May 23, 2008

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The American Institute of Architects has released the latest versions of many of its most widely used form documents, including the owner/contractor agreement forms and related general conditions and the owner/architect agreement forms. The AIA periodically revises its most popular form documents, generally on a 10-year cycle. The revisions are significant because the AIA documents have been the most widely used forms for major building projects in the United States.

At about the same time, more than 20 other trade organizations issued a set of 70 documents called ConsensusDOCS, which replace the prior Associated General Contractors of America contract forms and are intended to provide a more competitive alternative to the AIA documents. 1/ For the first time in many years, the AGC has not endorsed the new AIA documents.

Easier to Use:  Recognizing the broad range of project delivery arrangements in use, the AIA has designed the documents around modules of information to make it easier to choose alternate provisions applicable to the specific arrangement. In response to the changes over the last 10 years in the way documents are created and exchanged, the document forms are easier to edit and transmit electronically although a software license is required from the AIA.

New Number Designations:  The fill-in-the-blanks forms of owner/contractor agreements, designated as the A100 series, includes A101 Standard Form of Agreement between Owner and Contractor where the basis of payment is a stipulated sum; a new A102, which replaces A111, for cost plus fee with a guaranteed maximum price; and a new A103, which replaces A114, for cost plus fee without a guaranteed maximum price. These forms have been updated to coordinate with changes in A201, the general conditions, as described below, as well as with new forms such as E201 – 2007, Digital Data Protocol Exhibit. The new forms of owner/architect agreements are designated B101, replacing old B151 – Abbreviated Standard Form of Owner/Architect Agreement; B102, replacing old B141, Part 1; and B103, replacing old B141, Part 2.

Significant Conceptual Changes:  Many changes correct ambiguities in the prior versions or reflect recognition of typical current contractual arrangements. For that reason, the new versions are generally preferable for all parties involved to the ones they replace. A number of changes are more significant, and many of them reflect an acknowledgement that although parties have been using AIA forms as the basis for agreements for the design and construction of buildings, they have been modifying them to take the architect out of the middle of the relationship between owners and contractors.

Disputes:  A201 – 2007 General Conditions of the Contract for Construction, the backbone of the AIA forms of agreement between owners and contractors, always has included the concept that disputes between the owner and the contractor should first be submitted to the architect before initiating arbitration. Although the architect is retained by the owner and serves as the owner’s consultant, prior versions of the General Conditions required the architect to be impartial. Owners saw this provision as inappropriate because they were paying the architect. Contractors were doubtful of the reasonableness of the approach because contractor claims often arise out of errors or omissions in the drawings or specifications prepared by the architect, making it less likely that the architect would concede such problems. The requirement was contained in a document, the owner/contractor agreement, to which the architect is not even a party. Even architects were not fans of this approach, although such dispute resolution activities are compensated as additional services, because they wish to avoid being deemed to have any obligation to the contractor.

For all of such reasons, the 2007 versions of the owner/contractor agreement forms include the concept of initial decision maker, which is not necessarily the architect. This concept was first contained in the 2004 design-build forms. Of course, parties may decide to delete the entire provision requiring initial informal reference to a third party before resorting to formal dispute resolution.

Consistent with this change, the general conditions have been revised to delete the provision that the architect’s decisions would become final and binding unless either the owner or the contractor filed a demand for arbitration within 30 days. In the 2007 version, the party adversely affected by a decision may appeal it within 30 days, and the prevailing party may force the issue by giving notice within the same 30 days that the architect’s decision will be deemed final unless the aggrieved party files a demand for arbitration within 60 days after the decision.

Arbitration:  Since 1888, the AIA General Conditions have included a requirement that disputes between owners and contractors and those between owners and architects be decided by binding arbitration. In response to widely varying opinions regarding the relative advantages and disadvantages of arbitration, the new versions of the owner/contractor and owner/architect agreements offer the choice of dispute resolution formats in a check-the-box format. The choices are arbitration, litigation or another format to be described in the Agreement. Such other format could be judicial reference, for example. If no box is checked, litigation is the default. Although arbitration can offer the advantages of relative speed, efficiency and confidentiality, those features do not equally benefit owners and contractors or owners and architects. Owners are more likely to value the availability of full discovery in claims against contractors or design professionals more heavily than the faster resolution of disputes in which the owner is more likely to be the defendant in a claim for payment.

In requiring arbitration, the prior versions of the AIA documents did not exclude situations where the claim involves one party seeking indemnification against litigation brought by a third party who is not similarly bound to arbitrate. This resulted in multiple legal actions regarding the same facts. An example might be a case in which an injured worker sues the owner, but the owner is required to arbitrate its indemnification claim against the contractor. This problem now is avoided if the parties do not select arbitration. The revised treatment of this issue in the 2007 forms permits the consolidation of multiple arbitrations so long as: 1) consolidation is permitted under the respective arbitration agreements; 2) they substantially involve common issues of law or fact; and 3) the respective agreements to arbitrate employ substantially the same procedural rules and methods for selecting arbitrators.

Digital Protocol:  The AIA has introduced Document E201, Digital Data Protocol Exhibit, that may be incorporated by reference in owner/architect and owner/contractor agreements. Most documents now are exchanged in electronic form, and E201 document establishes the procedures that the parties will follow in transmitting or exchanging digital data for a project. The document includes representations by the parties regarding their respective rights to transmit the date and indemnification for claims arising out of unauthorized use of the data. The document uses a checklist format to identify who will be the receiving and transmitting parties, the data format, the transmission method and the permitted use of the data. An alternative document is C106, the Digital Data Licensing Agreement, that includes the provisions of E201, the Digital Data Protocol Exhibit, together with a provision for a licensing fee.

