December 1, 2007
By Richard G. Jensen
On November 5, 2007, the American Institute of Architects (“AIA”) published the 2007 edition of its A201 document, General Conditions of the Contract for Construction. The 2007 edition contains significant revisions to the 1997 edition of the A201. This briefing paper will discuss some of the most significant revisions.
The most sweeping revisions to the A201 document are the procedures for resolving disputes arising out of the construction project. These revisions include the following.
a. Dispute Resolution Method
For approximately 100 years, the AIA documents have provided for mandatory arbitration. In the past few years, however, this provision has come under increasing criticism from some people in the construction industry who have demanded that the AIA allow a choice between arbitration and litigation of disputes. In response to that criticism, the AIA revised the 2007 edition of its documents to remove the mandatory arbitration provision. The agreement between the owner and the contractor now allows the parties to select between litigation and arbitration. The agreement provides boxes to check — one box if the parties desire to have litigation as the dispute resolution method, and one box if the parties desire to have arbitration as the dispute resolution method.
Leaving it up to the parties to check boxes to determine which dispute resolution method they desire leaves unanswered the question of which dispute resolution method will be the default method in the event that the parties do not check either box. The AIA resolved that question by providing that litigation will be the default method. The AIA has noted, however, that this should not be construed as implying a preference for litigation.
As with the 1997 edition, the parties must first mediate before proceeding to the binding dispute resolution process. If arbitration is selected, however, the parties may select the arbitrator(s) and agree upon the schedule before engaging in mediation. The new A201 document also clarifies that a demand for arbitration may be made no earlier than concurrently with making the request for mediation.
b. Consolidation of Arbitration Proceedings
The 1997 edition of the A201 document precluded the consolidation of arbitration proceedings between the architect and the owner with related arbitration proceedings between the owner and the contractor. This has been criticized as inefficient because it could result in multiple arbitration proceedings arising out of the same facts. As a result, the 2007 edition of the A201 document will permit consolidation of arbitration proceedings between the owner and the contractor with other arbitration proceedings, so long as the following conditions are met:
i. The arbitration agreement governing the other arbitration must permit consolidation;
ii. The arbitrations to be consolidated must substantially involve common issues of law or fact; and
iii. The arbitrations must employ materially similar procedural rules and methods for selecting the arbitrator(s).
The AIA 2007 owner/architect agreements contain corresponding provisions allowing consolidation. As a result, the architect, the owner, the contractor and the subcontractors may now participate in one arbitration proceeding.
c. Initial Decision Maker
Past editions of the A201 document designated the architect as the initial decision maker concerning disputes between the owner and contractor. Some in the construction industry have complained about the architect being the initial decision maker. For example, contractors are often concerned that the architect cannot be impartial because: the architect is usually paid by the owner; or claims sometimes call into question the architect’s actions.
The AIA responded to those concerns by revising its agreements to allow the parties to select a third-party decision maker, referred to in the documents as the “Initial Decision Maker.” Specifically, the owner/contractor agreements allow the owner and contractor to designate a third-party initial decision maker to resolve claims. Obviously, retaining a separate initial decision maker will be more expensive than having the architect serve as the initial decision maker. This additional expense will likely not be justified for most projects. Therefore, on most projects, the owner and contractor will likely select the architect to be the initial decision maker. The 2007 agreements provide that if no initial decision maker is designated, then the architect will serve in that role.
d. Time Limit for Making Claims / Statute of Limitations
The 2007 edition of the A201 document contains a new provision concerning the deadline for commencing dispute resolution proceedings, referred to as the “statute of limitations.” The 1997 edition contained a complicated three-part approach to determining the deadline for commencing the dispute resolution process. The deadline was different depending upon whether the claim arose: prior to substantial completion; between substantial completion and issuance of the final certificate for payment; or after issuance of the final certificate for payment. The 2007 edition simply requires that causes of action must be commenced within the period specified by applicable law, but in no event more than 10 years after the date of substantial completion of the project.
