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Construction Law Essentials for Architects
By: Stephen D. Harrison
Presented at The 74TH Annual Convention and Design Expo Texas Society of Architects
I. Contracts, the Foundation of the Construction Process
The contracts used on a construction project are the foundation of the construction process. These contracts commonly include (i) the community facility agreement between the Owner and the governmental entity having jurisdiction of the project, (ii) the loan agreement between construction lender and the Owner (which often requires an “Architect’s Consent Agreement”), (iii) the agreement between the Owner and Architect for design services, (iv) the agreement between Architect and its design professionals, (v) the construction contract between the Owner and the Contractor, (vi) the subcontracts between the Contractor and its subcontractors and suppliers, as well as (vii) the consulting agreements between the Owner and its various consultants and testing companies.
All of these agreements define and allocate responsibilities in the design and construction process. These agreements also allocate liabilities that usually flow from the responsibilities allocated in the agreements. Some of these liabilities are either transferred by indemnity provisions, or capped by limitation of liability provisions. All of these contracts also allocate the payments to be made for the responsibilities assumed under the scope of work, and state the terms and the conditions precedent for payments for the work.
The risk assumed by each party under these contract terms must be properly understood and priced into the agreed contract amount. When the risks and terms are fully understood, and priced into the contract amount, disputes may be avoided. But when these risks are not apparent and poorly defined, disputes frequently arise. Sometimes these risks were not understood and were not addressed resulting in significant damages. In other instances the costs to assume these risks were not included in the agreed contract price, and the costs far exceed the compensation provided in the contract. Either of these roads leads to the courthouse. All parties will pay much more to resolve the disputes than it would have cost to have properly provided for these risks in the contract. The contracts must clearly address the scope of responsibilities, as well as the payments corresponding to the responsibilities assumed.
This paper will concentrate on the agreement between the Architect and the Owner, and the provisions which frequently lead to disputes in this contractual relationship.
II. The Agreement between the Architect and Owner
A. Standard Forms for Architects
With the advent of word processing, many owners have moved away from standard AIA documents in favor of forms which Owners or their attorneys deem more “owner-favorable.” Whenever possible, an Architect should use the standard AIA B Series Documents for Agreements with Owners. These forms were drafted by attorneys representing Architects, to protect Architects. If an Owner uses the standard AIA documents but provides modifications, these modifications should be carefully reviewed to ascertain the additional risk assumed by the Architect. To the extent possible, the Architect’s work in both the design and construction phases of the project should address increased risk from any modified terms.
B. Scope Discrepancies – Cost Estimates
Architects are generally familiar with the scope of work provisions defined as Basic Services. Problems arise when the Architect’s concept differs from the Owner’s concept of what is within the scope of “Basic Services.” The Architect’s subsequent failure to perform in accordance with the Owner’s expectations frequently leads to disputes. When the Owner incurs additional unanticipated costs related to this difference of understanding, the disputes lead to the Courthouse. Therefore the Architect’s communications with the Owner should supplement the contract, and clearly state the limitations in “Basic Services.”
As an example, the Architect’s estimate of the probable cost of construction work, is required to be performed in each phase of the Architect’s Basic Services.[i] In making decisions through the design phases of the project, the Owner will generally rely upon the Architect’s opinions with regard to cost. The Owner will be aggravated if the construction costs significantly exceed the Architect’s estimates of probable cost presented through the design phases. The Architect will believe, however, that detailed cost estimating or detailed value engineering are Additional Services[ii] outside the scope of Basic Services. The Architect’s subsequent statement to an Owner that the Owner should have paid extra for detailed cost estimating, will only add fuel to the Owner’s anger. The Architect’s arguments that the Owner should have been more frugal in his decisions during the course of the decision, will also not be favorably received by the Owner.
In these circumstances, the Owner may conclude that seeking remedies against the Architect, is preferable to seeking more money from its Lender, or substantially decreasing the Owner’s expectations for the Project.
