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.
Background: In June of 2004, Costa entered into a subcontract with Brait Builders Corporation to perform site work on a municipal construction project. The work consisted of earthwork such as digging trenches for underground utilities and diverting surface water. Work began on the project in mid-2004 but by early January of 2005 the relationship between Costa and Brait was unraveling. Brait sent a threatening letter alleging that Costa had left the work site under manned and unmanned. Costa replied alleging delay and added expenses caused by Brait. This was followed with more reciprocal accusations related to water accumulation and water removal from the work site. Shortly thereafter Costa wrote advising Brait that site work would be discontinued due to extreme weather conditions. On the same day Brait fired back announcing that he was terminating the subcontract for unacceptable performance and barring Costa from the work site.
The Case: In May of 2005 Costa filed suit against Brait alleging breach of the subcontract by obstructing performance, failing to pay amounts owed, and barring him from the work site. Some five years later (August 2010) the case went to trial. The jury returned a verdict in favor of Costa awarding general damages ($199,228), and consequential and incidental damages ($133,648), as well as statutory damages, attorney’s fees and interest all totaling approximately $1,124,000. Both parties appealed the verdict for various reasons.
Consequential Damages: Prior to trial, Brait made a motion for a directed verdict arguing that consequential damages were precluded by a provision of its general contract with the municipality that was incorporated into the subcontract with Costa. The motion was denied. At the close of the trial, Brait moved for a judgment notwithstanding the verdict on a similar basis. That motion was also denied.
The first paragraph of the subcontract contained what was called an “incorporation by reference” clause. This clause stated that the terms of the general contract were expressly incorporated into the subcontract. In addition the subcontract also contained the following flow down provision:
“The Subcontractor agrees to be bound to the Contractor by the terms of the [general contract] and to assume to the Contractor all the obligations and responsibilities that the Contractor by those documents assumes to the awarding authority, except to the extent that provisions contained therein are by the terms or by law applicable only to the Contractor.”
A key provision of the general contract (between Brait and the municipality) stated the following:
“The Contractor waives Claims against the Owner for consequential damages arising out of or relating to this Contract. This includes: (1) damages incurred by the Contractor for … losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.”
The Appeal: On appeal Brait argued that the combination of these provisions working together act to preclude Costa’s claim for consequential damages. The Supreme Judicial Court of Massachusetts agreed, remanded the case and ordered that the judgment be amended to strike the jury’s award of consequential damages. The court stated that “so-called ‘flow down’ clauses, pursuant to which the contractor’s obligations ‘flow down’ to the subcontractor, are an acceptable and common method for general contractors to limit risk.” In this instance the subcontract “unambiguously incorporates” the general contract, and the general contract “unambiguously precludes recovery of consequential damages”.