The American Institute of Architects has been publishing standard form agreements for the construction industry for nearly a century. These forms, in particular the A101, A111 (Owner/Contractor Agreements) A201 (General Conditions) and B141 (Owner/Architect Agreement), have enjoyed wide use by Owners, Architects and Contractors alike. The AIA forms have been used to define construction terms, set legal precedent and are generally accepted as establishing an industry-wide norm for contracting.
Over the years, the periodic revisions to the AIA Contract Documents have reflected a trend toward limiting the responsibility and liability of the Architect for design and construction administration. For example, the Architect's duty to "supervise" the work devolved to "observe" in 1976 and to "evaluate" in 1997. The latest revisions further shift and diffuse responsibility for design. Additionally, the new forms include controversial waivers of rights, reallocate many of the project risks, and produce ambiguities and inconsistencies within and among the various Contract Documents. Although the 1997 revisions have been promoted as reflecting industry consensus, the Owner's input is noticeably absent from the new Contract Documents.
The new AIA Contract Documents: ready or not for the next millennium?
The nature of the 1997 revisions raises the question of whether the AIA Contract Documents will continue to be viewed as reflecting an industry norm or whether deletion of the new concepts and changes will become part of a standard contract supplement. Many Contractors and Architects routinely use the 1987 version of the A201 without any modification. While sophisticated Owners regularly make changes to or supplement the AIA forms, whenever any party is presented with a 1997 version of the AIA Contract Documents, it must understand that there are significant departures from the 1987 forms and new concepts which must be carefully evaluated before signing the document. Owners will be adding more paragraphs to their contract supplements to undo or at least clarify the 1997 revisions. Contractors will now be well advised to carefully review, modify and supplement the AIA forms to address allocation of risk and refine the 1997 revisions.
A201 (1997) -- General Conditions
1) Consequential Damages Waiver
In an apparent attempt to limit the expense and unpredictability of construction contract litigation, a new subparagraph 4.3.10 has been added to include a mutual waiver of consequential damages by the Owner and Contractor. In general, the Owner waives damages for loss of use and the Contractor waives damages for home office overhead. The waiver is applicable to all consequential damages due to either party's termination of the contract; however, it is not intended to preclude an award of "liquidated direct damages." The effect and enforceability of this new provision is called into question by inherent ambiguities and conflicts with other AIA provisions.
The fundamental problem with the new provision is that there is no generally accepted definition of the term "consequential damages." Similarly, there is no clear definition of the term "liquidated direct damages." In order to be enforceable, liquidated damages must be the result of the parties' good faith effort to estimate the actual damages that likely will result from breach, where the exact amount of damages is uncertain and not readily capable of calculation. Direct damages, by contrast, are those that flow naturally or ordinarily from a contract breach and may be easily quantified. Thus, the term "liquidated direct damages" seems to merge two concepts that may be mutually exclusive or at least contain contradictory elements.
Additionally, subparagraph 4.3.1 conflicts with a number of other AIA Contract Document provisions. For example, the A111 contract permits the Contractor to recover for certain costs of the work including home office personnel and data processing; however, 4.3.10 of the A201 appears to prohibit recovery of these costs. The waiver also appears to conflict with Public Contract Code §7102 which voids any public contract provision intended to limit a Contractor's right to recover damages for delay.
Most Owners will simply strike 4.3.10. Presuming the waiver is enforceable and is not stricken, Contractors and Owners will undoubtedly use creative accounting techniques to recharacterize indirect costs as direct costs and thus avoid the waiver.
2) Design Delegation
New subparagraph 3.12.10 expressly addresses the issue of delegation of design responsibility to the Contractor. Some view the new provision as merely reflecting an increasingly common industry practice which Contractors should welcome. Others view the change as a dramatic shift in responsibility which opens a pandora's box of unintended consequences.