Owner’s Financial Information:  The 1997 A201 General Conditions gave the contractor the right to refuse to commence work and thereafter to stop if, following its request, the owner failed to provide reasonable evidence that financial arrangements had been made to fulfill the Owner’s obligations under the contract. This has been revised to provide that the contractor still may demand such evidence as a condition to commencing the work but thereafter may demand such evidence, and have the right to cease working, only if during the course of the work it is not timely paid or otherwise has reasonable concerns about the owner’s financial capacity or if a change in the work materially changes the contract sum.

In California, contractors also have the benefit of Civil Code §3110.5, a nonwaivable statute requiring in general that owners, other than those that are publicly traded, of projects with a cost in excess of $5 million ($1 million for tenant improvements) provide an escrow account, bond or letter of credit in the amount of the contract sum as security for the owner’s payment obligations. This law permits the contractor to cease working at any time the owner is not in compliance.

Limitations Period for Claims:  The 1997 versions of the A201 General Conditions and of the Owner/Architect agreements attempted to clarify the time when applicable limitations periods would commence depending on when the act or omission initially occurred. This deprived owners in states, such as California where certain statutes of limitation do not begin to run until discovery, of additional time to assert their claims. The 2007 A201, however, abandons any attempt to fix the commencement date of the limitations period, leaving that to state law, but instead requires that in all events, claims must be brought within 10 years after substantial completion. The provision, as so revised, is now the same as California law.

The Cost of the Work:  This definition is used in those owner/contractor agreement forms that base the contractor’s compensation on the cost of the work, with or without a guaranteed maximum price. The definition has been revised to add new items, although a number require the owner’s approval before the cost is incurred, so the change is not significant. Such items include bonuses, profit sharing and incentive compensation; self-insurance costs such as deductibles; and special software and electronic equipment. The owner now is given the right to audit any cost-plus subcontracts and the means of calculating costs of rental equipment and items not fully consumed in performing the work. A more significant change addresses related party transactions in which a portion of the cost of the work relates to work performed by an affiliate of the contractor. This is a common occurrence with many commercial contractors, which often have divisions that perform structural concrete work. The new provision requires disclosure when work is being performed by a related party and permits the owner to refuse to allow the related party to perform the work and instead require that it be competitively bid. As a practical matter, this provision conforms with procedures already followed on most larger commercial projects where most of the major portions of the work are competitively bid before the guaranteed maximum price is determined.

Insurance Requirements:  The new documents have a number of features that conform to current practices relating to insurance. For example, the owner/architect forms now have blanks for inserting descriptions of the types of insurance required to be maintained by the architect. The new owner/contractor forms substitute the common arrangement under which the contractor names the owner as additional insured for the prior approach, which did not require the contractor to do so but attempted to force the owner to elect to pay for Project Management Protective Liability Insurance, which was to be maintained by the contractor – an arrangement rarely, if ever, implemented.

Remaining Issues

Several issues of concern to owners were not addressed in the new AIA forms.

Ownership of Architect’s Intellectual Property:  Owners always have resisted the position taken in the AIA documents that the architect is the owner of the intellectual property (“instruments of service”) it prepares for the owner, under prior versions of the owner/architect agreement form, upon termination of the owner/architect agreement for any reason, the owner’s limited license to use the instruments of service terminated, only to be replaced by a limited license to use the materials if and when the architect was “adjudged” in default of the agreement. As a practical matter, this precluded an owner from terminating the agreement and continuing on with the design of a project using the architect’s work unless it waited to litigate the architect’s default or settled with the architect. The 2007 versions of the owner/architect agreements include some concessions in favor of owners by stating that the owner’s license only terminates if the architect rightfully terminates the agreement due to project suspension or the owner’s default. If the owner terminates for its convenience, in addition to paying termination expenses, including lost profit, the owner is required to pay a licensing fee, as pre-negotiated by the parties.

Most owners agree with the concept, added in 2007, that the owner should release the architect from and indemnify the architect against claims arising from the owner’s use if it has parted company with the architect. Owners, however, do want to have the right to use the materials, even when they have terminated the agreement in a dispute with the architect without fear of an injunction, and will therefore often negotiate to delete the architect’s ownership rights altogether.

Attorney Fees:  The new documents still omit an attorney fee clause, which is necessary to enable a prevailing party to recover its attorney fees.

Consequential Damages:  In the 1997 forms, the AIA added a provision under which the parties mutually waived rights to recover consequential damages. In the context of both owner/architect and owner/contractor agreements, owners typically have the greatest exposure to consequential damages, such as lost revenues, arising out of the other party’s breach. The 2007 versions retain this provision. As a practical matter, in owner/contractor agreements it is often supplemented by a liquidated damages provision, which recognizes damages for delay and fixes the amount recoverable.

For more information about the issues covered in this report, please contact Richard M. Shapiro in our San Francisco office at 415-369-7117 or at [email protected] or contact your Thelen attorney. For more information about Thelen’s Construction and Government Contracts Department, click here.

ENDNOTES

1/ The member organizations for ConsensusDOCS are: National Association of State Facilities Administrators, Construction Users Roundtable, Construction Owners Association of America, Associated General Contractors of America, Associated Specialty Contractors, Construction Industry Round Table, American Subcontractors Association, Associated Builders and Contractors, Lean Construction Institute, Finishing Contractors Association, Mechanical Contractors Association of America, National Electrical Contractors Association, National Insulation Association, National Roofing Contractors Association, Painting and Decorating Contractors of America, Plumbing Heating Cooling Contractors Association, National Subcontractors Alliance, Sheet Metal and Air Conditioning Contractors’ National Association, National Association of Surety Bond Producers, Surety and Fidelity Association of America, and Association of the Wall and Ceiling Industry.