Flow Down / Consequential Damages Case Study – Costa v. Brait

A recent case decided by the Supreme Judicial Court of Massachusetts illustrates how a flow down provision can work in the context of a claim for consequential damages.  The case of Costa v. Brait Builders Corporation, 463 Mass. 65, 972 N.E.2d 449, (Mass., 2012), involves several areas of dispute between a prime (general) contractor and one of his subcontractors on a municipal construction project.  One of the lessons learned is a keen reminder of the power of simple flow down language and good contract review practices.

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Prime / Subcontractor Relationships – the “flow down” factor.

The “flow down” provision is common tool used by a prime contractor to simplify its preparation of a subcontract agreement.  Rather than repeat and revise the provisions of its prime contract in the actual subcontract document, the prime uses a flow down clause to do protect itself from a drafting gap between the two documents.  A simple flow down provision in a subcontract agreement may read as follows:

“The Subcontractor agrees to be bound to the Contractor by the terms of the prime contract and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the Owner, except to the extent that the provisions contained therein are by the terms or by law applicable only to the Contractor.”

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Consequential Damages – the other damages.

“Take responsibility for the risks that you control.”  This is a common rationale used to justify the allocation of risk in contract negotiations.  Stated another way – “If a loss is the result of your actions you should be willing to step up and take responsibility for the resulting damage.”   This position sounds reasonable.  However, accepting this view will probably leave you vulnerable to claims that far exceed your commercial expectations.

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Warranty and Standard of Care

Do you repair, overhaul or manufacture goods?  Do you provide professional services?  Does your company offer mixed goods and services?  Regardless of the nature of your business keeping your obligations and remedies for non-conformance consistent with industry practice takes some diligence and sharp thinking.

Engineers and other professionals typically provide services in accordance with a generally accepted professional standard of care.  That standard of care does not guarantee perfection.  If it did medical professionals would be on the hot seat every time a patient, despite well grounded advice and care, took a turn for the worse.  The same logic applies to other professionals such as design engineers or financial consultants.  Presented below is an example of a professional standard of care:

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