SUBCONTRACTS: MANDATORY FLOW DOWN MYTHS AND REALITY

You will not find a list of mandatory subcontract flow down clauses conveniently located in any regulation (with the single exception of FAR 52.244-6 which lists subcontract clauses for commercial item contracts).  We have to create our own lists (depending, of course, on the type of prime contract and other regulatory criteria).  The American Bar Association (ABA) Public Contract Law Section has two now outdated publications addressing mandatory and suggested flow down clauses.

Recently, McKenna Long & Aldridge has conducted a webinar on the subject worthy of our attention.  The McKenna firm lists 9 mandatory flow down clauses for commercial item contracts (FAR 52.244-6) and an additional 4 such clauses for noncommercial item contracts.  It also lists 9 mandatory clauses for construction subcontracts and two additional clauses for service contracts other than construction.  We recommend this course.

It's hard to separate myth from reality.  Most prime contractors insist that all of their prime contract clauses (or most of them) must flow down to all subcontractors. Their superior bargaining position often allows them to get away with this approach.  They will take the position that since they are in the prime contract they must be flowed down (they are "mandatory").  Subcontractors, if they are in a superior bargaining position, can narrow that list down considerably. Myth and reality is dictated by bargaining position.

The general truth is that there are not that many mandatory flow down clauses and whether or not they are mandatory depends on the type of contract and the size of the order (and sometimes some other limitations on the need to flow down).  The biggest myth of all is that the disputes, changes and termination for convenience and default clauses are mandatory flow down clauses.  They are not mandatory.  And if they are flowed down in concept, they must be rewritten for the subcontract context. (See http://spriggslawgroup.blogspot.com/2012/05/model-subcontract-disputes-clause.html )

Does the Christian Doctrine apply to subcontracts? That is, if a mandatory clause is not in the subcontract, will it be read in as a matter of law.  The key phrase is "a matter of law."  Perhaps the most fascinating aspect of subcontracts under government prime contracts is what law applies.  Since subcontracts are commercial contracts (the government is not a party), state law would apply.

Most state laws do not have the equivalent Christian Doctrine.  Or do they?  The Uniform Commercial Code is based on the premise that many clauses will be read into commercial contracts.  If the Choice of Law clause in the subcontract refers to the federal common law of contracts, and if the judge decides to apply the federal law concepts (perhaps because of the many FAR clauses flowed down), he or she may decide to apply the Christian Doctrine.

The point here is that the flow down exercise is more art than science and is subject to negotiation.  The lesson for subcontractors is that the list of mandatory flow down clauses is not that long and if your bargaining position permits, you should test what the prime is saying about the clause being mandatory.

bill@spriggslawgroup.com          http://www.spriggslawgroup.com/