|
(pressing HOME will start a new search)
|
|
Major Changes in AIA A201-1997
|
This paper discusses six major changes in AIA A201-1997. These changes include: 1) Increased design delegation to the contractor, 2) Mutual Waiver of Consequential Damages 3) Change in Indemnity Provision 4) Broader definition of Hazardous Materials 5) Requirement of Mediation and 6) Changes to Insurance.
Key words: General Conditions, AIA A201 Key words: General Conditions, AIA A201
Introduction
The American Institute of Architects (AIA) has revised many of its standard form contracts effective late 1997. Among these is AIA A201, "General Conditions of the Contract for Construction". AIA A201 is generally considered the premier example of General Conditions in the construction industry. In addition to its widespread use, it is often a model used by others in the construction industry when drafting general conditions. It reflects current trends in both industry and the law.
The new AIA A201-1997 contains many major and minor changes from the 1987 version. Six major changes are: 1) clarification of obligations of contractor and subcontractor when design is delegated to them, 2) mutual waiver of consequential damages between owner and contractor, 3) contractor indemnification of owner is limited to the extent of the contractor’s own negligent acts, 4) a broader definition of the term "hazardous materials", 5) the requirement of mediation before arbitration is filed, and 6) increased insurance requirements. These changes are discussed in this paper.
Design Delegation to the Contractor
Clarifications of Architects’ and Contractors’ Duties Relating to Design
AIA A201, §3.12.10 (1997 Version) states:
The Contractor shall not be required to provide professional services which constitute the practice of architecture or engineering unless such services are specifically required by the Contract Documents for a portion of the Work or unless the Contractor needs to provide such services in order to carry out the Contractor’s responsibilities for construction means, methods, techniques, sequences and procedures. The Contractor shall not be required to provide professional services in violation of applicable law. If professional design services or certifications by a design professional related to systems, materials or equipment are specifically required of the Contractor by the Contract Documents, the Owner and the Architect will specify all performance and design criteria that such services must satisfy. The Contractor shall cause such services or certifications to be provided by a properly licensed design professional, whose signature and seal shall appear on all drawings, calculations, specifications, certifications. Shop Drawings and the submittals prepared by such professional. Shop Drawings and other submittals related to the Work designed or certified by such professional, if prepared by others, shall bear such professional’s approval when submitted to the Architect. The owner and the Architect shall be entitled to rely upon the adequacy, accuracy and completeness of the services, certifications or approvals performed by such design professional, provided the Owner and the Architect have specified to the Contractor all performance and design criteria that such services must satisfy. Pursuant to this Subparagraph 3.12.10, the Architect will review, approve or take other appropriate action on submittals only for the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents. The Contractor shall not be responsible for the adequacy of the performance or design criteria required by the Contract Documents.
AIA A201-1987 §1.2.3 required the contractor to produce the results "intended" by the architect – not necessarily the results as actually drawn by the architect. If the architect had not provided complete design criteria, the contractor was obligated to provide the design criteria necessary to complete the project or portion of the project as "intended". AIA A201-1997 §1.2.1 requires the contractor to produce the results "indicated" by the Contract Documents.
AIA A201-1987 §3.12.11 allowed the architect to rely upon "professional certification of performance criteria of materials, systems or equipment". In AIA A201-1997 §3.12.10 the architect is allowed to rely upon the professional certification obtained by the contractor only if "the Owner and the architect have specified to the contractor all performance and design criteria that such services must satisfy" (emphasis added).
AIA A201-1997 §3.12.10 prohibits design delegation to the contractor UNLESS "such services are specifically required by the Contract Documents". This is more fully discussed below in the section entitled "Categories of Design Elements for Which Contractor Has Liability". Since the design services required to be performed by the contractor must be specifically stated, it will be clearer to the owner that some design is being undertaken by the contractor. When the contractor does agree to undertake design, the contractor must employ "properly licensed design professional" to do the work.
