How to find them, what they cost, and the equitable language to negotiate in their place.
What follows is a guide to negotiating better indemnity language in your agreements, and about where to look for hidden indemnity exposure. Indemnity is an area where many states have effective limitations on the degree to which indemnity can be invoked, and most states have some form of legal protection against overly aggressive indemnification language.
That could be taken to mean that subcontractors and suppliers don’t really need to worry about negotiating better indemnification terms, because the courts will protect them. We think that is a risky approach, for two reasons.
For those reasons, FairBuild’s entire philosophy on contracts is to always seek what’s equitable. That’s what’s fair, and that standard doesn’t rely on the courts to intervene to protect your interests. What follows is guidance that will protect you from predatory indemnification because it’s fair and balanced for both parties.
This is one of six papers, each covering a different place indemnity risk can be hidden in a typical subcontract. Most subs and suppliers read the section titled “Indemnification” and if they get improvements to that, they assume the risk is covered. But overbroad indemnity risk can show up in at least five other places, and this paper covers one of the most overlooked: the flow-down clause.
Flow-down works through a legal mechanism called incorporation by reference. A single sentence in your subcontract pulls the entire prime contract between the GC and the Owner into your agreement and binds you to its terms as they apply to your work and possibly more broadly. That includes indemnity obligations the GC made to the Owner in a document you’ve probably never seen.
The other papers in this series cover the Indemnification section itself, the Insurance section, the Warranty section, the Default and Termination section, and the Patent and Intellectual Property section.
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Often in the early pages of the Subcontract, titled “Incorporation of Prime Contract,” “Flow-Down,” or “Conformance with Prime Contract.” Sometimes it’s a single sentence buried inside “General Provisions” or “Miscellaneous” near the end of the agreement, which makes it easy to miss.
“Subcontractor agrees to be bound to Contractor by the terms of the Prime Contract between Contractor and Owner, and to assume toward Contractor all obligations and responsibilities that Contractor assumes toward Owner thereunder, insofar as applicable to Subcontractor’s Work.”
One sentence binds you to every obligation the GC owes the Owner under the prime contract. That’s what incorporation by reference does: it makes a separate document part of your agreement without reprinting it where you can see it. That includes the GC’s indemnity obligations to the Owner. And the prime contract is a document you’ve probably never seen, drafted by the Owner’s lawyers.
When you accept a flow-down clause without reading the prime contract, you agree to indemnity obligations whose scope you don’t know, whose triggers you can’t predict, and whose dollar exposure may be well beyond what you contemplate as part of your obligations related to the project. That’s worth thinking about ahead of time.
Flow-down losses often run worse than standalone indemnity losses. The prime contract was negotiated between sophisticated parties with dedicated legal resources. The indemnity language may be broader than what a GC would put into their own subcontract template. The Owner’s lawyer has likely written language that contemplates exactly the kind of claim that arises during construction and how it can be enforced under the laws of state in which the project is being constructed. That language now runs to you through the flow-down.
“Subcontractor agrees to be bound to Contractor by the terms of the Prime Contract between Contractor and Owner, and to assume toward Contractor those obligations and responsibilities that Contractor assumes toward Owner thereunder, but only (a) to the extent applicable to Subcontractor’s Work as defined in this Subcontract, and (b) to the extent Subcontractor has been provided with a complete copy of the Prime Contract and any incorporated documents at least five business days prior to executing this Subcontract. In the event of any conflict between the Prime Contract and this Subcontract, the more specific provision shall govern as to Subcontractor’s Work.”
Three things are improved by this language. First, the flow-down is limited to what’s actually applicable to your scope, which keeps obligations that have nothing to do with your work out of the deal. Second, you require delivery of the prime contract before signing, which gives you the right to actually read what you’re agreeing to. Third, the conflict rule keeps the GC from using vague prime contract language to override specific subcontract language you negotiated.
Quite often, the hard part about this is getting the prime contract in time to review it while the GC is pressuring you to sign and return your agreement with them. You can get ahead of this by asking for the prime contract when you get notified of being awarded the job, since that’s often a few days ahead of getting the agreement you’re asked to sign.
The right to review the prime contract can also be a contested point. GCs will sometimes claim the prime contract is confidential or that they can’t share it. In normal commercial practice, sharing prime contract terms with subs is routine, and any legitimate confidentiality concern is addressable with standard NDA language. If a GC genuinely refuses to share the prime contract, treat that as a signal about what they don’t want you to see.
NOTE: FairBuild doesn’t provide legal advice. This paper is designed to help you review and understand agreements from general contractors. For specific legal questions about your contracts, talk to a construction attorney in your jurisdiction.
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