ACREL ANNUAL MEETING 2007
ANALYSIS OF AMERICAN INSTITUTE
OF ARCHITECTS 2007 DOCUMENTS
Stanley P. Sklar
Bell Boyd & Lloyd LLP
70 West Madison Street
Chicago, Illinois60602
312.807.4279
ACREL ANNUAL MEETING 2007
By Stanley P. Sklar
Bell Boyd & Lloyd LLP
ANALYSIS OF AMERICAN INSTITUTE OF ARCHITECTS 2007 DOCUMENTS
Background
In 1888 the American Institute of Architects (AIA) published the first nationally used construction agreement between an Owner and a Contractor. The first edition of the Owner/Contractor General Conditions (A201) was published in 1911. The first standard agreement between Owner and architect was published in 1916. Eventually a standing committee now known as the Documents Committee was established to develop and review the AIA family of construction documents. Currently, there are several series of documents. A-Series relate to those agreements between Owner and Contractor, general conditions, and Contractor-subcontractor agreements among others. B-Series relate to those agreements between the Owner and the architect for professional services as well as special purpose agreements relating to the Owner and architect. Other series include the C–Series relating to the architect and other professionals such as engineers, consultants and other architects; D-Series known as the Architect-Industry documents such as the Methods of Calculating Area and Volume of Buildings; F-Series relating to architects accounting forms; and G-Series relating to office administration, administration and closing out project agreements.
Customarily, the documents undergo revisions in ten (10) year cycles. 2007 marks the revisions to be issued relating to those documents published in 1997.
A101Standard Form of Agreement Between Owner and Contractor (Stipulated Sum)
Except for changes to make the base contract consistent with the proposed revisions to AIA A201 General Conditions contained within the agreement, there is a seismic change in the methodology for the resolution of disputes, not only for this document but as noted for the entire family of Owner/Contractor documents. Arbitration, which had been the favored method for resolving disputes, has been under severe attack for many reasons that are beyond the scope of this paper. AIA believes that it has addressed the concerns raised. This writer strongly disagrees.
Article 6 entitled Dispute Resolution is a major shift in the manner in which disputes are to be resolved. A new party called the Initial Decision Maker (IDM) has been created; it may or may not be the architect, depending on the procedure established by the parties. However, of greater importance and a major “trap” for the unwary is the “new” check-off system thatrequires a party to physically “check off,” at the time the contract is executed, whether it wants to have disputes resolved by "arbitration, litigation or other." The default for failure to check off a choice of dispute resolution method is litigation and nothing else. Therefore, when advising clients, counsel should be aware of the election. Itthus becomes critical to consider this provision carefully with the client, and it also raises an issue as to the manner in which the client is advised of the pro’s and con’s of each alternative. Although it is beyond the scope of this article, I am of the opinion that counsel must ethically outline the choices between arbitration and litigation to the client in a clear and unbiased manner. I would recommend that the opinion of using arbitration or litigation be based on reliable data and not the “tales of woe” of one method over the other. When the documents are next up for revision in 2017, the pendulum will swing back to arbitration with its experienced panels and away from litigation with juries who do not find expert testimony on the process of concrete curing to be very interesting.
A110/103Standard Form of Agreement Between Owner and Contactor (Cost of the Work plus Fee with a Guaranteed Maximum Price)
Article 5 regarding the Contractor's Fee seems to make the concept of equitable adjustment a contract term by indicating that if the parties cannot agree on an adjustment of the Contractor's Fee for changes in the work, but if the contract is silent on this issue or if the application of the adjustment of the Contractor’s Fee will cause “substantial inequity to the Owner or Contractor," then the Contractor’s Fee shall be “equitably adjusted.” Thus,Contractors seeking an equitable adjustment may rely on their contractual right to do so rather than a common law right.
Article 7 relating to Costs to be Reimbursed has added a provision (7.2.5) that requires that “bonuses, profit sharing, incentive compensation and discretionary payments to anyone hired by the Contractor (if approved by Owner in advance as provided in 8.1.8) are reimbursable costs."
Article 7 also refers to Costs of Materials (7.5.1) and clarifies the method to be used to value materials, temporary facilities, etc. while (7.5.2) further clarifies that,as to rental equipment, the charges must not only be commercially reasonable, but, more importantly, that the total rental cost cannot exceed the purchase price of a comparable item.
In addition, recognizing the world of technology that has entered the construction process, electronic equipment and software directly related to the work, except for home office data processing costs, will be considered a reimbursable cost. (7.6.6)
A new concept, Related Party Transactions (7.8), deals with reimbursable costs which arise from transactions between the Contractor and a related party as defined in the agreement. This could include subsidiaries of the Contractor which may have been created as separate profit centers to benefit the overall profitability for the Contractor. However, this entity must be disclosed prior to the execution of the contract, so that if the Owner does not authorize such a transaction, the Contractor is required to go to some other entity to procure the service or material.
Consistent with the new approach to the resolution of disputes referred to earlier, Article13 contains the provision for an Initial Decision Maker and check off for litigation, arbitration or other.