When design services are required of the contractor, AIA A201-1997 §3.12.10 requires the architect or owner to specify all performance and design criteria for design work delegated to the contractor. AIA A201-1997 §3.12.10 reads, "the Owner and the Architect will specify all performance and design criteria that such services must satisfy." It is clear the contractor is "not responsible for the adequacy of the performance or design criteria required by the Contract Documents". In AIA A201-1987 it was not clear who was responsible for performance and design criteria needed to complete the project.
AIA A201-1997 §3.12.10 also requires the designer to coordinate the delegated design with the overall project design. AIA A201-1997 §3.12.10 states, "the Architect will review, approve or take other appropriate action on submittals only for the limited purpose of checking…the design concept expressed in the Contract Documents". The designer has the obligation to check that the delegated design is in conformance with the design concept. Under AIA A201-1987 §3.12.7 the contractor had the duty of checking to make sure the submittals coordinated with the Work. AIA A201-1987 §3.12.7 read: "By approving and submitting shop Drawings, Product Data, Samples and similar submittals, the contractor represents that the Contractor has ….checked and coordinated the information contained within such submittals with the requirements of the Work and the Contract Documents."
AIA A201-1997 §3.12.10 voids any design delegation to the contractor in states where doing so would violate the law. That section reads, "The Contractor shall not be required to provide professional services in violation of applicable law." No similar provision existed in AIA A201-1987.
AIA A201-1997 makes it clear that if design delegation does not violate the law, the contractor can be required to pay and accept the risk for some design elements. The section also makes it clear the contractor must employ and pay for licensed professionals to complete all such design.
AIA A201-1997 §3.12.10 states, "If professional design services … are specifically required of the Contractor by the Contract Documents, …[t]he Contractor shall cause such services or certifications to be provided by a properly licensed design professional." See discussion below the three categories of design elements the contractor is required to pay for.
An example of what can go wrong with a contractor using unlicensed design services is the Hyatt Regency Hotel walkway collapse in Kansas City, Missouri. In 1981 114 people lost their lives and many were injured when the second and forth floor walkways of the hotel collapsed. The original structural supports for the walkways had been changed at the suggestion of the steel fabricator. The contractor should not have taken the suggestion of an unlicensed professional.
Contractors must be aware they are accepting not only the costs of design, but the liability and risk that any design they provide will be adequate to perform the job. Should the design prove inadequate, the contractor will be liable for damages associated with the inadequate design, including potential damage to third parties. Contractors may wish to purchase errors and omissions insurance, similar to that purchased by architects and engineers. This insurance will cover them for lawsuits which may not arise until years after the completion of construction. While it is certainly possible to require the firm or subcontractor which does the design work to indemnify the general contractor, or to have insurance, the general contractor is still primarily responsible to the owner.
Contractors are relieved from liability for damages related to inadequate design elements provided by the architect. The last sentence of provision AIA A201-1997 §3.12.10 reads the "Contractor shall not be responsible for the adequacy of the performance or design criteria required by the Contract Documents". This sentence means the contractor will not be responsible for the adequacy of those performance or design criteria supplied by the architect. However, if the contractor is required to provide design elements, particularly design specifications, it is likely a court will place the liability for those elements onto the contractor. Again, this sentence raises the issue of the meaning of the word "criteria". Since liability generally follows responsibility however, it is likely the law will hold the architect liable for the design and performance and specifications it is required to produce, and the contractor liable for the design and performance specifications it is required to produce. (Spearin v. U.S.).
Categories of Design Elements for Which Contractor Has Liability
AIA A201-1997 § 3.12.10 potentially requires the contractor to provide and pay for design work in three different areas: Category 1) Design elements necessary "to carry out the Contractor’s responsibilities for construction means, methods, techniques, sequences and procedures"; Category 2) Design elements "specifically required by the Contract Documents for a portion of the Work" AND related to systems, materials or equipment; and Category 3) Design elements "specifically required by the Contract Documents for a portion of the Work" and NOT related to systems, materials or equipment.
