A Contractors Guide to the FARs and DFARS. What to accept and what to flow down.

In Wonder Works Construction Corp. After Wonder Works sued to dismiss the arbitration proceeding, a New York trial court had ruled that the general "flow-down" clause in Wonder Works' subcontract bound Wonder Works to the arbitration process set forth in Dolner's prime contract, and sent the parties to arbitration.

Wonder Works appealed, and the New York appellate division overturned the trial court, because under New York law an arbitration agreement must be clear and unequivocal: Therefore, where the prime contract and subcontract did not clearly express the intent that the subcontractor be bound to arbitration, the general incorporation by reference was insufficient to do so. The case arose when Dolner received a notice of claim and demand for arbitration from the project's owner, seeking damages for allegedly deficient work.

Dolner in turn demanded that its subcontractor Wonder Works be joined to the arbitration as a party.

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Dolner based its attempt to join Wonder Works to the arbitration on subcontract language that said "with respect to the Work, [subcontractor] agrees to be bound by every term and provision of the Contract documents," and which required Wonder Works "to assume toward [Dolner] all of the duties that [Dolner] has assumed towards [owner]. Dolner's prime contract included an arbitration clause, but it also had a joinder clause which limited parties who could be joined to those joined by the owner at its sole option. Then, in somewhat contradictory language,, the prime contract also required Dolner's subcontracts to include language which bound the subcontractors to the results of any arbitration between Dolner and the owner, and gave Dolner the right to allow any subcontractor to "participate" in such an arbitration.

Everyone will buy it; there is no one else to buy it from, and there will be no choice but to buy it. It will be just a matter of when one buys. There is no doubt that E-Verify is a best practice.

Contractor Beware: That "Flow-Down Clause" May Not Flow as Far as You Think

However, it is not a replacement for background checks and other post-employment screenings and safeguards monitoring the system. In fact, the E-Verify system is still very much prone to identity theft, and must internally be monitored for misuse and overall compliance. In fact, employers may face civil and criminal liability if, based upon the totality of the circumstances, it can be established that they knowingly hired or continued to employ unauthorized workers.

While not an all-inclusive list, federal contractors would be well served by considering the following proactive steps:. Federal contractors will continue to be responsible for E-Verify compliance for the foreseeable future. The consequences of a failure to use the E-Verify program leading to the loss of current and future federal contracts should not be downplayed. Federal contractor compliance with the E-Verify MOU is a performance requirement under the terms of the federal contact.

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As such, termination of the contract for failure to perform is one potential consequence of noncompliance with the MOU. Suspension or debarment, of course, also may be a potential consequence where the violation suggests the contractor is not responsible. DHS already ranks high on the agency list for debarment numbers, leading with a significant number of non-procurement FAR debarments.

Federal contractors need to take this enforcement activity seriously as it likely will increase in the face of mandatory E-Verify.

In short, now is the time for companies proactively to review internal polices, perform the necessary risk assessments, conduct the Form I-9 exposure as well as anti-discrimination audits, and then take ownership of any changes or improvements that need to be made. By scrolling this page, clicking a link or continuing to browse our website, you consent to our use of cookies as described in our Cookie and Advertising Policy.

If you do not wish to accept cookies from our website, or would like to stop cookies being stored on your device in the future, you can find out more and adjust your preferences here. Compliance is Non-Negotiable To date, the Government has been fairly lackadaisical in its review of compliance in the E-Verify arena.

Provide bi-annual training to anyone who is a user in the system. As E-Verify ramps up its site visits and desk reviews, compliance is more important than ever. Ensure your I-9 compliance is also in shape, as the I-9 data feeds into the E-Verify system.

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Verify your company has a viable policy established to flow down the E-Verify requirement to your sub-contractors, vendors. Regardless of the size of your company, verify this process and take the extra step of seeing how it works in practice. Create a sub-contractor verification system. Carefully review the E-Verify exemptions.

Contractor Beware: That "Flow-Down Clause" May Not Flow as Far as You Think

Limited exemptions for COTS contracts, contracts where work is performed outside of the United States, and for employees with specific active security clearances exist but are often harder to segregate and rely on then general usage of E-Verify. Wonder Works appealed, and the New York appellate division overturned the trial court, because under New York law an arbitration agreement must be clear and unequivocal: Therefore, where the prime contract and subcontract did not clearly express the intent that the subcontractor be bound to arbitration, the general incorporation by reference was insufficient to do so.

The case arose when Dolner received a notice of claim and demand for arbitration from the project's owner, seeking damages for allegedly deficient work. Dolner in turn demanded that its subcontractor Wonder Works be joined to the arbitration as a party. Dolner based its attempt to join Wonder Works to the arbitration on subcontract language that said "with respect to the Work, [subcontractor] agrees to be bound by every term and provision of the Contract documents," and which required Wonder Works "to assume toward [Dolner] all of the duties that [Dolner] has assumed towards [owner].

Duane Morris LLP - Contractor Beware: That "Flow-Down Clause" May Not Flow as Far as You Think

Dolner's prime contract included an arbitration clause, but it also had a joinder clause which limited parties who could be joined to those joined by the owner at its sole option. Then, in somewhat contradictory language,, the prime contract also required Dolner's subcontracts to include language which bound the subcontractors to the results of any arbitration between Dolner and the owner, and gave Dolner the right to allow any subcontractor to "participate" in such an arbitration. While the case involved whether to give binding effect to the flow-down provision in the first instance, its outcome actually rests on the New York law governing arbitration clauses, which states that such clauses must be unambiguous in expressing a clear intent of both parties to arbitrate disputes.

Those terms of Dolner's prime contract that addressed arbitration were not clear insofar as they addressed subcontractors.