A107/102Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of a Limited Scope (Stipulated Sum) for Smaller Projects
Once again, the major change to make the AIA contracts consistent with eachother is the check-off provision regarding dispute resolution. It should also be noted thatthe agreement contains its own set of General Conditions that should be carefullyreviewed to ensure that many of the provisions that are absent due to the abbreviated nature of the document, may have to be included.
Revisions to Article 7 make it clear that except for specific modifications, the plans prepared by the architect belong to the architect includingstudies by architect, surveys, models, sketches, design and construction drawings.
For some reason, the indemnification clause has been deleted and provisions should be made for its inclusion to protect the Owner. It is also interesting to note that there are references to the architect’s obligation for site visits, etc., but in my opinion, these provisions are not binding on the architect since the architect is not a party to this agreement.
While the dispute resolution process is somewhat more detailed, it does provide for mediation as a mandatory first step before litigation or arbitration are to be considered. For the first time, consolidation is addressed and permitted with other arbitrations; however,consolidationis permitted only if the agreements between Owner and Contractor do not specifically prohibit consolidation, and the consolidated case must substantially involve common issues of law or fact and employ the same procedural rules as the arbitration between the Owner and the Contractor.
AIA A 201 General Conditions of the Contract for Construction
In general, the major issues of concern to practitioners are the following which will be covered in more detail. They are not necessarily in order of priority:
.Dispute Resolution
.Initial Decision Maker
.Time Limits on Claims
.Consolidation and Joinder
.Consequential Damages
.Digital Practice
.Owner's Right to Stop the Work
.Owner's Right to Carry Out the Work
.Review of Contract Documents
.Indemnification
.Archeological Issues
.Superintendent
.Instruments of Service
.Contingent Assignment of Subcontracts
.Progress Payments
.Hazardous Materials
.Governing Law
1.Dispute Resolution
Clearly this change is the most dramatic. Ever since AIA first published its construction contracts, arbitration has been the favored method of dispute resolution. However, due to objections over the years (and on this issue I will not comment except to say that AIA should be careful what it has wished for), there is now a check-off procedure in every AIA contract between Owner and Contractoras previously described.
It should be noted that regardless of the check-off system, mediation is a condition precedent to the implementation of any method of dispute resolution.
In addition under 4.5 or 4.6, an area of confusion has been clarified by requiring any arbitration to be conducted under the AAA rules in effect at the time of the contract. When selecting arbitration, it would be appropriate to include a copy of the applicable rules as an exhibit to A201 to avoid future confusion. The rules are readily down loadable from the AAA website(
15.1.2 clearly states that claims by the Owner or the Contractor must be initiated by a written notice to the other party and to the Initial Decision Maker (with a copy to the architect if the architect has not been designated as the Initial Decision maker) within 21 days after the claimant first recognizes the condition giving rise to the claim or within 21 days after the occurrence giving rise to the claim.
§4.315.1.2 Time Limits on ClaimsNotice of Claims. Claims by either the Owner or Contractor must be initiated by written notice to the other party and to the Initial Decision Maker with a copy sent to the Architect, if the Architect is not serving as the Initial Decision Maker. Claims by either party must be initiated within 21 days after occurrence of the event giving rise to such Claim or within 21 days after the claimant first recognizes the condition giving rise to the Claim, whichever is later. Claims must be initiatedby written notice to the Architect and the other party.
No change has been made to the requirement that the Contractor continue performing pending final resolution of the claim. (15.1.3).
§4.315.1.3 Continuing Contract Performance. Pending final resolution of a Claim except as otherwise agreed in writing or as provided in Section 9.7.1 and Article 14, the Contractor shall proceed diligently with performance of the Contract and the Owner shall continue to make payments in accordance with the Contract Documents. The Architect will prepare Change Orders and issue certificates for payment in accordance with the decisions of the Initial Decision Maker.
Claims for Additional Cost (15.1.4)
§4.3 15.1.45 Claims for Additional Cost. If the Contractor wishes to make Claim for an increase in the Contract Sum, written notice as provided herein shall be given before proceeding to execute the Work. Prior notice is not required for Claims relating to an emergency endangering life or property arising under Section 10.64.
§4.3.6 If the Contractor believes additional cost is involved for reasons including but not limited to (1) a written interpretation from the Architect, (2) an order by the Owner to stop the Work where the Contractor was not at fault, (3) a written order for a minor change in the Work issued by the Architect, (4) failure of payment by the Owner, (5) termination of the Contract by the Owner, (6) Owner’s suspension or (7) other reasonable grounds, Claim shall be filed in accordance with this Section 4.3
and Claims for Additional Time (15.1.5)
§4.3.715.1.5 Claims for Additional Time
§4.3.715.1.5.1 If the Contractor wishes to make a Claim for an increase in the Contract Time, written notice as provided herein shall be given. The Contractor's Claim shall include an estimate of cost and of probable effect of delay on progress of the Work. In the case of a continuing delay only one Claim is necessary.