Category 1 design elements to be paid for by the contractor are those necessary to carry out the contractor’s responsibilities for construction means, methods, techniques, sequences and procedures. Examples of these types of elements are scaffolding and shoring. This is not new, and contractors have historically been responsible for design costs associated with means and methods. None of these design elements need be reviewed by the architect, though these design elements could be submitted to the architect for "the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents". The wording does not specifically require the contractor to have such design elements prepared by a licensed design professional, though a prudent contractor certainly would comply with all local law regulating design services.
Category 2 design elements to be paid for by the contractor are, "Design elements that are specifically required by the Contract Documents for a portion of the Work" AND related to systems, materials or equipment. Examples of a Category 2 design elements are heating, ventilation and air conditioning systems (HVAC), communication systems, window walls/store fronts and warranty contracts for asphalt or concrete. This is the category of design element discussed most extensively in the provision. For this category of design, and this category only, the owner and the architect must specify ALL performance and design criteria such design services must satisfy.
The first issue that may arise in connection with Category 3 design elements is; what is the definition of the word "criteria"? Is the word "criteria" the same as "specification"? The terms "design specification" and "performance specification" are fairly well defined in the law. A performance specification outlines the ultimate result to be achieved, but does not outline the method of achieving that result. A design specification outlines the very specific details for achieving the result. For example, assume a specification states contractor to install an HVAC system able to keep the interior temperature at 75° Fahrenheit when the outside temperature is 105° Fahrenheit, 85% humidity. This is a performance specification. In order to perform this task the contractor must develop design specifications, specifically stating what piece of equipment goes where and how various elements of the HVAC system are to be connected and interact. However, the contract says the architect will provide the "design criteria". If "design criteria" (term used in AIA A201-1997) is the same as "design specifications" what is left for the contractor to actually provide?
A performance specification transfers the risk a system will adequately perform onto the contractor. The courts have historically found contractor’s liable for the costs and risks associated with broadly worded performance specifications. U.S. v. Spearin, R.M. Hollingshead v. U.S., Midwest Dredging Co. v. McAninch Corp., Farm-Fuel Products Corp. v. Grain Processing Corp., Hol-Gar Manufacturing Corp. v. U.S., Roy McGinnis, Spartan Electronics, Maitland Bros. Co., U.S. v. Wegematic Corp., Williston on Contracts §§5516, 6617, Harrington, Thum & Clark (1984); Clark & Thum (March 1981).
For example, the court in (Stuyvesant Dredging Co. v. U.S.) said "Design specifications explicitly state how the contract is to be performed and permit no deviations. Performance specifications, on the other hand, specify the results to be obtained, and leave it to the contractor to determine how to achieve those results." In that case the contractor was required to dredge a channel to the width prescribed by the performance specification. It was up to the contractor to provide a design specification that could achieve the result.
Two exceptions to this rule do exist. In cases of "objectively impossible" or "practically impossible" specifications, the risk returns to the owner. See Hol-Gar Manufacturing Corp. v. U.S., Owens-Corning Fiberglass v. U.S., H&H Elec., Inc., Restatement of Contracts §454, Uniform Commercial Code §2-615 (Comment 3). A good discussion of the concept can be found in Natus Corp. v. U.S.
Under this provision the architect will provide the contractor with performance specifications for systems, materials or equipment for which the contractor is responsible for providing design specifications. If the design specification does not fulfill the requirements of the performance specification, the contractor has breached the contract.
Category 3 design elements to be paid for by the contractor are design elements "specifically required by the Contract Documents for a portion of the Work" and NOT related to systems, materials or equipment. Exactly what design elements are in this category are not clear. It is likely to include elements that can be categorized as "processes" or "sequences", however, those items are covered by Category 1 design elements. Again, the design of these types of elements, processes and sequences, has traditionally been the contractors’ responsibility. The real issue may be; why has this third category been introduced at all? This clause may have been added to protect the architect in the event a court determines a design element is not a Category 1 or 2. In that event the design element will be a Category 3 and the responsibility for payment of the design will be on the contractor.
