When a Flow Down Provision Doesn’t Flow Up: Oregon Appellate Court Holds That a Flow Down Provision From a Prime Contract With an Arbitration Clause Does Not Grant Subcontractors a Right to Compel Arbitration With Owner

Eugene Water & Elec. Bd. v. MWH Americas, Inc., 2018 Ore. App. LEXIS 879 (July 25, 2018)

On July 25, 2018, an Oregon appellate court concluded that a pair of subcontractors could not compel an owner to arbitrate its claims against them by virtue of a “flow-down” provision in a prime construction contract which also contained an arbitration clause.  The case is a reminder that principles of contract interpretation govern the enforcement of arbitration agreements and that courts will not compel arbitration where both parties have not expressly consented to arbitrate their disputes.

As part of an improvement project for the Leaburg Dam near Eugene, Oregon, the Eugene Water and Electric Board (“EWEB”) entered into a prime contract with Advanced American Construction (“AAC”) as the general contractor for the project.  AAC subsequently entered into subcontracts with MacTaggart, Scott & Company Limited (“MacTaggart”) and Olsson Industrial Electric, Inc. (“Olsson”).  When the improvements to the Leaburg Dam failed, EWEB filed a complaint in Oregon state court against AAC and, shortly thereafter, asserted claims against the two subcontractors in an amended complaint.

During the proceedings, AAC sought to compel arbitration of EWEB’s claims against AAC because the prime contract contained an arbitration clause.  As litigation proceeded, both MacTaggart and Olsson also sought to compel arbitration of EWEB’s claims against them.  Problematically, however, because MacTaggart and Olson, as subcontractors, were only in direct privity with AAC, and not EWEB, no express agreement to arbitrate existed between EWEB and the two subcontractors.  Continue reading “When a Flow Down Provision Doesn’t Flow Up: Oregon Appellate Court Holds That a Flow Down Provision From a Prime Contract With an Arbitration Clause Does Not Grant Subcontractors a Right to Compel Arbitration With Owner”

Federal Court in Pennsylvania Holds Pay-If-Paid Clause Unenforceable Where Prime Contractor’s Inadvertent Delays Contribute to the Owner’s Withholding of Payment

Connelly Constr. Corp. v. Travelers Cas. & Surety Co. of Am., 2018 U.S. Dist. LEXIS 123009 (E.D. Pa. July 24, 2018).

This post was published in the October 4, 2018 issue of eNews published by National Association of Credit Management (NACM).

The Commonwealth of Pennsylvania Department of General Services undertook a project for the construction of a new maximum security prison facility in Montgomery County, Pennsylvania.  Walsh Heery Joint Venture (“WHJV”) was the prime contractor and it retained Connelly Construction Corporation as its masonry subcontractor.

The prime contract permitted the Commonwealth to withhold retainage from WHJV until completion of the project.  Similarly, the subcontract permitted WHJV to withhold retainage from Connelly in proportion to the retainage held by the Commonwealth.  The subcontract also included a pay-if-paid clause under which Connelly agreed that it was not entitled to payment unless, as an express condition precedent, WHJV was paid by the Commonwealth.

Completion of the project was delayed for more than two years.  As a result, the Commonwealth continued to withhold retainage from WHJV, and WHJV thus withheld more than $200,000 in retainage from Connelly, long after Connelly completed its scope of work. Continue reading “Federal Court in Pennsylvania Holds Pay-If-Paid Clause Unenforceable Where Prime Contractor’s Inadvertent Delays Contribute to the Owner’s Withholding of Payment”

Federal Arbitration Act Preempts Florida State Statute Which Prohibits Out-of-State Resolution of Construction Claims Involving Florida Real Property

Sachse Constr. & Dev. Corp. v. Affirmed Drywall, Corp., 2018 Fla App. Lexis 9998 (July 18, 2018)

Sachse Construction, a Michigan-based general contractor, entered into a subcontract (the “Subcontract”) with Affirmed Drywall Corp. (“Affirmed”), a Florida drywall subcontractor, to perform work on a property in Florida.  The Subcontract provided that all disputes be resolved by mediation and/or arbitration in Southfield, Michigan, or within 20 miles thereof, pursuant to the Construction Industry Rules of the American Arbitration Association and in accordance with Michigan laws.  However, under Section 47.025 of the Florida Statutes, a venue provision in a contract involving a Florida-based contractor or subcontractor, etc., for the improvement of real property located in Florida is considered void as a matter of public policy if it requires that legal action be brought outside of Florida.

Affirmed filed an action in Florida state court alleging claims for breach of contract against Sachse and to recover against a bond naming Sachse and the surety on the bond.  Sachse moved to dismiss or to compel arbitration in Michigan in accordance with the dispute resolution provision in the Subcontract.  Sachse argued that the Subcontract involved interstate commerce, so the Federal Arbitration Act (the “FAA”) governed the Subcontract and preempted inconsistent state law.  Sachse claimed that Section 47.025 did not void the provision in the Subcontract mandating that disputes be resolved by arbitration in Michigan because of the FAA’s liberal policy favoring arbitration agreements.  The trial court disagreed, denied Sachse’s motion and ordered Sachse to answer the complaint.  Sachse appealed. Continue reading “Federal Arbitration Act Preempts Florida State Statute Which Prohibits Out-of-State Resolution of Construction Claims Involving Florida Real Property”