Especially during periods in which construction costs are rapidly fluctuating, the Architect should consider making a written recommendation to the Owner to obtain a Cost Estimating Consultant to prepare detailed costs estimates. Another alternative is using the Construction Manager At Risk[iii] procurement method, in which a Contractor is involved during design phases of the project to assist with cost estimates.
C. Scope Discrepancies – Code Compliance
Another area in which the scope of Basic Services is commonly disputed relates to compliance with laws, building codes, and regulations applicable to the project. The Architect’s contract clearly places this responsibility on the Architect beginning initially in the schematic design phase.[iv] Problems arise, however, when additional costs are added during construction from requirements of building officials. The additional costs may arise from a building official’s interpretation of code requirements which differ from the Architect’s interpretation. The potential for conflicts increases as governmental entities adopt new standards with differing conditions for energy conservation, historic preservation, tree removal, storm drainage retention, etc. Although considered by most governing bodies as progressive means of enhancing the quality of building construction, many of these newly drafted regulations and ordinances are overly broad, and subject to varying interpretations.
These potential problems can be avoided, or at least mitigated, by the Architect’s comprehensive and prudent review of all subdivision and building ordinances in the governing jurisdictions for a project, at an early stage. Normally the Architect begins this review in the schematic design phase. The Architect should consider performing this review when the Architect is evaluating his costs for performing the design. The Architect could then inform the Owner not only of the extra costs during construction, but also of the additional costs in the design phase for addressing these issues. The risk of these progressive ordinances adding unanticipated construction cost to a project, is substantially reduced when costs are allocated for a comprehensive examination of the regulations and evaluation of alternatives.
D. Outside the Architect’s Scope of Work
When the Architect relies on the work of another consultant engaged by the Owner, the Architect is often exposed to substantial risks, outside the Architect’s scope of work.
An Architect should review and evaluate the Owner’s contracts with a geotechnical engineering firm engaged directly by the Owner. The Architect must assure that the geotechnical engineer is financially capable of bearing the responsibility for damages if its work is negligent. First, the Architect should confirm the geotechnical engineer’s risk of loss is not limited by a limitation of liability provision in its contract. Texas courts generally enforce limitation of liability clauses.[v] Geotechnical engineering firms frequently negotiate these limitation of liability terms in their contracts with Owners, arguing that the fees for their services does not justify the risk of uncapped damages. Unfortunately, when the geotechnical engineering work is not properly performed, the damages usually far exceed the limited damages stipulated in these contracts.
Secondly, the geotechnical firm must have professional liability insurance sufficient to cover the potential damages arising out of its work. Not only should the coverage be adequate, but also the deductible should be capable of being borne by the geotechnical firm. The Architect must review these matters before inadvertently assuming these risks by basing the project design on another professional’s work.
Pollution abatement consultants can also create substantial risk of additional liability. When hazardous wastes in a building are not properly identified, substantial delays and damages usually result. A common occurrence is that hazardous wastes are defined by the consultant as remediated or encapsulated. The demolition required during the remodeling construction, however, encompasses the areas in which the hazardous wastes are encapsulated, not remediated. If the pollution abatement consultant fails to adequately communicate the risks of demolition in these areas to the Architect, the Architect may fail to adequately detail or note the shielding required during the demolition process. In such instances, the potential for damages may be very substantial. Therefore, a prudent Architect will confirm the qualifications, expertise, and financial capacity for independent consultants retained by the Owner, upon whose work the Architect’s design will rely.
E. PREPARATION OF CONTRACT DOCUMENTS
The Architect is typically responsible for the preparation of the Construction Documents in the design development phase of the work.[vi] Although the Owner must approve these documents, the Architect contracts to develop these documents. With regard to the plan drawings and the technical specifications, the Architect is a trained and experienced expert, knowledgeable of the requirements of these documents.