Mutual Waiver of Consequential Damages
The second major change in AIA A201-1997 is the waiver of consequential damages. In a broad sense, "damages" are what the losing party to a lawsuit will pay to the winning party. Several categories or types of damages are recognized, including "consequential damages". Under prior A201 forms no category of damage was waived. The parties could make a claim for any type of damages. (Note: this paragraph is not discussing the waiving of claims, only the waiver of certain categories or types of damages. The parties may waive claims under both contract forms). Though the law relating to damages varies with state law, some general principles have emerged.
"General" damages are the most common form of contract damages awarded. "General" damages are the immediate costs associated with breach of the contract or those which arise naturally from the breach. General damages include items the parties could have reasonably foreseen when the contract was entered into. For example, should the owner delay the construction, it is foreseeable the contractor will have increased rental payments for the job shack located on the site. That rental would be an actual damage. Alternative terms for general damages are "direct" or "actual" damages. The term "actual damages" is more often used in connection with tort liability, rather than contract liability.
"Consequential" or "special" damages are those damages that are more remote than actual damages, or damages that may not naturally flow from the breach. A consequential or special damage may be one that arises because of some unique characteristic of the damaged party, rather than some general characteristic of all similarly damaged parties. For example an owner may cause a delay in the construction, and during that delay the project manager dies in an unrelated car accident. The contractor is forced to obtain the services of another project manager, but at a cost greatly in excess of the deceased project manager’s salary. This would likely be a consequential damage as it was not reasonably foreseeable to the owner, that the first project manager would die.
Of great concern to contractors collaborating with the AIA in the preparation of AIA A201-1997 was the case of Perini Corporation v. Greate Bay Hotel & Casino, Inc. In this case the owner was awarded consequential damages in excess of $14.5 million dollars for lost profit when a casino was not completed on time. This amount was greatly in excess of the profit the contractor was expected to make on the project. While lost profit might be an actual or direct damage, the unusually large amount in this case is considered a consequential damage because of the unique characteristic of this owner, a casino owner, rather than owners in general.
The exact line between and direct and consequential damages is not clear and may vary with state law, and certainly depends on the specific facts of the case and the characteristics of damage. AIA A201-1997 does provide some guidance. The provision specifically states the owner waives the following damages: rental expense, loss of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons. Damages waived by the contractor include: 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.
Notice this provision waives much of the damage and risk the contractor is accepting should its design work performed prove to be faulty. For example, assume a stairwell or walkway designed by the contractor’s licensed engineer employee proves to be faulty, collapses and kills the owner. This would likely be a consequential damage waived by the provision. Note, however, this provision cannot waive the liability of third parties who may be injured. Should patrons of the owner’s establishment be injured, the contractor will remain liable to those patrons. A contractor should obtain insurance to protect it from such lawsuits.
The provision specifically retains the possibility of "direct liquidated damages". The term "direct liquidated damages" is not known in the case law and will hopefully not cause confusion to judges unfamiliar with the construction industry practice. In this sentence the term means that the liquidated damage provision must be an estimate of the direct damages only, no consequential damages are to be hidden in the liquidated damages provision.
The contractor must be careful the owner does not try to "hide" consequential damages in the direct liquidated damage clause. The direct liquidated damage clause must reflect an estimation of direct damages only, and should not contain any provisions for consequential damages.
The problem could arise because judge-made law normally enforces liquidated damage clauses and makes no distinction between "direct" or "consequential" damages included in the provision. If the provision is an estimation of the actual damages, is not designed as a penalty, and is understood by the parties to be a provision for liquidated damages, the provision will be enforced. However, actual damages could include consequential damages. The inclusion of the term "direct" will hopefully prevent this from happening. Should the court or jury determine the liquidated damage provision contains consequential damages, the provision should not be enforced.
