FCA CONTRACTINSIGHT Vol. 2, ISSue 1 MarcH 2008 AIA A401: THE “NEW” 2007 CONTRACTOR– SUBCONTRACTOR AGREEMENT On November 5, 2007, the American Institute of Architects (“AIA”) released revisions to its standard form construction contracts. Many of these changes will have a significant impact on FCA members. This Contract Insight will focus exclusively on changes in the new 2007 AIA CAP Document version to the 1997 AIA A401, Contractor-Subcontractor Agreement. CONTRACTOR-SUBCONTRACTOR AGREEMENT The relationship between a general contractor and subcontractor is usually formalized by a contract. In today’s construction industry, parties commonly use a “standard form” construction contract to memorialize their arrangement, and to set forth the essential terms of the parties’ agreement. The terms of the contract will generally detail such items as the scope of work, the price of the work, requirements for communicating with the project’s stakeholders, what will happen in the event a party breaches their obligation under the contract, etc. Because, a legally executed contract is binding upon the parties, general contractors and subcontractors must be familiar with the terms of the agreement prior to signature. The new AIA A401-2007 Standard Form Agreement between 1 FCA CONTRACTINSIGHT Contractor and Subcontractor (“A401-2007”) introduces several substantive changes from the previous A401-1997 (“A401-1997”). These major changes, along with their potential impact on business, are outlined in this article. provide additional liability coverage on behalf of the general contractor. This can be accomplished with an “additional insured endorsement,” which is a mechanism that adds the general contractor to the subcontractor’s insurance policy. Subcontract Documents1 The AIA reinserted the “additional insured” requirement into the A401-2007 after nearly a decade of excluding it from the subcontractor agreement. The language of the new section 13.4 clearly attempts to limit a subcontractor’s additional insured liability to only those losses caused by the subcontractor’s own negligent acts or omissions. Subcontractors should always review every relevant subcontract document to ensure familiarity with the entire scope of a project. Under the A401-2007, subcontractors have the ability to obtain and review those documents prior to execution. This subtle yet important change should relieve subcontractors of some undesired risk. The A401-1997 was not clear as to whether subcontractors could obtain the subcontract documents prior to execution. However, the A401-2007 authorizes subcontractors to obtain and review all subcontract documents prior to being bound to the agreement. Subcontractors that take advantage of this new modification should be rewarded with fewer surprises as the project unfolds. Additional Insured2 General contractors and subcontractors must typically provide insurance for the work they perform on a project. This usually involves each individual contractor and subcontractor securing separate insurance policies to cover any losses incurred as a result of their work. In some instances, the subcontractor may have a duty to 1 2 2 Further, the only party the subcontractor must name as “additionally insured” for “completed operation” claims is the general contractor. Previous versions of the subcontract mandated the subs provide the additional insurance for owners, architects and their consultants for completed operation claims. The A401-2007’s limitation of such coverage to only the general contractor may result in lower insurance costs for many subcontractors. Dispute Resolution3 Disputes arise frequently in the construction industry. If a contract contains no specific provision on how the parties will resolve disputes, the default is for the parties to handle the matter before the appropriate Vol. 2, Issue 1 March 2008 state or federal court. However, nearly every standard construction contract contains some dispute resolution procedure with the goal of encouraging negotiated resolutions, and limiting costs. Having an effective dispute resolution mechanism in place prior to commencing a project should be crucial to all parties. The A401-2007 made two important modifications to the A401-1997’s dispute resolution provisions. Under both the A401-2007 and A401-1997, disputes between general contractors and subcontractors are subject to mandatory mediation. “Mediation” is a non-binding process where the parties generally seek the assistance of a third party to attempt to resolve their matters through negotiation. However, the A401-2007 gives the parties greater autonomy in negotiating which binding dispute resolution process will be used in the event mediation fails. Under the A401-1997, matters not resolved by mediation were only subject to binding arbitration. The “new” section 6.2.1 allows the parties to “check the box” as to whether arbitration or litigation will be used for the binding resolution of disputes. 3 3 FCA CONTRACTINSIGHT This “check the box” approach is a significant departure from the trend favoring mediation. Both the recently created ConsensusDOCS (see Contract Insight No. 4) and AIA follow an approach permitting choice in selecting the method for dispute resolution. This change has not gone unnoticed by the American Arbitration Association (“AAA”). The AAA, with its well-known and widely-used Construction Arbitration Industry Rules, was the primary beneficiary of the prior presumption in favor of arbitration. In response to the change by the AIA and ConsensusDOCS, the AAA has begun a media campaign, including advertising entitled “The Risks of Not Choosing AAA Arbitration In the New AIA and ConsensusDOCS Contracts.” The presence of “choice” in dispute resolution will require discussion with legal counsel, as well as offering a topic for negotiation when analyzing AIA (or ConsensusDOCS) construction contracts. Additionally, the A401-2007 eliminated a previous limitation on consolidation or joinder of third-parties to disputes arising under the subcontract. Under the A401-1997, the architect (or its agents) could not be made a party to subcontract disputes under any circumstances. However, the A401-2007 does not 4 4 contain a similar limitation. With A401-2007, neither general contractors nor subcontractors are barred from bringing the architect in as a party to subcontract disputes, assuming the architect consents in writing at any time. Indemnification4 Subcontractors expect to undertake some risk when signing a subcontract. Subcontractors generally do not expect to be liable for damages caused by the conduct of the general contractor, owner, or other subcontractors. However, a subcontractor can assume such liability when signing an agreement with an indemnification provision. An indemnification provision typically requires