Subparagraph 3.12.10 provides that delegation of design to the Contractor is prohibited unless such services are specifically spelled out by the Contract Documents or unless the Contractor needs to provide such services in order to carry out its responsibilities for construction means and methods. While the first part of this provision puts the burden on the Owner and its Architect to enumerate the areas of design delegation, the second clause is arguably so broad as to encompass design responsibility for the Contractor's entire scope of work.
If professional design services or certifications are required by the Contract Documents, the Owner and Architect must specify the performance and design criteria that such services must satisfy. The Contractor will not be held responsible for the adequacy of the performance or design criteria required by the Contract Documents. The Architect must review, approve or take other appropriate action on the design submittals made by the Contractor.
The new provision raises a variety of questions. Since California law requires Architects and Engineers to be licensed, can an unlicensed Contractor sign a contract that requires him to provide, directly or indirectly, some kind of design service? Is it good practice to have the design function diffused and fragmented? Will the Contractor be able to provide adequate insurance to cover its new design risk? Is design delegation consistent with competitive bidding laws?
While a Contractor may eagerly or begrudgingly accept design responsibility, it is incumbent upon the Owner to ensure that there are no gaps in responsibility and that the Owner understands that the Architect is being compensated for providing less than the complete design of the Project. During the proposal or contract negotiation stage, the Architect should be required to include a designation of all portions of the design that it intends to delegate as well as the qualifications necessary for those services to be performed. The Owner can then require the Contractor or its specialty subcontractors to provide evidence of appropriate insurance coverage for the design services that have been delegated.
3) Mediation
Recognizing the trend of utilizing alternative dispute resolution procedures to reconcile construction disputes, paragraph 4.5 has been added to require that claims be submitted to mediation as a condition precedent to arbitration or suit. Mediation is a process in which a neutral individual or panel assists adverse parties in reaching a settlement among themselves. The mediator does not issue a decision on the merits and cannot impose a binding settlement. Rather, the mediator acts as a facilitator to guide the parties toward mutual agreement through negotiation. The success of a mediation is due, in large part, to the voluntary and non-binding nature of the process. Thus, mandating the use of mediation may undermine the efficacy of the procedure. Moreover, the success of a mediation often depends on the timing and prior experience of the parties. In some cases, parties are amendable to a negotiated settlement only after being subjected to the time and expense of a difficult arbitration or after assessing information obtained through discovery. Thus, mediation as the required first step in claims resolution may be doomed to failure. The parties should consider modifying this provision to provide more flexibility and thereby increase the probability of a successful mediation.
4) Termination for Convenience
Many Owners routinely added a termination for convenience clause to the 1987 edition of the A201. Although the 1997 version now includes paragraph 14.4, Owners, as well as Contractors, should modify or at least clarify its terms.
Paragraph 14.4 provides for termination of the contract but not performance of the Contractor. Contractors should add a clause stating that upon termination, all contractual rights and remedies cease, such as warranty and indemnity obligations. Owners should be aware that paragraph 14.4 provides that upon termination, the Contractor is entitled to receive payment for work completed, costs incurred by reason of the termination and reasonable overhead and profit on work not executed, although some of these costs were arguably waived under 4.3.10. Recovery of the costs enumerated in 14.4 will put the Contractor in a better position than if it had completed the work, i.e., it receives profits without having to perform the work. Owners should eliminate the clause permitting compensation for overhead and profit on work not executed or substitute a graduated termination fee.
5) Owner's Responsibilities
The new provisions of Article 2 require the Owner to designate a representative other than the Architect. Title information is due within fifteen days after the Contractor's written request. Information on financial arrangements is a condition precedent to the Contractor's duty to commence or continue operations. The Owner must now notify the Contractor before materially varying these financial arrangements.
There are no limitations on the timing or circumstances that would justify Contractor requests for evidence of financial arrangements. The condition precedent language arguably gives the Contractor an immediate right to stop work until receipt of reasonable financial assurances, a very powerful threat which the Contractor could abuse. Most Owners will strike the condition precedent language as well as the notice to Contractor when varying financial arrangements.