§4.3.715.1.5.2 If adverse weather conditions are the basis for a Claim for additional time, such Claim shall be documented by data substantiating that weather conditions were abnormal for the period of time, could not have been reasonably anticipated and had an adverse effect on the scheduled construction.
are unchanged from the 1997 document. As to claims for consequential damages, it too remains unchanged except for the deletion of the word “direct” when referring to liquidated damages. The document clearly permits claims for damages for time and money plus liquidated damages.
§4.3.1015.1.6 Claims for Consequential Damages. The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes:
.1damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or the services of such persons; and
.2damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 415.31.106 shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.
2.The Initial Decision Maker (1.1.8, 15.2)
§1.1.8 INITIAL DECISION MAKER
The Initial Decision Maker is the person identified in the Agreement to render initial decisions on Claims in accordance with Section 15.2 and certify termination of the Agreement under Section 14.2.2.
§4.4.115.2 INITIAL DECISIONDecision of Architect.
§15.2.1 Claims, including those alleging an error or omission by the Architect but excluding those arising underSections 10.3,through 10.45, 11.3.9, and 11.3.10, shall be referred initially to the ArchitectInitial Decision Makerfor initial decision. The Architect will serve asthe Initial Decision Maker, unless otherwise indicated in the Agreement. Except for those Claims excluded by this Section 15.2.1, Aan initial decision by the Architect shall be required as a condition precedent to mediation, arbitration or litigation ofallany Claimsbetween the Contractor and Ownerarising prior to the date final payment is due, unless 30 days have passed after the Claim has been referred to the Initial Decision MakerArchitect with no decision having been rendered, by the Architect. Unless the Initial Decision Maker and all affected parties agree, the Initial Decision MakerThe Architect will not decide disputes between the Contractor and persons or entities other than the Owner.
§4415.2.2 The Initial Decision MakerArchitect will review Claims and within ten days of the receipt of thea Claim take one or more of the following actions: (1) request additional supporting data from the claimant or a response with supporting data from the other party, (2) reject the Claim in whole or in part, (3) approve the Claim, (4) suggest a compromise, or (5) advise the parties that the Initial Decision MakerArchitect is unable to resolve the Claim if the Initial Decision MakerArchitect lacks sufficient information to evaluate the merits of the Claim or if the Initial Decision MakerArchitect concludes that, in the Initial Decision Maker'sArchitect's sole discretion, it would be inappropriate for the Initial Decision MakerArchitect to resolve the Claim.
In general, in the absence of the designation of a third party, the Initial Decision Maker (IDM) is, by default, the architect(15.2.). Therefore, this becomes an issue to be considered at the time the contract is executed. Since the IDM is a new concept, it remains to be seen whether architects will continue to be the first party to deal with claims or whether they will consider designating a truly independent party to assume that role. Should that occur, Owners should recognize that there would be an additional cost involved. It should also be noted that decisions by the IDM are a condition precedent to mediation, arbitration or litigation. The concept of the IDM can do much to minimize disputes rising to adversary levels. However, it should be noted that an “appeal” of the mediator’s decision may be made by sending a notice to the non-appealing party within 30 days from the date of the initial decisionand the non-appealing party must file a demand for mediation within 60 days thereafter. The failure of the non-appealing party to do so will result in theinitial decision being final, and mediation of that decision is deemed to have been waived by the non-appealing party;and thus the decision becomes final and binding on all parties.
3.Time Limits on Claims
§13.7 COMMENCEMENT OF STATUTORY LIMITATION PERIODTIME LIMITS ON CLAIMS
§13.7.1 The Owner and Contractor shall commence all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, against the other arising out of or related to the Contract in accordance with the requirements of the final dispute resolution method selected in the Agreement within the period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the Work. The Owner and Contractor waive all claims and causes of action not commenced in accordance with this Section 13.7.1.
The confusing three-phase Statutes of Limitations provision in 13.7 has been replaced by a new section entitled "Time Limits on Claims"13.7.1 and refers to state law as being the appropriate measure of limitation periods. The 2007 agreement provides that an action must be filed in accordance with the period specified in the final dispute resolution method selected by the agreement,but in no event will the period specified be more than 10 years from the date of substantial completion, and claims not commenced in accordance therewithare waived by the parties. The causes of action include contract, tort, breach of warranty or otherwise.
4.Consolidation and Joinder (15.4.4)
§4.6.415.4.4 Limitation onCONSOLIDATION OR JOINDER
§15.4.4.1 Either party, at its sole discretion, may consolidate an arbitration conducted under this Agreement with any other arbitration to which it is a party provided that (1)the arbitration agreement governing the other arbitration permits consolidation; (2)the arbitrations to be consolidated substantially involve common issues of law or fact; and (3)the arbitrations employ materially similar procedural rules and methods for selecting arbitrator(s). No arbitration arising out of or relating to the Contract shall include, by consolidation or joinder or in any other manner, the Architect, the Architect's employees or consultants, except by written consent containing specific reference to the Agreement and signed by the Architect, Owner, Contractor and any other person or entity sought to be joined.