Thomas R. Folk and Michael S. Dingman | Reed Smith LLP | November 15, 2016
The Supreme Court of Virginia recently held in a construction case that typical flow-down provisions found in subcontracts are insufficient to pass through to the subcontractor, a general contractor’s waiver of statute-of-limitations rights in the prime contract. The decision begs the question of whether a general contractor’s waiver of other rights in a prime contract by the general contractor will flow through and bind a subcontractor by merely referring to the prime contract and/or incorporating it into the subcontract.
On November 3, 2016, the Supreme Court of Virginia held in the case of Hensel Phelps Construction Co. v. Thompson Masonry Contractor, that typical flow-down provisions found in subcontracts may not be sufficient to pass through to the subcontractor, a waiver of rights in the prime contract. The court also reiterated that indemnity clauses that even arguably indemnify against one’s own negligence will be struck down in their entirety as void and against public policy.
At issue was a claim by Virginia Tech against Hensel Phelps (HP) for the alleged defective construction of a student health and fitness center completed in June 2000. Twelve years later, Virginia Tech asserted a claim against HP in excess of $7 million for defective work. The work at issue had been performed by HP’s subcontractors, including Thompson Masonry. HP settled Virginia Tech’s claim for $3 million and sought that amount from Thompson. Thompson claimed that the five-year statute of limitations for breach of contract in Virginia had long since expired, barring any claim by HP against Thompson.
The court noted that the Commonwealth and its agencies, including Virginia Tech, are not subject to any statute of limitations. HP argued that it passed through to Thompson all of HP’s obligations to Virginia Tech – including the obligation of responding to a claim by Virginia Tech at any time. HP had attempted to pass through its obligations under its contract with Virginia Tech to Thompson by using typical flow-down provisions. The HP/Thompson subcontract specifically incorporated by reference the prime contract between HP and Virginia Tech. It also contained the following language: “The subcontractor is bound to the contactor by the same terms and conditions by which contractor is bound to Virginia Tech.” Despite this language, the court held that, in order for Thompson to be deemed to have waived its right to rely on the statute of limitations, it must have had clear knowledge of this right and must have expressed a clear intent to relinquish that right. No express statement in the subcontract waived Thompson’s right to rely on the statute of limitations. Thus, the court concluded that incorporating the prime contract, and inserting the typical flow-down provisions, were not sufficient to show a waiver. Therefore, the court held that Thompson could invoke the statute of limitations as a bar to HP’s claim, and affirmed the dismissal of that claim.
The decision begs the question of whether the waiver of other rights in a prime contract by the contractor will flow through and bind a subcontractor by merely referring to the prime contract and/or incorporating it into the subcontract. Thus, if a contractor is waiving important rights in its prime contract, it may well want to consider inserting express waiver language of such rights in its subcontract agreements, rather than relying upon the typical flow-down clauses.
HP could have protected itself with an enforceable indemnity provision. However, HP’s indemnity clause required that HP be indemnified against its own negligence, which is contrary to Virginia law as set forth in Uniwest Construction v. Amtech Elevator Services, Inc., 280 Va. 428 (2010). In Uniwest, the court struck down an indemnity provision in its entirety because it could be construed to indemnify the indemnitee against its own negligence contrary to Virginia law. The Hensel case is another reminder that contractors need to be careful in crafting their indemnification clauses so as not to lose these valuable rights. Indeed, in concluding its opinion in the Hensel case, the court noted that Hensel would not be without a remedy if it had drafted a subcontract “to comply with Uniwest.”