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AIA General Conditions: What You Don't Know Might Hurt You
by C. Daniel Lins
The American Institute of Architects ("AIA") construction contract forms are among the most widely used construction contracts in the United States. Because these contracts are an industry standard in many respects, they are often negotiated and signed without the advice of legal counsel. What many owners, contractors, and other users of AIA forms do not realize, however, is that the form contract they sign also binds them to approximately 50 additional pages of "general conditions" incorporated by reference into the contract. AIA Document A201, which contains these general conditions, is rarely attached to the contract that is signed—and, in fact, must be purchased separately from the AIA. Unfortunately, many parties discover the existence of the A201, and the additional terms therein, only when there is a dispute. At that point, the parties learn that they agreed to very specific procedures related to change orders, insurance, dispute resolution, and payment—procedures they may not have previously contemplated much less agreed to had they been aware that such terms existed.
The A201 establishes many of the rights and obligations between the owner, contractor, and architect operating under an AIA form contract, and the 1997 version of the A201 (the "A201-1997"), in use from 1997 to November 2007, impacts the majority of form construction contracts executed in recent years. After the A201-1997 received considerable criticism in some quarters for its perceived pro-contractor and pro-architect bias, in 2007, the AIA substantially revised the A201-1997, replacing it with a new form ("the A201-2007"). Several key provisions of the A201-1997 and A201-2007, not specified on the face of the form AIA contracts, include the following:
1. The Initial Decision Maker. For nearly 100 years, various versions of the A201 have designated the project's architect as the Initial Decision Maker ("IDM") for disputes arising between the owner and contractor. In short, the A201 required that any dispute be submitted to the architect for an initial decision, and the losing party could then demand mediation and then arbitration as provided under the contract. For those projects without architects, this requirement often stymied the dispute-resolution process. In recent years, both owners and contractors complained about this architect-as-decision-maker construct. Both sides were concerned about the architect's impartiality, particularly in situations where the architect's conduct formed the basis of the claim. As of the 2007 revisions to the A201, the architect is no longer the automatic initial decision maker in disputes, and the parties can now choose any third party to serve as the Initial Decision Maker. If, however, the parties fail to specify a third-party IDM, the architect still serves as the default, so in situations in which one or both parties is not aware of the A201, the concerns involving the architect as decision maker remain meaningful.
2. Arbitration. The AIA required mandatory arbitration from its very first owner-contractor agreement in 1888 all the way to 2007. Contractors and owners who are aware of these provisions requiring binding arbitration often deleted them. Beginning with the A201-2007, arbitration is no longer the required form of dispute resolution—although it is still an option available to the parties. In the new forms, the parties can now check a box to determine whether disputes will be resolved by arbitration, litigation, or something else. If no box is checked, the default is now litigation and not arbitration. (As before, the A201 still requires mediation before any binding dispute resolution process is pursued.) Prior to 2007, the A201 not only required arbitration, it also required that the arbitration be administered by the American Arbitration Association (AAA). Under the current version, if the parties choose arbitration, they may now choose their own provider of arbitration services. If the parties choose arbitration but fail to choose a provider, the AAA remains the default.
3. Statute of Limitations. From 1987 to 2007, the A201 contained a contractual statute of limitations for an owner's claims against a Contractor, which began to run upon "substantial completion" of the project. (This is different than the "discovery rule" adopted in many states, under which the statute of limitations commences only after the owner knows or should have known about the contractor's breach of contract.) The A201-2007 does away with this limit on the owner's rights, providing instead that the statute of limitations is now established by applicable state law. The A201-2007, however, also includes a 10-year statute of repose that specifies that in no event shall any claims against a contractor be asserted more than 10 years after the date of substantial completion.
4. Consequential Damages. Beginning in 1997, the A201 adopted a controversial waiver provision eliminating each party's potential recovery of consequential damages. Consequential damages are those that do not flow directly from a particular action but instead result indirectly from that action (such as lost rent, a type of consequential damages commonly claimed by owners). Though the waiver of consequential damages in the A201 is mutual on its face, owners groups have decried the provision due to their belief that it is not mutual in practice. Owners assert that their losses due to consequential damages almost always far outweigh those of contractors. The A201-2007 retained this consequential damages waiver provision.
5. Financial Information. The A201-1997 permitted contractors to request financial information from the owner and to stop working until such information was received. Due to the potential for abuse, the A201-2007 now restricts the contractor's rights to receive such information after work commences. The contractor can now make such requests only if: (1) the owner has failed to make a payment to the contractor, (2) a change in the work materially changes the contract sum, or (3) the contractor specifies in writing reasonable concerns about the owners ability to make payments when due. Upon receiving this request, the owner is still required to provide reasonable evidence about its financial ability to make payments when due.
6. Change Orders. Under the A201, the architect, rather than owner, directs the work and authorize any change orders. A change order, defined as a written instrument evidencing the agreement of architect, owner, and contractor and involving a change in the work, adjustment to the contract sum, and adjustment in the contract time, must be not only approved by the architect but also drafted or prepared by the architect. An order for minor changes to the work may be issued by the architect alone. As with the initial decision maker provision above, the architect's central role in the A201 with regard to the issuance of change orders can certainly muddle the process in projects where the participation of an architect was neither provided for nor expected.
7. Insurance. The A201 has long required that contractors procure liability insurance. In 1997, the AIA began requiring a specific, newly created type of insurance policy called "Project Management Protective Liability Insurance." Few such policies were purchased, and this type of insurance failed to get off the ground, primarily because owners and contractors agreed that contractors could just add owners, architects, and subcontractors to the contractor's liability policy as "additional insureds." The AIA adopted this solution, and the A201-2007 now requires that the contractor add the owner, the architect, and the architect's consultants as additional insureds under the contractor's policy. Additionally, the A201-2007 requires that contractors maintain completed operators coverage.
These are but a few of the many general conditions contained in the widely used (though, unfortunately, less widely known) AIA form A201. For those who have utilized AIA forms in the past but were not aware of these general conditions, it would be advisable to review the contracts to which you are a party and obtain a copy of the A201 (or comparable AIA document) that may have been incorporated by reference. If you have questions about any form AIA contracts you may have used or any additional terms that may have been incorporated therein, contact qualified legal counsel. |
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