Balancing interests in construction contracting.

The public works department had just completed a large construction project that was hailed throughout the city as physically critical to the area’s future economic development as well as aesthetically impressive. An inspection by city engineers, however, revealed minor flaws in the construction — mistakes that, if not corrected, could eventually render the project dangerous.

But the standard form contract signed by the city’s officials precluded them from taking any action against the architects or contractors and did not provide for repair of the problems.

The example above is fictitious. The situation is not. Public owners often approve widely used standard form contracts with little or no investigation. Then, months or years down the road, they discover either mistakes in the architect’s plans or faulty construction and realize too late that the contract does not provide for those mistakes to be corrected and may even prevent the city from taking legal action.

Because contracts often become the battleground on which disputes are fought, it is important that they contain provisions ensuring the protection of public owners. Standard form contracts, such as the American Institute of Architects (AIA) Owner-Architect Agreement and the General Conditions for Construction, in many instances, do not do this adequately. These contracts are drawn up by construction interest groups and can contain language contrary to public owners’ interests.

An Unbalanced Scale

The AIA Owner-architect Agreement is the most widely used standard form of agreement between owners and architects. The standard agreement contains 14 articles, but only the first discusses the professional undertakings of the architect. The remaining articles can be read to either directly benefit the architect or diminish his or her responsibilities.

Prior to beginning a project, an architect’s most important work is the design and preparation of detailed plans and specifications, documents that form the basis of construction. The owner-architect agreement says that “the architect shall prepare, for approval by the owner, construction documents consisting of drawings and specifications setting forth in detail the requirements for the construction of the project.”

At first blush, this appears to be an airtight agreement charging the architect with responsibility for the accuracy and adequacy of the plans and specifications.

Certainly, public owners intend for the architect to shoulder this responsibility.

But the agreement can be read to dilute that responsibility. Language like “for approval by the owner,” and provisions stating that public owners agree to “designate a representative authorized to act on the owner’s behalf,” and to “render decisions in a timely manner pertaining to documents submitted by the architect,.” can, taken as a whole, serve to lessen the architect’s liability for errors and omissions in the plans and specifications.

For instance, architects facing legal claims have argued that the owner gave final approval to the work and thus became responsible for it.

Additionally, when there are errors or omissions in plans, contractors may hold public owners responsible for damages on the basis of an implied warranty that the plans and specifications are sufficient to construct the project. This implied warranty is not generally overcome by clauses disclaiming responsibility for the accuracy of the plans or requiring contractors to verify specifications by inspection of the site. Public owners need to ensure that there are clear rights of indemnity against those who created the problems.

Faulty Architecture

Both the AIA Owner-Architect Agreement and the AIA General Conditions give architects ample authority to protect public owners. Difficulties arise, however, from the absence of clear language making it the architect’s duty to protect the public owner and in the abundance of language that minimizes the architect’s responsibility.

Under the owner-architect agreement, architect is designated “a representative of” the owner who “shall advise and consult with the owner during construction.” Furthermore, architects are “authorized access to the project at all times; may require that all of the public owner’s instructions to the contractor be forwarded through the architect; named as the party authorized to determine how much money is owed to the contractor at any given time; authorized to interpret the contract documents; to reject unacceptable work; to require special inspections or testing; to order minor changes in the work; and generally will endeavor to protect the public owner’s interest and assure successful completion of the project.”

At the same time, while granting ample authority to the architect, the AIA documents insulate the architect from full responsibility.

For example, the owner-architect agreement specifies that “the architect shall visit the site at intervals appropriate to the state of construction or as otherwise agreed by the owner and architect in writing to become generally familiar with the progress and quality of the work completed and to determine in general if the work is being performed in a manner indicating that the work when completed will be in accordance with the contract documents.”

It continues, “the architect shall not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the work. On the basis of on-site observations, the architect shall keep the owner informed of the progress and quality of the work, and shall endeavor to guard the owner against defects and deficiencies in the work.”

Literal interpretation of this section permits architects to “visit,” not inspect the project at intervals vaguely described as those “appropriate to the stage of construction,” in order to become “generally,” not specifically, with what the contractor has been doing and to determine, “in general” whether the work is acceptable.

The language very nearly implies that more stringent requirements would entail exhaustive or continuous inspections and absolves architects from any such obligation.

In cases in which architects have been blamed for failing to correct faulty construction, they often point to this language for insulation from responsibility.

Contractors’ Warranties

Construction contracts typically include warranties such as the following found in the AIA General Conditions:

“The contractor warrants to the owner and architect that materials and equipment furnished under the contract will be of good quality and new unless otherwise required or permitted by the contract documents, that the work will be free from defects not inherent in the quality required or permitted, and that the work will conform with the requirements of the contract documents. Work not conforming to these requirements, including substitutions not properly approved and authorized, may be considered defective.”

