Last time, we discussed how some of the 2017 revisions to the American Institute of Architects (AIA) form design and construction contracts benefit general contractors. Such revisions added clarity to provisions concerning cost savings, retainage, termination for convenience, and notice.
Industry stakeholders should not be surprised that in the spirit of fairness, the 2017 revisions to the A102 Guaranteed Maximum Price contract and the A201 General Terms and Conditions equally benefit owners and developers. These revisions create new default provisions that reflect common owner demands negotiated into the prior form documents. Some key changes are as follows:
The prior form A102 hid a parenthetical place marker at the bottom of the scheduling section of the document for the parties to address liquidated damages. If they did not ignore or strike this section, sophisticated owners would draft their own liquidated damages provision and insert it into the document. The new A102 document no longer hides the ball. Article 5 Contract Sum of the A102-2017 now includes a stand-alone provision (Section 5.1.6) for the parties to consistently determine whether the owner may be entitled to liquidated damages.
When drafting the liquidated damages provision to comply with Washington law, this author recommends that the parties reaffirm that the liquidated damages are (i) not to be construed as a penalty and (ii) a reasonable forecast of the owner’s anticipated losses from the time of contracting. It is generally advisable to tie the liquidated damages amount to a direct loss the owner incurs as a result of delayed construction, such as a rent abatement to a tenant as a result of the owner not timely delivering the premises.
In order to encourage cleaner contracts and efficient negotiations, Section 5.1.6 immediately precedes the new “cost savings” provision that incentivizes contractors to complete work under budget. With both provisions side-by-side, the parties can effectively evaluate the economic consequences of complying with the construction schedule and guaranteed maximum price.
A new benefit to owners is the addition of Section 3.5.2 of the A201. This default provision now requires all material, equipment and other special warranties to be issued in the name of the owner directly. This means that the owner will no longer have to go through the contractor to enforce its warranty rights. The prior AIA documents did not account for this seemingly obvious right. As such, parties would negotiate whether all warranties would be in the owner’s name, or if the general contractor would hold and assign them to the owner upon substantial completion. With the new default language, contractors, subcontractors, and suppliers should expect the requirements that their warranties initially be in the owner’s name (and not merely assignable) to be the industry standard.
Contractors typically incorporate by reference the terms of the A102 and A201 (among other prime contract documents) into each subcontract. Indeed, the owner expects the contractor to do so under Section 5.3 of the A201. However, that section is now revised to require the contractor to ensure by written agreement that its subcontractors assume the same obligations to the contractor that the contractor assumes to the owner. Requiring the assumption of the prime contract by written agreement is critical to account for owners customarily requesting to review and approve of all subcontracts prior to commencement of the applicable work. Thus, if a subcontractor is inadvertently granted greater rights because its subcontract contains provisions that are inconsistent with the A102 and A201, then the contractor will be in breach. Owners will undoubtedly hold contractors accountable for any inconsistent subcontract provisions.
As a practice point, it is important that all subcontracts be in writing so that the contract price and scope of work is clearly defined. Failing to clearly define the price and scope could open the door to unexpected, excessive and illegitimate lien claims (e.g., a subcontractor could claim a lien for work that the contractor did not direct it to perform or at a price greater than what would have been provided in the written agreement).
This lawyer’s favorite owner-oriented revision to the 2017 AIA documents is the addition of the lien indemnity set forth in Section 9.6.8 of the A201. That section (contained in Article 9 Payment and Completion) now provides that so long as the owner has complied with its payment obligations, the contractor shall indemnify and defend the owner for any loss or liability (including attorneys’ fees and litigation costs) for any claim of lien asserted by a subcontractor or supplier of any tier.
The general indemnity provision set forth in Section 3.18 of the A201 applies to claims made against the owner arising out of the contractor’s work only. Since it does not specifically cover claims of liens, owners would heavily negotiate that term to shift the risk of meritless lien claims to the contractor. That negotiated term is the new default language in Section 9.6.8. Therefore, contractors must expect to be responsible for improper lien claims and should pass down similar burdens to their subcontractors.
Prudent owners should additionally ensure that the lien indemnity in the A201 mirrors the lien indemnity language contained in the owner’s standard conditional and unconditional lien releases are included in order to avoid any claims of conflicting contract terms.
A Couple Other Things
In addition to the above provisions, there are a couple other owner-favored revisions worth mentioning.
Changed conditions. Section 3.7.4 of the A201 now requires the contractor to provide notice of a changed condition within 14 days of observing in order to be entitled to additional compensation. The prior document required such notice within 21 days.
Construction procedures. Section 3.3.1 of the A201 now requires contractors to perform their work using the safer of (i) the means and methods imposed by the contract documents or (ii) alternative means and methods proposed by the contractor. This imposes a heightened duty of care on the contractor to the benefit of the owner.
Although the foregoing provisions are just a few of several owner-oriented revisions to the AIA documents, an overarching theme is that the revisions limit the owner’s liability exposure. Considering the amount of financial risk that owners carry throughout their development projects, these revisions seem to be a reasonable compromise to encourage ongoing development in a post-recession market.