February 29, 2008

"Flowdown" or "conduit" clause allows general contractor to enforce forum selection provision found in owner-GC contract


This appeal involves the applicability and enforceability of a forum selection clause in a construction contract. The contract was for the design and construction of a Kentucky correctional facility. The contract between the Commonwealth of Kentucky and the general contractor, a Tennessee corporation, provided that all actions on the contract must be filed in Franklin County Circuit Court in Frankfort, Kentucky. The general contractor entered into a subcontract with another Tennessee corporation for the performance of certain work on the Kentucky correctional facility. The subcontract incorporated all terms of the original contract by reference and contained a "flow-down" provision. The subcontractor later sued the general contractor in Shelby County, Tennessee. When the general contractor moved to dismiss for lack of venue, the subcontractor contended that the forum selection clause did not apply to its claims. The subcontractor also contended that the forum selection clause was unenforceable under the facts of this case.

The trial court found in favor of the subcontractor. We granted the general contractor's Rule 10 application for extraordinary appeal. We reverse and remand, finding that the forum selection clause was applicable and enforceable, and the lawsuit should have been filed in Kentucky.

Cases available at the Tennessee Bar Association website: http://www.tba2.org/tba_files/TCA/2008/esi_022908.pdf

"The General Contractor also argues that the forum selection clause requires the Subcontractor to file its lawsuit in Kentucky because of the following provision of the Subcontract: 'Article VII - (a) Contractor shall have the same rights and privileges as against the Subcontractor herein as the Owner in the Design/Build Contract has against Contractor. Subcontractor shall have the same rights, remedies and privileges against the Contractor herein as the Contractor in the Design/Build Contract has against Owner.'" Id.

"The aforementioned provision is an example of a “flow-down” or “conduit” clause. Flow-down clauses are commonly used in subcontracts and are closely related to the concept of incorporation by reference. See T. Bart Gary, Incorporation by Reference and Flow-Down Clauses, 10 Constr. Lawyer 1, 45 (Aug. 1990). “If the clause functions as intended, the same rights and obligations of the subcontractor should flow from the subcontract up through the general contractor to the owner, and conversely down the same contractual chain.” Id. The use of flowdown clauses “represents efforts to ensure consistency of obligations throughout the various tiers of the contracting process.” Id. at 44." Id.

"We agree with the General Contractor’s contention, as the Subcontract clearly provided that “ALL TERMS AND CONDITIONS OF THE CONTRACT BETWEEN THE COMMONWEALTH OF KENTUCKY AND RAY BELL CONSTRUCTION COMPANY, INC. ARE FULLY INCORPORATED HEREIN BY REFERENCE.” Because the terms of the Contract were expressly incorporated into the Subcontract, the language of the Contract became a part of the Subcontract, and both writings must be construed together. See Staubach Retail Services-Southeast, LLC v. H.G. Hill Realty Co., 160 S.W.3d 521, 525 (Tenn. 2005); T.R. Mills Contractors, Inc. v. WRH Enterprises, LLC, 93 S.W.3d 861, 870 (Tenn. Ct. App. 2002). ... Pursuant to the flowdown clause, the General Contractor has the same right to enforce the forum selection clause against the Subcontractor. Similarly, the General Contractor’s corresponding remedy against the Owner was to file an action in Kentucky, and pursuant to the flow-down provision, the Subcontractor has that same remedy." Id.