6) Contractor's Review Obligations
Subparagraphs 3.2.1 through 3.2.3 were rewritten to address competing goals of Architects and Contractors. Architects continually look for a remedy against Contractors who exacerbate design problems by failing to carefully review and compare the Contract Documents and site conditions before starting work. Contractors seek to avoid assuming any responsibility for detecting errors or omissions in the Architect's plans and specifications. While the language of the new provisions limits the purpose of the Contractor's review obligations, it expands the scope of the review as well as the grounds for and nature of the penalty imposed for failing to detect errors and violation of building codes. This section is one of the few 1997 revisions that actually appears to favor the Owner's interests.
The Contractor now must compare drawings, take field measurements and observe conditions at the site before starting each portion of the work. Thus, the Contractor's obligation for review and coordination continues throughout the life of the project.
The new section clarifies that the purpose of the Contractor review is not to discover errors, omissions, or inconsistencies nor to ascertain compliance with applicable laws, statutes, ordinances, building codes, rules and regulations. However, the Contractor must promptly notify the Architect of all discovered errors, omissions or inconsistencies and variances with applicable laws and codes. The Contractor is now liable to the Owner for damages resulting from such errors, inconsistencies, omissions and variances that it knows or should have known. If the Contractor fails to perform the review and comparison of documents and site conditions, the Contractor must pay such costs and damages to the Owner as would have been avoided if the Contractor had performed such obligations. Given the expanded penalty, Contractors should establish procedures, schedules and checklists for performing their duties under this section. Contractors should document the activities they under take and transmit the documentation to the Owner and Architect as evidence that these contractual duties have been performed.
7) Indemnification
The Contractor's duty to indemnify and hold harmless (but not defend) the Owner under subparagraph 3.18.1 is now limited to the extent claims, damages, losses or expenses are not covered by a new form of insurance known as "Project Management Protective Liability Insurance". Indemnity for loss of use damages has been deleted to be consistent with the waiver of consequential damages. The comparative fault concept has been strengthened by deleting the language "in whole or in part" from the causation clause. These changes narrow the Contractor's indemnity obligation and may prompt Owners to simply substitute an entirely new and broader indemnity provision in place of 3.18.1.
8) Insurance
As previously noted, new paragraph 11.3 permits the Owner to require the Contractor to purchase and maintain "Project Management Protective Liability Insurance." Since this new hybrid policy is untested, it is not clear what claims will be covered. The Owner, Contractor and Architect waive all rights against each other for damages covered by the policy, except such rights as they may have to the proceeds of the insurance. This section also provides that the Owner shall not require the Contractor to include the Owner, Architect or other persons as additional insureds on the Contractor's liability insurance coverage under paragraph 11.1. However, if the new liability policy is not procured, the additional insured endorsements should be required.
Paragraph 11.4, regarding property insurance, has been revised to include coverage for earthquake, flood and windstorm. Additionally, the Owner, rather than the Contractor, now is responsible for costs not covered by deductibles even if the Owner purchases the property insurance.
B141 (1997) - Boon or Boondoggle?
The new edition of the B141 has been fundamentally reformatted to a "modular" agreement comprised of at least two parts: an agreement form and a services form. In general, the new form broadens the basis on which an Architect may claim a readjustment of its fee, continues the trend of using exculpatory language to describe project administration services and incorporates the controversial provisions concerning waiver of consequential damages and design delegation analogous to the A201 provisions. The form still fails to include such key provisions as indemnity and insurance. The new 24-page, two-part form is accompanied by 15 pages of instructions to assist the parties in filling out 48 "mandatory" and 31 optional blanks. The new format forces the parties to exchange information and engage in interactive decision-making at the outset of the project, thereby facilitating communication and dispute avoidance, a positive step. However, given the time it will take to become familiar with the new forms and the questionable benefits to be gained, particularly by Owners, it is likely that many Owners and Architects will now switch to the new B151 Abbreviated Standard Form of Agreement which utilizes the format and structure of the old version of B141.
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