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“Standard” Construction Documents – Some Traps for the Unwary

on Monday, 21 July 2014 in Health Law Advisory: Zachary J. Buxton, Editor

Beginning a major construction project can be an exciting time for an organization. During this time, there are a multitude of decisions that need to be made – programming, budgeting, financing and architect and contractor selection, to name a few. One of the most important decisions an owner can make is to have a careful legal review of the design and construction documents.
Frequently, design and construction documents are prepared by the project architect utilizing form contract documents published by the American Institute of Architects (AIA). These documents typically include an agreement between the owner and the architect, and an agreement between the owner and the contractor or construction manager. In preparing these agreements, the architect completes the blank spaces in the documents to adapt them to the particular project involved and occasionally will make revisions to the language of the standard forms.

Form documents can be time saving and can assure that the owner will end up with complete agreements that are generally consistent with design and construction practices. Like any form document, however, there are legal issues and shortcomings in these documents that should be considered and addressed by the owner with its legal counsel. The AIA form documents are also long and detailed, and have a considerable number of provisions that need to be modified to protect the owner.

Furthermore, in completing the form documents, the architect will insert project information and will make revisions to adapt them to the particular project. Because this added language becomes a part of an agreement that will be binding on the owner, these modifications also need careful legal review.

The following discussion highlights some of the more important issues for the owner to consider. This is, of course, not a complete listing of all such issues, which is beyond the scope of this article.

  • Dispute Resolution. The AIA design and construction documents require non-binding mediation of disputes. If the dispute is not settled by mediation, the document form provides that the owner and the architect or contractor will either arbitrate or litigate the dispute until resolved. The decision whether to litigate or arbitrate disputes, however, is made at the time the agreement is signed, not when the dispute arises, and is made by checking the appropriate box in the form document when it is prepared. There are pros and cons for each dispute resolution method, and legal counsel should be consulted regarding the best method for the particular project and situation involved. However, it is important that the same dispute resolution procedure (arbitration or litigation) is selected for both the architect agreement and the contractor agreement. Otherwise, the owner may not be able to have both the architect and the contractor appear before the same tribunal in a situation where it is uncertain which one is at fault, which could lead to inconsistent results.
  • Consequential Damages. Both the AIA architect and contractor agreement forms provide that both parties waive any claim against the other party for consequential damages. Thus, in the event of damage to the project by the contractor, for example, the contractor would have to repair the damage (direct damages), but would not have to pay any damages for the owner’s lost income or additional borrowing costs (consequential damages) if the project is delayed due to the damage caused by the contractor. Architects and contractors usually resist any attempt to completely eliminate this waiver. An alternative to a complete waiver is to allow consequential damages, but to cap them at an agreed upon amount, say $1,000,000. There is no exact formula to determine the appropriate amount of any cap, so there is a risk that it could be set substantially lower than the consequential damages the owner could suffer if a consequential damage claim arose. If the owner agrees to allow the waiver to remain in the agreement, or agrees to a cap of the amount, the owner would be well advised to discuss possible insurance coverages to mitigate this risk, such as insurance to cover lost revenues. The owner should assure that the insurance coverage applies to claims arising during construction activities. Alternatively, the owner could consider a provision for liquidated damages to compensate the owner where contractor fault causes a project delay. Interestingly, despite the waiver, the AIA architect agreement allows for limited recovery of certain consequential damages by the architect from the owner in the event of a termination of the agreement not caused by the fault of the architect.
  • Joinder of Parties in an Arbitration. The AIA documents contain a number of restrictions regarding the ability of the owner to join the contractor and the architect in a single arbitration proceeding. These provisions may create questions during an arbitration as to whether one of the parties is properly included in an arbitration. The American Arbitration Association, whose Construction Industry Arbitration Rules are required to be used for arbitrations under the AIA documents, already have rules governing joinder that should be satisfactory without the imposition of additional requirements in the AIA documents.
  • Indemnity Provisions. While the AIA construction contract documents have indemnity clauses protecting the owner, the language of those clauses limits the indemnity to personal injury and property damage claims. The AIA architect agreements do not have any indemnity clauses in favor of the owner. These indemnity clauses need a careful legal review to assure that the limited indemnity in the construction contract documents adequately protects the owner. The owner should also consider whether to include an indemnity clause in the architect agreement.
  • Construction Liens. If the project is owned by a non-governmental entity, there is the possibility that a construction lien can be filed by a contractor or subcontractor employee for unpaid wages or by a subcontractor or by a supplier to the contractor or a subcontractor for amounts not paid when due. Even if lien waivers are required as a condition to payment, it can be difficult to assure that lien waivers from all subcontractors and suppliers have been obtained. The filing of a construction lien on a project can adversely affect project financing and exposes the project owner to the risk of foreclosure. The AIA construction documents do not effectively deal with construction liens. Provisions requiring that the contractor obtain the release of the construction lien of record by posting a bond and indemnifying the owner against any loss by reason of the filing of a lien should be included in the construction documents.
  • Financing Requirements. The lender providing financing for the project will likely have its own requirements pertaining to contractor pay application approvals, pay application documentation, the manner of disbursement of the loan proceeds, casualty insurance requirements, control of casualty insurance proceeds and the like. The AIA construction contract documents do not address many lender-related matters. Accommodation of the lender’s requirements may necessitate modification of the construction documents.

The foregoing is only a sampling of the issues that need to be addressed in reviewing and modifying the AIA design and construction documents for a construction project. Even if the design and construction documents are prepared on document forms from another document publisher, a thorough legal review should be conducted by legal counsel experienced in construction matters before any design or construction contracts are signed.

P. Scott Dye

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