Although the Architect is usually very familiar with many of the terms in the Construction Contract and the General Conditions, the Architect seldom has legal training to comprehensively address the legal issues and all of the terms and conditions of the construction contract. The Architect should avoid liability from damages that may arise out of unenforceable or misinterpreted terms and conditions in a Construction Contract. The primary means of avoidance is by using standard documents accepted in the industry, such as the AIA family of documents. The AIA construction contract documents should be modified when necessary to address Texas laws. Only the most recently revised documents should be used. The defense of an Architect using an outdated document would be difficult when damages arise from terms relinquished in revised, updated documents.
With regard to the Supplemental Conditions, the Architect will have specific knowledge necessary for drafting these provisions. The Architect should, however, request information from the Owner, or the Owner’s risk manager, with regard to the types of insurance coverage and the limits of the coverage required for a specific project. The Architect should also seek information from the Owner in determining the amount of liquidated damages which would be a reasonable forecast of just compensation for the Owner’s actual damages in the event of a delay.[vii] The Owner’s reasonable forecast of just compensation should be established for any phase of the project which the Owner’s damages would be substantially different. The damages arising from a delay in the substantial completion preventing the occupancy of a building, will be substantially different from a delay in final completion after the Owner has already occupied the building. The Architect’s failure to seek the Owner’s input with regard to just compensation for these differing damages, may prevent the enforcement of the liquidated damages provisions.[viii]
Finally, the Architect should also transmit the legal portions of all contract documents to the Owner’s attorney, and request his review and revision. The Architect should welcome this review and incorporate any revisions requested by legal counsel. At a minimum, the legal documents to be reviewed by the Owner’s attorney should include the Contract, the General Conditions, the Supplemental Conditions, and the Performance and Payment Bonds. An Architect who fails to obtain this review, is exposed to liability for damages which arise from any legally inadequate or unenforceable terms or conditions in the Contract Documents.
F. An Architect’s Representations and Certifications
Everything that an Architect tells an Owner during the course of design and construction is a representation. When these representations are in writing, however, and when the representations turn out not to be accurate, the Architect could be exposed to liability. When these representations are material and are required in the Architect’s contract, the Architect’s exposure to liability increases. When these contractually required representations are called “certifications”, and the certifications are not accurate, the Architect’s road becomes even more rocky.
The primary reference to certifications in the Architect’s contract relates to applications for payments to the contractor. The standard AIA contract provides that the Architect’s certification for payment constitutes a representation to the Owner:
(i) that the work has progressed to the point indicated in the Contractor’s application;
(ii) that the work is in accordance with the contract documents.[ix]
Although there is some limiting provisions such as “based upon the Architect’s evaluation of the work” and “to the best of the Architect’s knowledge, information and belief”[x] this certification presents substantial risks for the Architect. The wording of the certification in the Architect’s agreement and in the Contractor’s application for payment is usually not subject to the Architect’s modification. The Architect should therefore seriously consider the responsibilities attendant with these certifications. The Architect’s due diligence is required in making evaluations prior to making these certifications. Both the Owner and Contractor should be promptly notified by the Architect when any issues are raised during the Architect’s evaluation of the construction work required for this certification.
G. Inspections by Architects
Except with regard to Final Completion, the standard AIA form carefully utilizes words such as “observations”, “evaluations”, and “visits to the project site” to describe the Architect’s construction phase work, rather than the word “inspections”[xi]. The word “inspection” is described in these provisions by the words “exhaustive or continuous”, and designates work outside the Architect’s construction phase work.[xii]
In all communications, whether written or oral, the Architect should likewise refrain from using the word “inspections”. This word implies a level of review usually far more comprehensive than what the Architect provides during construction site visits.
H. Third Party Beneficiaries of the Architect’s Duties
The Architect’s contract with the Owner should explicitly disclaim a contractual relationship with any third party.[xiii] The Architect’s duties should be limited to the Owner, rather than extending to third parties, such as adjacent property owners, guests of the Owner, or construction workers.