the subcontractor pay for the general contractor’s losses if the general contractor is liable to a third party. For example, if the general contractor is sued, the subcontractor may be responsible to reimburse (or indemnify) the general contractor for money the general contractor paid to the third party. Under the expanded indemnification requirements of A401-2007, the subcontractor must indemnify the general contractor for the costs and expenses the general contractor incurs (1) for the remediation of Vol. 2, Issue 1 March 2008 materials or substances brought to the site that are negligently handled by the subcontractor, or (2) where the subcontractor fails to perform their obligation to take reasonable precautions to prevent foreseeable bodily injury or death resulting from a hazardous material or substance. Thus, subcontractors that sign the A401-2007 should take extra precautions in handling materials and substances on site – particularly those that may be hazardous. This “new” subcontractor indemnification requirement is in addition to the traditional indemnification requirements set forth by section 4.6 of both the A401-2007 and A401-1997 subcontracts. Payment for Stored Materials and Temporary Facilities and Services 5 On most significant jobs, subcontractors are required to order expensive equipment and materials to be paid for under the contract as the project progresses. However, these arrangements can pose a number of important issues for the subcontractor: Who is responsible for the care, custody and control of the materials on-site? What if the materials are stolen? Who will insure the materials and what type of policies are required? The answers to these issues will generally be governed by the terms of the contract. Under the A401-2007, the general contractor is obligated to furnish all temporary facilities, equipment and services at no additional cost to the subcontractors unless specifically identified. This will provide subcontractors with certainty they can utilize such job-site items and services without incurring any additional expenses. Under the “old” A401-1997 language, subcontractors were responsible for unexpected charges for such items and services. Waiver of Claims 6 For many construction businesses, it can be a relief to get any payment for work performed, let alone be paid entirely. For subcontractors, the risk of nonpayment seems even greater than the risk experienced by general contractors. Most subcontractors are concerned about whether the general contractor will get paid and, more importantly, whether the general contractor will in turn pay the subcontractor. However, subcontractors must be careful when accepting payment or they may find themselves without a remedy to recover all amounts to which they are entitled. Under the A401-2007, a subcontractor’s acceptance of final payment will constitute a waiver of any outstanding claims against the general contractor, unless those claims are identified in writing as unsettled by the subcontractor at the time of final payment. Thus, subcontractors must be diligent in properly documenting all outstanding claims and bringing those claims to the general contractor’s attention prior to accepting final payment. Failure 5 6 5 FCA CONTRACTINSIGHT to do so may result in significant financial losses or waiver of any further right to payment to the subcontractor. Assignment of Subcontract to Owner7 The A401-2007 presumes that the owner may accept the general contractor’s obligation and retain the ability to enforce the contract in the event the general contractor is unable to perform. A401-2007, section 7.4.1, incorporates by reference the AIA A201, and provides: “Each subcontract agreement for a portion of the work is assigned by the Contractor to the Owner.” See also AIA A201 General Contract §5.4.1 (2007 Edition). Such assignment is only effective after a termination of the contract with the contractor by the owner for cause. See AIA A201 §5.4.1.1. In the event of such an assignment, or an assignment by the owner of the subcontract to any third parties, the owner continues to be liable to the subcontractor for obligations under the subcontract. See AIA A201 §5.4.3. 7 8 6 Warranty 8 A warranty is “an express or implied statement that some situation or thing is as it appears to be or is represented to be.” See Webster’s New American Dictionary. An “express warranty” is an actual promise regarding the condition of something. The following contract language is an example of an express warranty: “The Subcontractor warrants to the Contractor that the Work will be free from defects.” Under both the A401-2007 and A401-1997 (and in most other construction contracts), subcontractors are expressly required to warrant that materials and equipment furnished for the project will be of good quality, and that any work performed will conform to the requirements of the subcontract and be free from defects. However, the A401-2007 also requires subcontractors to furnish satisfactory evidence as to the kind and quality of materials and equipment utilized in the subcontract work if requested by the general contractor or architect. In effect, section 4.5 Vol. 2, Issue 1 March 2008 requires subcontractors to keep organized records of the materials and equipment used in the subcontract work after the project is completed to ensure compliance with the agreement. Timing of Contractor Remedies 9 The A401-2007 has expanded the time subcontractors have to correct any defects in the subcontract work. If a subcontractor defaults or neglects to carry out its work in compliance with the contract, the subcontractor now has five days, instead of three, to commence and continue correction of the default. Sub-Subcontractor Work 10 Under the A401-2007, subcontractors are required to enter into written agreements with subsubcontractors. The A401-1997 only required subcontractors to enter into written agreements with sub-subcontractors upon request by the general contractor. 9 10 7 Vol. 2, Issue 1 March 2008 CONCLUSION Although the majority of the provisions in AIA A401 remain unchanged, both general contractors and subcontractors should be aware of the new provisions in the A401-2007 and understand how duties, responsibilities and (most importantly) liabilities have been altered. It is important to remember this Contract Insight does not reflect every change made to the A401, but addresses key changes that may affect subcontractors in general. The Finishing Contractors Association wants the Contract Insight articles to serve its members. Your feedback or topic suggestions are welcomed by contacting Steve Yoch at syoch@felhaber.com or (800) 989-6321 or Amelia Townsend at atownsend@ finishingcontractors.org or (703) 448-9001. 8150 Leesburg Pike, Suite 1210 Vienna, VA 22182 www.finishingcontractors.org 8