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Arbitration is looking better and better everyday to consumers. Though it may not seem to have a major impact on the construction industry yet - arbitration agreements are commonplace in your agreements.

It doesn't matter whether you are a general contractor, subcontractor, supplier, renter, or consumer - the fact is you will likely run into a binding arbitration clause that will require you to bring your claims for product liability, design liability, delivery or installation before a private neutral.

But is this good for you as claimant, or is this one big bad frightening risk of loss? 

Recent legislation has been proposed by the federal legislature which would seek to limit arbitration "coercion." The bill is entitled the Arbitration Fairness Act and has been presented by Congressmen Durbin and Feingold.

The bill's supporters believe that U.S. consumers have been harmed by being forced to appear before hand-selected arbitration forums caused when vendors place binding clauses in their sales contracts, slips and invoices.The general belief, as put forth by Mr. Nathan Koppel of the Wall Street Journal's Law Blog, is that arbitration outfits tend to side with corporate defendants in order to shore up continual and future use of their venues.

But a new study by Northwestern Law School suggests that consumers generally come out on top and that their claims are heard in under seven months, far shorter than a state or federal court disposition, which may take up to two years. The study included an examination of a relatively small sample of over 300 cases, and it is uncertain how cases were selected.

The study does show that there is not such a wide discrepancy in rulings, as was once thought to be. You can read about the study on their website, and follow updates of commenting correspondents. 

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This weekend, I read a post on the South Carolina Construction Law Blog about Texas' Prompt Payment Act.  It caused me to do a little online research on similar acts around the country, finding them in Alabama, Tennessee, Georgia, Wisconsin, New York, federally, and elsewhere.  

A "Construction News" pamphlet from Baker Donelson [pdf] in the Winter of 2004 has a good article about the statutes in AL, TN & GA, the theme of each act simply being this:  "Prompt Payment Acts Set Payment Guidelines for Construction Work."

It's no secret that payment problems are rampant in the construction industry.  And unfortunately, the old statement that "possession is 90% of the law" has some truth to it. 

Large well-funded construction companies can hold progress payments at the end of a project for trivial reasons, and strong-arm its subcontractors into settling for less.  Prompt Payment Acts aim to equalize the playing field a bit, applying penalties against those who misapply funds or try to strong-arm subs and suppliers.

So, do they exist in Louisiana and Washington?   Mostly....no.  

Both Louisiana and Washington lack a pure "Prompt Payment Acts."  Those victim to the misapplication of funds must rely on jurisprudence or other possibly applicable statutes, discussed below. 

Misapplying Funds in Louisiana
Buried within the Private Works Act in Louisiana is La. R.S. 9:4814 (A), which provides as follows with regard to the misapplication of funds:

No contractor, subcontractor, or agent of a contractor or subcontractor, who has received money on account of a contract for the construction, erection, or repair of a building, structure, or other improvement, including contracts and mortgages for interim financing, shall knowingly fail to apply the money received as necessary to settle claims to sellers of movables or laborers due for the construction or under the contract. Any seller of movables or laborer whose claims have not been settled may file an action for the amount due, including reasonable attorney fees and court costs, and for civil penalties as provided in this Section.

This provision actually works as a "prompt payment" requirement, but as is evidence from its terms it only has limited applicability. 

First, the contractor must "knowingly" misapply the funds.  Second, the only parties qualified to recover the penalties of the provision are "sellers of movables" and "laborers." 

The Private Works Act in Louisiana specifically distinguishes between laborers and subcontractors, and so subcontractors who provide labor to the project would not likely qualify for the penalties under La. R.S. 9:4814 - although the matter has never been decided.

Unfortunately for everyone not mentioned by §9:4814, Louisiana doesn't provide a remedy when funds are misapplied, and the parties must rely exclusively on the conditions of its contract.

Misapplying Funds in Washington
In 2006, the Washington Court of Appeals published an interesting reversal in Westview Investments, Ltd. v. U.S. Bank National Association [pdf of decision], addressing the issue of misapplying construction funds in Washington.