The Architect should also avoid expanding the scope of the parties to which he owes a duty by not controlling the construction work. The standard contracts promulgated by AIA, specifically disclaim the Architect’s duty to control the work. If an Owner uses a form other than an AIA document, the Architect should consistently disclaim the right to control the construction work. In accepting control of construction the Architect accepts responsibility for the safety of third parties at the construction site.
Texas courts have held that an architect can have the right to control either by contract or by actual exercise of control.[xiv] The Architect maintains the responsibility to notify parties of non-conforming work, and the authority to reject work that the Architect finds is non-conforming.[xv] The Architect must take precaution with this authority to assure that by the Architects actions, the Architect does not exercise control of the construction work. By controlling construction, the Architect becomes responsible for the safety of workmen, and for latent defects in the construction.
I. Payment for Architectural Services
The Architect’s contract with the Owner should clearly specify the amount of the Architect’s compensation, as well as the time for payment. A prudent Architect will timely send statements corresponding with the Architect’s contractual entitlement to payment. The Architect will also monitor payments to assure payments are timely.
Although Texas lien laws have been modified to vest the Architect with lien rights, one of the most effective means of assurance for payment is the Architect’s control of its instruments of service. The AIA documents specifically establish that prompt payment is a condition of the Architect’s grant to the owner of a non-exclusive license to use the Architect’s instruments of service.[xvi] The Architect should appreciate the significance of this condition to the Owner’s license to use the Architect’s work. No changes should be made to this condition precedent without due consideration and a rational basis for the Owner’s change.
J. Binding Mediation
Texas courts will usually require mediation of a case prior to trial.[xvii] Unless a party objects to mediation and convinces a judge that a mediation is futile and non-productive, the court will order the parties to mediation. Therefore, a requirement for a mediation as a condition precedent to dispute resolution,[xviii] is redundant and may impose additional costs on the Architect.
Under Texas law, prior to an Owner proceeding against an Architect on a dispute resolution proceeding, the Owner must obtain a certificate of merit from another licensed architect which alleges with specificity the negligent act or omission of the Architect.[xix] At the time of mediation, an Owner may not have obtained, and may not be able to obtain, a legally sufficient certificate of merit required under Texas law to initiate dispute resolution. Requiring mediation prior to a dispute resolution procedure, could also require the Architect to prematurely seek legal counsel, and to marshall defensive evidence. A provision requiring mediation in an Architect’s contract will seldom be more efficient for the Architect in promoting resolution, than the procedures provided under Texas Rules of Civil Procedure or under the Construction Industry Rules of the American Arbitration Association.
Effective January 1, 2012, the Texas Legislature declared “void and unenforceable as against public policy” any provisions of an indemnity agreement that require the indemnitor to indemnify an indemnitee, for the indemnitee’s own negligence in an agreement, collateral to or affecting a construction contract.[xx] This anti-indemnity statute should bar enforcement of an Owner’s contract with the Architect, requiring the Architect to indemnify the Owner for the Owner’s own negligence. Specifically excluded from this anti-indemnification statute, however, are indemnity provisions related to construction for municipal public works, and related to bodily injury or death of an employee of the indemnitor, or the indemnitor’s agents.
The legislation addresses many of the valid objectives of an Architect to indemnifying an Owner (and usually the Owner’s agents) for the Owner’s and its agents own negligence. The risks of liability arising out of such indemnities still exists, however, for injuries to the Architect’s employees arising out of the Owner’s negligence. Since the Architect’s employees will have very limited exposure to the construction site, and the Owner’s negligence causing personal injuries to the Architect’s employees will be remote, the Architect’s potential liability under such an indemnity would be extremely remote.
This indemnity obligation for an Owner’s own negligence on a municipal project is not barred by statute. This indemnification is especially troublesome for an Architect. The Architect’s professional liability policy, specifically excludes liability assumed by the Architect by contract, such as this indemnity provision on municipal projects. Without insurance coverage, the Architect could be fully liable for any damages arising out of the negligence of the Owner, and often the Owner’s agent. Because of the risks of this uncovered loss, the Architect should strike indemnity provisions on a municipal contract indemnifying the Owner and its agents for their own negligence.