Enforcing a liquidated damage provision that contains consequential damages would be contrary to the spirit of the document. However, realistically, it is unlikely the contractor will dissect the direct liquidated damage provision at the time the contract is entered into, and judges may be unwilling to do so at the time of trial. Judges may be of the opinion the contractor should have negotiated the direct liquidated damage clause at the time the contract was signed, if it thought the direct liquidated damage clause actually contained hidden consequential damages.
Changed Indemnity Provision
The third major change involves a change in the indemnity provision. Indemnity provisions have been the subjects of much dispute and negotiation. AIA A201-1987 stated "§3.18.1…contractor shall indemnify…the Owner, Architect…from and against claims, damages…arising out of our resulting from performance of the Work….but only to the extent caused in whole or in part by negligent acts or omissions of the Contractor…". This sentence means if the contractor was negligent at all, the contractor paid for the entire amount of the damages.
For example, assume a stairwell collapses and must be rebuilt at a cost of $10,000. Experts agree that the design was defective, however the concrete contained too much water. The jury evaluates the testimony and states that 99% of the cause of the damage is due to the negligent design of the stairwell by the architect, and 1% due to the negligence of the contractor in preparing the concrete. The contractor must pay the entire $10,000 cost of rebuilding the stairwell even though it was only 1% responsible for the event. AIA A201-1997 changes this result dramatically.
AIA A201-1997 reads "Contractor shall indemnify…the Owner, Architect…from and against claims, damages…arising out of our resulting from performance of the Work….but only to the extent caused by the negligent acts or omissions of the Contractor…". This modified provision states the contractor will only be responsible for the damages the contractor causes. The owner and/or architect will be responsible for the damages they cause. Using the same example as above, the contractor is liable for 1% of the damages, or $100, and the architect is liable for the remaining $9,900.
Broader Definition of Hazardous Materials
The fourth major change in AIA A201 is a broader definition of hazardous materials. This provision was first introduced in 1987 and protected the contractor from costs associated with the removal and containment of asbestos and PCB. Under the 1997 version, a hazardous material is more broadly defined as "a material or substance, including but not limited to asbestos and polychlorinated biphenyl (PCB), encountered on the site by the contractor that presents the risk of bodily injury or death." Under this definition any substance which presents a risk of bodily injury or death is a hazardous substance.
In the event hazardous materials are found the owner is required to indemnify the contractor, architect or subcontractor for claims or damages related to the hazardous substance, including removal, containment, and injury. This in effect puts the cost of alleviating the condition caused by hazardous material upon the owner.
As with all risks and liabilities of the parities using AIA A201-1997 the damages are limited by the Mutual Waiver of Consequential damages. Therefore, should the contractor uncover a hazardous material and be delayed in the project, it is not likely it will be able to recover home office overhead or other consequential damages.
This is an area where owners need to check their insurance coverage. Many property and liability policies do not contain provisions for removal, containment or damage related to pollution or pollutants. Pollutants are likely to include hazardous materials. Therefore a provision denying coverage for pollution is likely to deny coverage for anything related to hazardous wastes.
Requirement of Mediation
The construction industry has long recognized the inefficiency of litigating disputes. Construction contracts have for some years contained mandatory arbitration clauses. These mandatory arbitration clauses have consistently been upheld in most jurisdictions. Upholding a mandatory arbitration clause prevents the parties from proceeding with litigation in a matter.
In a further attempt to reduce the cost of claims and disputes, mediation is now required before arbitration or litigation is filed. Mediation is the use of a third party to help the parties voluntarily come to a settlement of their dispute. The mediator does not decide if one party is right or wrong, but merely assists the parties in negotiating a settlement. In mediation the parties retain more control over the outcome of the settlement and can fashion unique and appropriate remedies to conflicts. Arbitrators and judges are generally limited to damages.
A case settled at mediation will incur fewer costs than a case settled at arbitration. This is because it is not necessary to prove your case at mediation, merely to discuss various possible settlements. Mediations are not won or lost. Arbitration, on the other hand, is similar to a trial and the parties must prepare their cases in a similar manner or face the possibility of losing. While it is true an arbitration is less formal than a court trial, and therefore less costly, the parties still give up a great deal of control over the outcome once the matter is placed in the arbitrators’ hands. In addition the arbitrators are generally limited as to the scope and type of remedies they can employ. As with judges they are generally limited to monetary damages.
