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”

When Surety Bond Incorporates the Subcontract by Reference, Is the Subcontract’s Arbitration Clause Also Incorporated? Federal Court in South Carolina Says Yes; Federal Court in Kansas Says No — In Two Matters Involving the Same Parties

Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 111021 (D.S.C. July 18, 2017); Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 135948 (D. Kan. Aug. 24, 2017)

Two recent decisions from United States District Courts for the District of South Carolina and the District of Kansas, respectively, reached opposite conclusions when presented with the same issue:  Is a surety bound to arbitrate claims against it when the surety’s bond incorporates its principal’s contract by reference, and the principal’s contract contains an agreement to arbitrate disputes.  The District of South Carolina, applying South Carolina law, held that a surety is bound by the arbitration agreement in the incorporated contract, while the District of Kansas held that a surety is not so bound.

These cases both arise from an arbitration demand filed by the general contractor, Carothers Construction, Inc. (“Carothers”) against the surety, Developers Surety and Indemnity Company (“DSI”).  DSI issued performance and payment bonds on behalf of subcontractors Liberty Enterprises Specialty Contractor (“Liberty”) and Seven Hills Construction, LLC (“Seven Hills”) in favor of Carothers for their work on Projects located in South Carolina and Kansas, respectively.  Each subcontractor defaulted on its contractual obligations.  Carothers initiated arbitration against DSI regarding both Projects.  According to Carothers, the bonds incorporated by reference the subcontracts’ mandatory arbitration clauses and thus, DSI was subject to binding arbitration.  In declaratory judgment actions before Federal District Courts in South Carolina and Kansas, DSI asked the courts to declare that the arbitration clause did not bind it to arbitrate Carothers’ claims.  Each court reached the directly opposite conclusion.  This article discusses the decision reached by each court in turn. Continue reading “When Surety Bond Incorporates the Subcontract by Reference, Is the Subcontract’s Arbitration Clause Also Incorporated? Federal Court in South Carolina Says Yes; Federal Court in Kansas Says No — In Two Matters Involving the Same Parties”

Virginia Supreme Court Holds That Subcontractors Did Not Waive Statute of Limitations, With The Result That The General Contractor Was Liable To Owner For Defective Work But With No Recourse Against Subcontractors Who Performed The Work

Hensel Phelps Constr. Co. v. Thompson Masonry Contractor, Inc., et. al., No. 151780, 2016 Va. LEXIS 166 (Va. Nov. 3, 2016)

The dispute arose from the construction of a student health and fitness center at Virginia Tech. The prime contractor, Hensel Phelps, and its subcontractors substantially completed their work in 1998, and Virginia Tech made final payment in 1999. In April 2012, Virginia Tech discovered defects in the work, elected to repair them, and then sought to recover the costs from Hensel Phelps. Despite the significant passage of time between completion of the work and Virginia Tech’s assertion of its claims, Hensel Phelps could not invoke the statute of limitations because under Virginia Code § 8.01-231, statutes of limitation do not apply to claims asserted by Commonwealth agencies such as Virginia Tech.  Ultimately, Hensel Phelps paid $3,000,000 to Virginia Tech to settle the defective work claims.

Hensel Phelps, in turn, sought to recover from the subcontractors that performed the defective work. When the subcontractors refused to pay, Hensel Phelps commenced an action alleging, among other things, breach of contract against the subcontractors and their sureties. All of the defendants argued that Hensel Phelps’ claims were barred by the applicable statute of limitations. The lower courts agreed. On appeal, the Virginia Supreme Court affirmed. Continue reading “Virginia Supreme Court Holds That Subcontractors Did Not Waive Statute of Limitations, With The Result That The General Contractor Was Liable To Owner For Defective Work But With No Recourse Against Subcontractors Who Performed The Work”