Further, in any indemnification agreement, whether for municipal improvements or not, the agents of the Owner should be struck as indemnitees. The term “agents” includes an unnamed class of unidentified parties, which encompasses unknown risks. One such unnamed party could be the Owner’s pollution abatement consultant. Therefore, all such references to “agents” of the Owner as indemnitees should be struck from indemnity provisions.
L. Non-standard provisions in Contracts for Architectural Services
When an Architect encounters Owner drafted agreements with non-standard provisions, or signifies changes to provisions in standard forms, the Architect should consider whether engaging knowledgeable legal counsel would be prudent. The legal obligations imposed by such provisions, and the potential consequences, should be fully understood prior to the Architect entering into an agreement. When the potential consequences from such provisions are dire, most Owners, as well as their legal counsel, make reasonable modifications. A prudent Architect will carefully consider entering into a contract relationship with an Owner not willing to make reasonable modifications to provisions imposing unreasonable liabilities.
[i] Paragraphs 3.2.6, 3.3.3 and 3.4.4, AIA Document B101-2007.
[ii] Paragraphs 4.1.10 and 4.1.11, AIA Document B101-2007.
[iii] Paragraphs 2.1.2, 184.108.40.206, and 220.127.116.11, AIA Document A133-2009.
[iv] Paragraphs 3.2.6, AIA Document B101-2007.
[v] Allright, Inc. v. Elledge, 515 S.W.2d 266 (Tex. 1974); but see Phillips v. Phillips, 820 S.W.2d 785 (Tex. 1991) (refusing to enforce a liquidated damages provisions, as opposed to a limitation of damage provision, when the liquidated damage amount is a penalty. If the party attempting to enforce the stipulated damage amount is the party paying the damages, the provision is an enforcible limitation of damages provision. If the party attempting to enforce the stipulated damage amount is the party receiving the damages, the provision is a liquidated damage provision, and the enforcing party must establish that it is not a penalty by establishing that (i) the damage caused by. the breach is impossible or difficult to estimate; and (2) the amount of liquidated damages is a reasonable forecast of just compensation. See 592 S.W.2d 340, 342 n. 2 (Tex. 1979).
[vi] Paragraph 3.3.1, AIA Document B101-2007.
[vii] Commercial Union Ins. Co. v. La Villa Independent school District, 779 S.W.2d 102, 106-107 (Tex. App.—Corpus Christi 1989, no writ).
[viii] Stewart v. Basey, 245 S.W.2d 484, 485-486 (Tex. 1952.).
[ix] Paragraph 18.104.22.168, AIA Document B101-2007.
[xi] Paragraph 22.214.171.124, AIA Document B101-2007.
[xii] Paragraphs 126.96.36.199 and 188.8.131.52, AIA Document B101-2007.
[xiii] See Section 10.5, AIA Document B101-2007.
[xiv] Black + Vernooy Architects v. Smith, 346 SW3RD 877 (Tex. App.—Austin 2011, pet. for review denied) emphasizes the importance of these issues. The Appellate Court reversed a trial court’s judgment against the Architect awarding a portion of the damages sustained from serious personal injuries by guests when a balcony collapsed at a residence. The Appellate Court found that guests of the Owner were not third party beneficiaries of the contract between the Owner and the Architect. The Appellate Court also held that the Architect’s common law duty did not extend to these injured parties in light of the Architect’s duties during the construction phase, and the Architect’s lack of control of the construction, either by contract or the actual exercise of control.
[xv] Paragraph 184.108.40.206, AIA Document B101-2007.
[xvi] Paragraph 7.3, AIA document B100-2007.
[xvii] Chapter 154, Tex. Civ. Prac. & Rem. Code.
[xviii] Paragraph 8.2.1, AIA Document B101-2007.
[xix] Chapter 150, Tex. Civ. Prac. & Rem. Code.
[xx] Section 151.102 Tex. Ins. Code.