Changes to Insurance
The types of insurance the owner needs to obtain has been increased. The builder’s risk policy must now include "earthquake, flood, windstorm, test and start up" coverages.
In addition, a new type of insurance, "Project Management Protective Liability," (PMPL) is an optional insurance the contractor can obtain. This insurance will be paid for by the owner. This policy provides "primary protection of the Owner’s, Contractor’s and Architect’s vicarious liability for construction operations under the Contract."
In other words, this policy provides insurance if a party is found to be vicariously liable for the acts of others. In general, a party with control over a person will be vicariously liable for all damages caused by that person. An employer is generally vicariously liable for the breaches of tort or contract committed by its employee in the course and scope of employment. The owner will be vicariously liable for the breaches of the architect, and the contractor will be vicariously liable for the breaches of subcontractors.
There are two major advantages for the contractor obtaining this policy. First, to the extent the policy covers a claim or damage, indemnity and subrogation are waived. Secondly, the contractor will not be required to name the owner as additional insured on its general liability coverage. Because the PMPL policy is separate from the contractor’s other insurance, conflicts between the owner, contractor and insurance company over coverage can be expected to decrease. Since this is a new form of policy however, contractors and owners will want to understand the exact scope of coverage before deciding the owner should not be added as an additional named insured on the contractor’s Builders Risk or other insurance.
Summary
This article has discussed some of the major changes in AIA A201-1997. Many other changes have also been incorporated into it, changes not discussed here. It is likely specific state law will affect any interpretation of the document. Anyone using AIA A201-1997 should have the document carefully reviewed by counsel to determine the exact nature of their rights and liabilities under this new form, as compared to the prior form, and in connection with a particular project.
References
American Institute of Architects, AIA A201-1997, Washington, D.C.
Blake Constr. Co. v. U.S., 597 F.2d 1357 (Ct.Cl. 1979).
Clark & Thum, Owner’s Warranty of Specifications, Construction Briefings #81-2, Federal Publications Inc. (March 1981).
Farm-Fuel Products Corp. v. Grain Processing Corp., 429 N.W.2d 153 (Iowa 1988),
H&H Elec., Inc. ASBCA 29621, 86-3 BCA ¶19,303 (1986).
Harrington, Thum & Clark. (1984). The Owner’s Warranty of the Plans and Specifications For a Construction Project, 14 Pub.Cont.L.J. 240
Hol-Gar Manufacturing Corp. v. U.S., 360 F.2d 634 (Ct.Cl. 1966).
Maitland Bros. Co., ASBCA 25637, 86-3 BCA ¶19,251 (1986)
Midwest Dredging Co. v. McAninch Corp., 424 N.W.2d 216 (Iowa 1988)
Natus Corp. v. U.S., 371 F.2d 450 (Ct.Cl. 1967).
Owens-Corning Fiberglass v. U.S., 419 F.2d 439 (Ct.Cl. 1969).
Perini Corporation v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 610 A.2d 364 (1992).
R.M. Hollingshead v. U.S., 111 F.Supp. 285 (1953).
Restatement of Contracts §454,
Roy McGinnis, ASBCA, 28536, 85-3 BCA ¶18,259 (1985).
Spartan Electronics, ASBCA 14431, 73-1 BCA ¶9816 (1973.
Stuyvesant Dredging Co. v. U.S., 834 F.2d 1576 (Fed. Cir. 1987.
U.S. v. Lennox Metal Mfg. Co., 225 F.2d at 309
U.S. v. Spearin, 248 U.S. 132 (1918).
U.S. v. Wegematic Corp., 360 F2d 674 (Ct.Cl 1966),
Uniform Commercial Code §2-615 (Comment 3).
Williston on Contracts §§5516, 6617.
