontracted, and Subcontractor shall be entitled to all privileges and protections granted Contractor under the Main Contract.
The principal reasons for using a conduit clause in a subcontract are convenience and certainty. These clauses are intended to perform two functions: (1) they incorporate by reference the applicable technical provisions of the prime contract that the subcontractor must perform, and (2) they impose upon the subcontractor the same rights and obligations the contractor has agreed to with the owner. Both of these rationales are convincing when a lengthy and complex prime contract is involved.
The first purpose rarely causes disputes. The second frequently leads to disputes when the subcontract does not address the particular issue, but the general conditions of the prime contract contain a clause addressing that issue. In such disputes, the courts are called upon to interpret the subcontract clauses that flow down or are incorporated by reference. Sime Construction Co. v. Washington Public Power Supply System, 28 Wn.App. 10, 621 P.2d 1299 (1980), review denied, 95 Wn.2d 1012 (1981), illustrates some of the problems presented by a conduit clause. In Sime, a prime contractor used a broad conduit clause with hopes of incorporating all the prime contract terms into the subcontract. A dispute arose between the subcontractor and prime contractor as to how notice of claims should be given. The subcontractor contended that (1) the prime contract provisions regarding written notice were not incorporated into the subcontract by the conduit clause, because those provisions were not specifically incorporated; and (2) if the prime contract provisions were incorporated, then they conflicted with the express subcontract provisions regarding notice, creating an ambiguity that should be resolved against the prime contractor as the subcontract drafter. The general contractor ultimately prevailed. The notice provisions from the prime contract were deemed incorporated and part of the subcontract. This result was obtained after three years of trial and appellate court litigation.
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In Mountain States Construction Co. v. Tyee Electric, Inc., 43 Wn.App. 542, 546-47, 718 P.2d 823 (1986), a Washington court construed language requiring the subcontractor to assume towards the contractor "all obligations and responsibilities which the CONTRACTOR has assumed towards the OWNER ...." The court noted that, if anything, the incorporation language introduced additional ambiguity into the subcontract because, literally, it required the subcontractor to build the entire project to fulfill the prime contractor's obligations:
It is obvious that neither party intended the language to effectuate such a result. Mountain States, as the general contractor, undertook duties far greater than did Tyee, the electrical subcontractor. What the court is asked to do is to graft Mountain States' self-serving interpretation of paragraph A onto paragraph S to overcome the shortcomings in paragraph S. But there is no language contained in paragraph A that would provide notice to Tyee that it was expected to obtain an insurance policy naming Mountain States as an insured. If Mountain States had such a result in mind, it should have so stated when it drafted paragraph S in its attempt to specifically set out Tyee's contractual obligations pertaining to insurance.
Id. at 546.
The Court of Appeals held that the subcontract's general flow-down clause did not require the subcontractor to furnish comprehensive general liability insurance naming the prime contractor as an additional insured, as required of the prime contractor by the prime contract. Id. at 543. The court reasoned that the narrower insurance provision in the subcontract governed. Id. at 547.
Another problem caused by conduit clauses is the ambiguity over which dispute process is to be used. By its very nature, the conduit clause is intended to impose upon a subcontractor the same liabilities the prime contractor has to the owner. This obligation is especially important in the context of disputes in litigation involving the owner, prime contractor, and subcontractor. Unless a prime contractor can insist that the same court or arbitrator decide both the prime-owner dispute and the subcontractor-prime dispute, the intended effect of the conduit clause may be emasculated by inconsistent results achieved by different forums.
In an extreme case, a literal reading of the conduit clause may actually deprive a subcontractor of a forum, as occurred in 3A Industries, Inc. v. Turner Construction Co., 71 Wn.App. 407, 869 P.2d 65 (1993). 3A Industries was a subcontractor to Turner Construction Company, the general contractor on the State of Washington McNeil Island Corrections
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Center project. During the course of the project, 3A Industries filed a claim against Turner for damages arising from delays and interference caused by Turner's mismanagement of the project. 3A Industries sued Turner's payment bond surety pursuant to 08 RCW, Washington's "Little Miller Act," and sued to foreclose against the retainage pursuant to .28 RCW.
The subcontract contained no arbitration clause. Turner and its surety moved to stay the litigation, asserting that 3A Industries was obligated to arbitrate the dispute pursuant to a provision of the subcontract between Turner and 3A Industries purporting to incorporate the rights and remedies contained in the prime contract between the State of Washington and Turner. 3A Industries argued that it did not agree to arbitrate its statutory claims and that the remedies it owed Turner pursuant to the incorporation clause were limited to those relating to the scope, quality, or manner of 3A Industries' performance of work. The trial court denied Turner's and its surety's motion to stay. However, the Court of Appeals found that the "rights and remedies" incorporated by the flow-down clause included the duty of 3A Industries to arbitrate its statutory claims (bond and retainage claims) with Turner if Turner so demanded.
The Court of Appeals distinguished a long line of federal cases under the Miller Act, 40 U.S.C. §§ 3131 -3134, requiring that waiver of the right to sue against the bond in court must be express and not merely incorporated by reference, and found that the incorporation of an arbitration clause was substantially different from incorporation of a federal disputes clause in the federal cases. The waiver of the right to sue against the bond in court must be express and not merely incorporated by reference. See Fanderlik-Locke Co. v. United States ex rel. M.B. Morgan, 285 F.2d 939 (10th Cir. 1960), cert, denied, 365 U.S. 860 (1961); 3A Indus., 71 Wn.App. at 411-17. Although there can be no dispute that parties can agree to arbitrate, the central question arising from the 3A Industries decision is whether—given the valuable protection afforded by the statutory right of a subcontractor to sue in court pursuant to the bond and retainage acts, Chapters 39.08 and 60.28 RCW—that agreement should be inferred from a general incorporation clause. This decision is particularly questionable because the subcontractor's claims were against Turner and arose from the subcontract, not from the general contract.
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(2) No damages for delay
Legally, three types of construction delays occur on a project: nonexcusable, excusable, and compensable delays. Nonexcusable delay is caused by factors within the subcontractor's reasonable control, and the subcontractor is not entitled to a time extension or additional compensation due to the delay. An excusable delay is caused by factors beyond the subcontractor's reasonable control, but not by the owner's or general contractor's actions or inaction. The subcontractor generally may obtain an extension of time due to excusable delay, but is not entitled to compensation for costs incurred due to the delay. Finally, compensable delay is delay that is attributable to the owner/general contractor, and such a delay entitles a subcontractor to a time extension and reimbursement for the increased costs caused by the delay.
Under Washington law, a contractor has a right to delay damages whether the construction contract contains "delay damages" language or not. In Bignold v. King County, 65 Wn.2d 817, 825, 399 P.2d 611 (1965), the court held that "[i]n every construction contract there is an implied term that the owner or person for whom the work is being done will not hinder or delay the contractor, and for such delays the contractor may recover additional compensation."
To attempt to avoid liability for delay damages, owners and contractors often include a "no damage for delay" clause in contracts. These clauses usually provide that a contractor waives all right to seek compensation for delays. By statute, "no damage for delay" clauses, which waive damages for unreasonable...