The 2007 edition of the A201 document also provides a mechanism for either party to insist on immediate resolution of claims. In the 1997 edition of the A201 document, the architect could force the parties to commence the dispute resolution process immediately by stating in the initial decision that it would become “final and binding” unless arbitration was demanded within thirty days from the date of the initial decision. The 2007 edition moves this right to the owner and the contractor. It provides that either party may, within 30 days from the initial decision, demand in writing that the other party file for mediation within 60 days of the initial decision. Failure to do so makes the Initial Decision Maker’s decision final and binding.
The 1997 edition of the A201 document required a newly created type of insurance policy, “Project Management Protective Liability Insurance.” Few of these policies were purchased and, accordingly, the 2007 edition removes the requirement. Instead, the 2007 edition adopts a requirement that is already in widespread use — “additional insured” endorsements. In making this change, the AIA found that most owners were requiring contractors to include the owner and architect as additional insureds under the contractor’s liability policy and that most contractors were requiring the same from their subcontractors. Such additional insured endorsements were generally provided at little or no additional cost.
The 2007 edition does not require the contractor to purchase insurance protecting the owner or architect from claims for their own negligence. Instead, it requires that the contractor include the owner, the architect and the architect’s consultants as additional insureds for liability arising out of the contractor’s negligent acts or omissions that occur during the contractor’s operations. It also requires that the contractor include the owner as an additional insured for liability arising out of the contractor’s negligent acts or omissions occurring during the contractor’s completed operations.
The requirement that the contractor include the owner as an additional insured for liability arising out of the contractor’s negligent acts or omissions occurring during the contractor’s “completed operations” is likely to generate some confusion. In the insurance industry, the term completed operations refers to the time after the contractor has completed the project. The parties may question specifically what insurance coverage the contractor is being required to purchase for the contractor’s acts or omissions occurring after completion of the project.
The 2007 edition adds a clause to the hazardous materials section that is likely to raise some questions. Specifically, the 2007 edition provides, “If the Contractor encounters a hazardous material or substance not addressed in the Contract Documents . . . the Contractor shall, upon recognizing the condition, immediately stop work in the affected area and report the condition to the Owner and Architect in writing.” The contractor’s report of the condition is what triggers the owner’s duty to investigate and remediate the hazardous material. One may question what the term “addressed” means; it could arguably mean anything from “specified” to “inferred.” If it is construed to mean the latter, then the owner arguably has no duty to investigate and remediate any hazardous material “inferred” in the contract documents.
The 2007 edition also limits the owner’s indemnification obligations. The 1997 edition required the owner to indemnify the contractor from any claim unless caused by the contractor’s “sole negligence.” The 2007 edition requires the owner to indemnify the contractor from any claim “except to the extent” caused by the contractor’s fault or negligence. Thus, under the 1997 edition, the owner was entirely responsible for claims unless the contractor was “solely” at fault; whereas, under the 2007 edition, the owner and the contractor are each responsible for their own fault.
The 1997 edition of the A201 document allows the contractor to request financial information from the owner and, under certain circumstances, to stop the work upon making such a request. To address that concern, 2007 edition places certain restrictions on the contractor’s rights to demand financial information after the work commences. The contractor can do so only if: the owner has failed to make payments to the contractor as required by the contract documents; a change in the work materially changes the contract sum; or the contractor identifies in writing reasonable concerns regarding the owner’s ability to make payments when due.
The 2007 edition also provides the owner more of an opportunity to address contractor payment issues. It allows the owner to request written evidence from the contractor that the contractor has paid subcontractors and suppliers. If the contractor fails to provide the evidence, the owner can directly contact subcontractors and suppliers to determine whether they have been paid. If the contractor fails to pay a subcontractor or supplier, the owner is permitted to issue joint checks to the contractor and to the subcontractor or supplier.
The 2007 edition of the A201 document contains revisions that materially alter the relationship of the parties involved in the construction process. This briefing paper has discussed a few of the most significant revisions.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T