This warranty affords considerable protection to public owners as it is a strict warranty — i.e., not based on negligence — and therefore imposes liability on the contractor for inferior work even when no particular violation of the plans and specifications is shown.

However, the warranty contains no language requiring the contractor to take any steps to correct the problem.. Likewise, it states nothing about how long the warranty remains in effect. In fact, this is true of warranties in general; they are essentially representations of fact and do not create obligations to do anything. On the other hand, most standard form contracts contain guaranty clauses which do obligate the contractor to do something for a specific period of time.

Again, the AIA General Conditions are typical:

“If, within one year after the date of substantial completion of the work or designated portion thereof, or after the date for commencement of warranties, or by terms of an applicable special warranty required by the contract documents, any of the work is found to be not in accordance with the requirements of the contract documents, the contractor shall correct it promptly after receipt of written notice from the owner to do so unless the owner has previously given the contractor a written acceptance of such condition,” states the standard such clause. “This period of one year shall be extended with respect to portions of work first performed after substantial completion by the period of time between substantial completion and the actual performance of the work. This obligation shall survive acceptance of the work under the contract and termination of the contract.

The owner shall give such notice promptly after discovery of the condition.”

This guaranty clause explicitly obligates contractors to correct defective work for one year after substantial completion. As long as public owners give notice to contractors within a year, they are bound to make repairs even after the expiration of one year Nevertheless, problems are encountered when the one-year guaranty is linked to an express warranty clause or when the courts confuse a warranty with a guaranty obligation.

For example in Cree Coaches Inc. v. Panel, Supplies Inc., the contract contained a one-year guaranty clause, but, in addition, provided that “the making and acceptance of final payment shall constitute a waiver of all claims by the owner other than those arising from unsettled liens or from faulty work appearing thereafter as provided for by the guaranty clause.”

The problem was that the two clauses together provided that the contractor’s only obligation, after final payment, was to correct defective work appearing within one year. On the other hand, courts are reluctant to place a short fuse on contractors’ warranty obligations and will strain to find that the typical one-year guaranty obligation is an additional remedy.

Termination Clauses

Most contracts contain provisions permitting public owners to fire contractors who have defaulted on a project and replace them. However, sometimes public owners terminate work prior to completion of a project for their own convenience. Thus, if the project becomes obsolete, the funds required are no longer available or any reason arises that causes public owners to want to terminate work, a proper termination clause permits this without breaching the contract.

It is not unusual for a construction’ contract to contain a “termination for convenience” clause. Federal government contracts generally permit owners to terminate a contract for convenience when the contracting officer determines that such termination is in the “best interest of the government.” An additional benefit of a termination for convenience clause occurs when public owners wrongfully find a contractor in default of his contract and terminate his work. A properly drafted termination clause converts the wrongful termination into a termination for convenience.

For example, the federal government’s termination clause provides that any termination that is ultimately determined to be unjustified is automatically deemed a termination for the convenience of the government.

When a public owner is wrong in terminating, a contractor’s profit recovery is limited to profit on the work performed, rather than profit for the entire job, as would be the dam, ages in awrongful termination action for breach of contract.

Arbitration Clauses

Many standard form contracts contain clauses providing that all claims and disputes be decided by arbitration. Most states and the federal government encourage arbitration and provide for strict enforcement of such clauses.

Indeed, the AIA General Conditions provide for arbitration between contractors and owners. However, they exclude architects from the arbitration process, thus leaving out one of the parties frequently involved in disputes. Consequently, public owners, if given a choice, may opt for the courts rather than arbitration for a number of reasons. For instance:

* Arbitrators are often inclined to compromise rather than grant either party a victory.

* Public owners will need discovery of a contractor’s files and the facts known to the contractor’s witnesses. Formal discovery procedures are not as broad in arbitration as those in state and federal courts.

* Arbitrators are not bound by contract language or normal rules of law and evidence.

* Arbitration is not inexpensive. The American Arbitration Association charges an initial filing fee and an additional fee based on the amount of the claim.

* Some claim that arbitrators selected for their expertise in the disputed area can arrive at more reasoned results. However, because of such expertise, arbitrators may have biases that do not conform to a public owner’s position.

Most of the objections to arbitration can be solved by changes in arbitration clauses. Nevertheless, public owners may be encouraged to refrain from using arbitration clauses in their contracts.

Ultimately, standard form contracts are produced by interest groups and therefore subject to biases. Public owners should be cautious when using these documents and scrutinize them carefully.

There are alternatives to standard form contracts, such as having the various parties draft an original contract to provide for unique needs and eliminate the inclusion of potentially harmful clauses.