Since progress payments are not funds held in "trust" by statute in Washington, the court explained that they may be considered trusts if appointed as such by the parties - namely, through contract.

According to the Westview decision, progress payments made by a project owner to a general contractor constitute "trust funds" for the benefit of subcontractors, when the agreement between owner and contractor is based on AIA A201 (1997).    

Interfering with any "trust funds" would be a tortious conversion - and the Westfield court even goes so far as to rule that banks may be liable for misappropriating trust funds when it uses these funds to  pay down the borrower's debt to the bank (see discussion here).

Time for A Prompt Payment Act?
Is it time for a Prompt Payment Act in these Washington and Louisiana?  

While many statutes and regulations have drawbacks, there doesn't seem to be a downside to requiring contractors to pay its bills!

Litigation is costly and time-consuming - and it doesn't seem fair that after a long, expensive battle with a better-funded opponent, subcontractors and suppliers must settle for the principal debt. 

There are ways to punish contractors in Louisiana and Washington when funds are misapplied, but it's always dependant on circumstance.  A Prompt Payment Act would help equalize the playing field for subcontractors and suppliers who rely heavily on prompt payments.

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In October 2007, the American Institute of Architects (AIA) released the 2007 edition of its Family of Contract Documents for the construction industry; undoubtedly, the most popular set of documents in the market. The documents are clearly the leader in the industry and have been court-tested for nearly 100 years.

While a number of changes have been made to the document sets by the AIA over the past decade, the October 2007 release is the first major change to the A201 General Conditions document since 1997. The A201 General Conditions is referred to as the "backbone" of the AIA Family of Documents.

The changes made by this release are numerous, and are the by-product of changes in the construction industry, modern technology and even the marketplace for the sale of contract documents.


The Forces Behind the Changes
When reviewing the changes made to the AIA Family of Documents, or any set of contract documents, it's valuable to understand the driving forces behind those changes. As far as the 2007 AIA docs are concerned, a lot has changed in the world of construction, and the world as a whole, in the last decade.

The construction industry itself looks much different in 2007 than it did ten years prior. A surge in design-build arrangements led the AIA to revise its design-build language in 2004, and introduce the A141. The real estate boom went full-throttle with residential buildings being constructed faster than ever before, encouraging many to get into the "flipping" business, and condominium complexes in large cities across the country became commonplace developments.

While Alternative Dispute Resolution devices were available in 1997, their popularity has only gained since that time, and novel devices (such as construction neutrals) have risen from obscurity.

In addition to changes in the industry, the entire world has changed as a result of extreme advances in technology. In 1997, very few contractors were using their AOL dial-in connection as a critical component to their business. In 2007, however, electronic communication is unavoidable.

Finally, the marketplace for contract documents themselves has also changed since 1997. While the AIA documents have enjoyed a fairly uncompetitive market, recently other organizations have begun producing documents for the construction industry.

One prime example of an AIA Competitor is the Associated General Contractors of America, who began publishing its own documents in 1997. In September 2007, just one month before the AIA release, AGC folded its documents program and joined more than 20 leading construction associations who united to publish a consensus set of contract documents called ConsensusDOCS.

The AIA and ConsensusDOCS documents are now in direct competition, and it will be interesting to see how this competition changes the documents themselves, and whether the AIA set of documents will lose some of its dominance in the market.

The ConsensusDOCS website has put together a matrix to compare its new documents with the ACG and AIA Documents, and you can download and view the matrix here:

http://www.consensusdocs.org/information_matrices.html

While the next ten years will prove interesting, it is fair to say that the 2007 AIA documents were drafted in an entirely different world than the 1997 edition. This led to a number of important revisions that will alter the way your construction project is administered, and many of these changes are below discussed.

Some Important Changes between AIA 201 Editions, 1997 v. 2007
Now with a background on the environment leading to these changes to the contract documents, those who use the AIA contract documents (regardless of its edition) should be aware of some critical revisions to the new edition.

