R. Zachary Torres-Fowler | Pepper Hamilton LLP | September 27, 2018
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.
Nevertheless, the subcontractors argued they were entitled to compel arbitration by virtue of a “flow-down” provision in the prime contract between EWEB and AAC. The prime contract’s “flow down” provision stated:
Contractor shall require each Subcontractor, to the extent of the Work to be performed by Subcontractor, to be bound by the terms and conditions of these General Conditions and all other Contract Documents, and to assume toward the Contractor all the obligations and responsibilities which the Contractor assumes toward the Owner thereunder, unless (1) the same are clearly inapplicable to the subcontract at issue because legal requirements or industry practices, or (2) specific exceptions are requested by Contractor and approved in writing by Owner. Where appropriate, Contractor shall require each Subcontractor to enter into similar agreements with Sub-subcontractors at any level.
According to MacTaggart and Olsson, the “flow-down” provision incorporated the terms of the prime contract, including the arbitration provision, into AAC’s subcontracts and, therefore, bound EWEB to arbitration with the two subcontractors.
The trial court rejected the subcontractors’ arguments. On appeal, the Oregon appellate court agreed and held that, as a matter of contract interpretation, the “flow-down” provision did not entitle the subcontractors to compel arbitration.
According to the court of appeals, although “some ‘flow-down’ or ‘conduit’ provisions in construction contracts have the effect that [MacTaggart and Olsson] assert of binding an owner to arbitrate with subcontractors down the chain of contracts,” the text of the “flow-down” provision in this instance did not give the subcontractors the right to request arbitration. As the court explained, the prime contract’s “flow-down” provision “states that the contractor must require subcontractors, as to the work to be performed by the subcontractors, to be bound by the terms and conditions of all contract documents, and to assume toward the contractor all the obligations and responsibilities which the contractor assumes toward the owner.” As a result, the “flow-down” provision imposed requirements on AAC—as the contractor—with respect to its subcontracts, but did not create an agreement between EWEB and the subcontractors or, otherwise, impose reciprocal obligations and responsibilities directly toward EWEB. In other words, the rights and obligations of the prime contract flowed-down, not up.
Moreover, as the court pointed out, the “flow-down” provision only applied “to the extent of the Work to be performed by Subcontractor.” According to the court, this language meant that the “flow-down” provision only addressed the subcontractors’ performance obligations and responsibilities to AAC, and did not reflect an intention to afford the subcontractors additional rights and remedies directly toward EWEB.
As a result, the court of appeals affirmed the lower court’s ruling and dismissed the subcontractor’s appeal.