Contractor's Risks and the AIA A201

The AIA standard form of agreement between contractor and owner (the AIA A101) does not appear to be an overly complex or daunting agreement on its face.  However, upon closer review, and a look at the right hand margin, it becomes apparent (sometimes not until something has gone terribly wrong on your construction project) that when you signed that AIA A101 you agreed to many, many terms that are not contained in the AIA A101 at all.  In fact, the terms and conditions of the agreement you just entered into are contained in an entirely different document, the voluminous and detailed AIA A201.  The reason is that in that margin on the first page of the AIA A101, in not so conspicuous print, is a notation that the AIA A201 is incorporated into your agreement.  Many times one (or even both) of the parties to the contract, especially if not familiar with it or not represented by counsel, do not realize what they just agreed to and often one (or both) parties did not even review the AIA A201 prior to signing the contract.  But the AIA A201 is the "meat" of the contract between the owner and the general contractor.  Sure the AIA A101 contains the most basic terms, such as price and possibly completion time, but the real details of the project show up in the AIA A201.  Some of the conditions set forth in the AIA A201 can come as a real surprise, and can be devastating news, to an unsuspecting party when something goes wrong.  Today we are going to discuss a few of the common shockers that can be pitfalls for the unsuspecting party.

Arbitration Provision

The AIA A201 contains an alternate dispute resolution section.  The exact language may be different depending on the version of the AIA A201 that you are using and may be altered by the parties but both the owner and the contractor should be aware that this provision exists.  It could call for mandatory mediation in addition to mandatory arbitration.  In general, the arbitration provision will require any disputes arising out of the contract to be submitted to binding arbitration before the American Arbitration Association.  What this means is that when something goes wrong you don't get your day in court.  You get your day in front of the arbitrator and it is a very different process.  Construction arbitrations before the American Arbitration Association are generally governed by the Construction Industry Arbitration Rules and Mediation Procedures.  Opinions are varied on whether arbitration is preferable to litigation and each case is certainly different.  The arbitration vs. litigation discussion is one worthy of its own discussion so I won't go into detail here but if you are interested in exploring the arbitration vs. litigation topic more I suggest you take a look at this article:

Construction Arbitration vs. Litigation - which is right for you?

Waiver of Consequential Damages

The AIA A201 incorporates another significant term that can come as a real surprise to the unsuspecting party, especially the unsuspecting owner.  This provision provides that both the owner and the general contractor waive the right to pursue a claim against the other for any consequential damages that arise out of the other party's breach.  So what are consequential damages?  Well, the simple definition is anything that is not direct damages.  Direct damages would be the owner's cost to repair defective work, the owner's cost to complete unfinished work, the general contractor's payment due for work that was completed by not paid for, etc.  Consequential damages on the other hand are damages that flow indirectly from the breach.  While a general contractor certainly can face consequential damages, it is usually the owner that takes the big hit in the form of consequential damages when something goes wrong (and that is usually why the owner is devastated to discovery that he agreed to the AIA A201 after something has gone wrong).  What if the project was grossly delayed due to the contractor's malfeasance and the owner missed a prime market, lost months (or years) of rental income or lost funding to complete the project?  Too bad, those damages are consequential and are waived.  

Notice of Claims

The AIA A201 contains a provision requiring that when either party intends to make a claim against the other, they must serve written notice of the claim to the other party within 21 days of discovering the existence of the claim.  There is some dispute over the effect of this clause.  Some will argue (usually those that the claim has been made against) that failure to serve notice of the claim within 21 days will serve as a waiver of the claim.  Others (usually those making the claim but after the expiration of the 21 days) will argue that the provision is simply a condition precedent to litigation or arbitration and, therefore is simply a timing mechanism.   Those taking this position will point to Section 13.4.2 of the AIA A201 that says "no action or failure to act by the owner, architect or contractor shall constitute a waiver of a right or duty afforded them under the contract, nor shall such action or failure to act constitute approval of or acquiescence in a breach there under..." in support of their argument failure to serve the notice (a failure to act) cannot be deemed a waiver.  I tend to agree with the latter argument but that doesn't mean a judge or arbitrator will agree so it is best to know what your AIA A201 says and to immediately serve notice of a potential claim as soon as it is discovered. 

This is by no means intended to be a full or complete list of the key provisions in the AIA A 201, there are many other important provisions that I will save for another day.  The important thing to take away is that the AIA A201 is one of the most important documents in the construction industry, and if you are using the AIA A101 (or any other AIA document that incorporates the AIA A201) then you should make sure you read, and understand, the meaning and consequences of the AIA A201.

Vincent T. Pallaci is a partner at the New York law firm of Kushnick Pallaci, PLLC where his practice focuses primarily on the area of construction law.  He can be reached at (631) 752-7100 or vtp@kushnicklaw.com