Dispute Resolution
By far, the most significant change to the A201 General Conditions regard the provisions governing dispute resolution.

First, the "dispute resolution" provisions have been completely re-located. While previously within Article 4 of the General Conditions, a portion of the contract that regulated the "Architect" and the "Administration of the Contract," the provisions are now found within a new Article 15, regulating the "claims" topic.

This relocation is more than a move around the corner, its a move to a completely different town.

When ADR and Article 4 were connected, so to was the Architect. In fact, the Architect played a critical role in dispute resolution under the 1997 documents. In the 2007 documents, however, the parties can elect to have the architect take a back-seat, and to create a dispute resolution program independent of the Architect.

The parties can elect to have all "claims" decided upon by an Initial Decision Maker, commonly referred to as a "neutral." This seems to be a pleasant change to the old ADR provisions. Since Architects are generally hired by, and paid by the Owners, many contractors and other related parties were suspicious of the Architect's impartiality. Further, the Architect oftentimes found herself between a rock and a hard place, required to be "neutral" while collecting payment from the Owner.

The ability to engage a neutral party to make these decisions is a very critical change to the A201, and the importance of this alteration is highlighted by the complete movement of the ADR provisions to a non-Architect related article, and an article of its own.

Second, the ADR provisions have gone from mandatory by default, to unselected.

In other words, in 2007 the parties will resolve their disputes through litigation unless they affirmatively choose to mediate and/or arbitrate. This gives parties the freedom to pick and choose their dispute resolution process, and selection of the ADR procedure is as simple as checking the box next to ADR process of choice.

Responding to the Digital Age
One thing that cannot be avoided in 2007 is digital information and electronic communications.

In the fast-paced world of construction, project information, change order requests, project correspondence and more is being exchanged instantly through email and other electronic means. How will these communications and digital information get handled by parties to a construction project?

A201 § 1.6 speaks to the issue, and AIA has introduced E201 as an exhibit to its document family. The E201, "Protocols," sets forth its purpose within the document by stating "This Exhibit establishes the procedures the parties agree to follow with respect to the transmission or exchange of Digital Data for this Project."

Setting Contractual Time Limits on Disputes and Claims
In §13.7 of the 1997 A201, the documents set forth certain time limits dictating when legal statutes of limitations would run against claims under the contract. In essence, the provision sought to circumvent the legal statutes, and instead create a "contractual statutory period" for claims.

The 2007 edition eliminates this provision completely, and now the parties claims are simply subjected to state law.

The reason for the change is two-fold. First, it was not very popular among some parties to the contract, and second, many states do not allow the parties to contract around statutory time periods.

Additional Duties Upon Contractor to Review Field Conditions and Contract Documents
The 1997 edition of the A201 was sometimes criticized because the Contractor was only liable for errors and omissions it "recognized" and "knowingly" failed to report. Many argued that this let the Contractor "off the hook" on far too many occasions, and that the documents did not impose a great enough obligation on the Contractor to review the field conditions and the contract documents to determine - as he or she only could - whether the execution of the design at the job-site was feasible as contemplated.

The 2007 edition, however, does heighten the obligation of the Contractor under §3.2. Now the Contractor must "promptly report to the Architect any errors, inconsistencies or omissions discovered by or made known to the Contractor..."

Owner Ambiguity regarding Allowances Selections
The 1997 documents required that the Owner make material and equipment selections under an allowance "in sufficient time to avoid delay in Work." The new A201 language is changed just a bit, now requiring the Owner to select these items "with reasonable promptness."

This change seems to be more ambiguous than the 1997 language, and begs the question of whether the Owner has the duty to "avoid delay in the Work," and whether the Contractor has a strong claim against an Owner who does delay the Work by its lack of selections when the Owner arguably acted "with reasonable promptness."

The Contractor's Superintendents
Both the 1997 and 2007 A201 requires that the Contractor disclose the names of its subcontractors, and to allow the Owner/Architect a specific amount of time to offer any reaonsable objections to the selected sub. The 1997 document, however, did not provide the Owner/Architect the same opportunity to be advised of and make objections to the Contractor's superintendent.

The 2007 documents, through §3.9, does give the Owner / Architect this right and ability.

Contractor Construction Schedule
Similar to the heightened requirement in §3.9 for a Contractor to advise and seek approval from the Owner and Architect of its potential superintendents, the following section §3.10 escalates what is required by the Contractor in the way of schedules.

While the 1997 version of the A201 merely required the production of a schedule that was coordinated with the construction of the project, the new 2007 provision is more detailed and strict. The contract documents are now much more specific about what should be submitted, about when it is required, and about the penalties to the contractor in the event it defaults under this provision.

Conclusion
The 2007 Version of the AIA Contract Documents is now out in the marketplace, and if you work with the documents you want to be familiar with the new revisions. There are clear differences between these editions, and a mistaken belief that you are operating under the 1997 edition when the alternative is true could prove costly for your organization.

In general, the changes to the A201 are improvements to the industry-standard document. Most noticeably, the ADR provisions are a breath of fresh air to those who have met some frustration in dealing with the ADR provisions of the '97 edition.

As discussed, the 2007 changes are a reflection of the alterations to the construction industry, the world in general and even the American Institute of Architects over the past decade. It will be interesting to see what comes next for the AIA documents, and how they will continue to change with the rapid technological advancements in society, as well as the competition in the contract documents market.

This article presents a summary of some of the changes made to the A201 in its 2007 edition. It does not cover all of the changes to the document, and its important to review the document in full with the assistance of counsel to best understand the ramifications of its terms. Furthermore, the authors' commentary herein is the viewpoint of the author, and an opinion only.

Related Articles:
Construction Contracts 101: Use of Standardized Forms

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In construction, it is not a question of whether or not to have a written contract: the real issue is how many contracts will be involved in the project. Construction is a complex process involving overlapping time, money, and labor concerns. How best to allocate the financial risks in the event that anything goes wrong -- which it will -- is wisely documented before work begins. Indeed, in most states and for most projects, written agreements are legally required.

For many years, there has been a continuing argument that construction contracts should be readily adaptable to standardization. Companies have promoted contract kits for both commercial and residential purposes; various associations, including notably the American Institute of Architects, have provided detailed contract examples and forms for the use of their memberships.

In fact, Fall 2007 saw the AIA revamping its sets of forms, as well as the introduction of www.consensusdocs.org -- a web site containing the collaborative work of over 20 nationally-recognized construction associations in what they are deeming a revolution for the construction industry. Representing owners, architects, designers, engineers, general contractors, sureties, and a wide variety of subcontractors, www.consensusdocs.org provides standardized contracts and forms whose language has been negotiated and honed by representatives of all facets of the American construction industry.

Between the AIA and the ConsensusDocs project, have the issues and conflicts of the past regarding construction contracts and the allocation of risk been resolved? Have we entered into a peaceful, strife-free era for the construction industry? Probably not.

No matter the source of the written template, the individual project will require its own unique risk allocation. Environmental concerns will vary; the bargaining power between the parties will not be equal.

In each contract, in every situation, parties will want to insert provisions into the contract to favorably distribute their responsibilities and limit their liabilities. Additionally, the written language of each agreement must be weighed against the impositions of implied warranties, environmental requirements and restrictions, and the like -- by local, state, and federal law -- to the specific project.

The contractual language will also need to predict and preempt party disputes, in advance, for a broad range of possibilities, such as who bears the financial responsibility for:

Failing to properly fund the work;
Failing to secure (and pay for) easements;
Warranting the plans and specifications;
Interpreting the documents;
Assessing and allocating damages for delays in construction;
Terminating a party due to dissatisfaction with the work;
Violating applicable codes and regulations; and
Making errors in design or requiring excessive change orders.

Decisions will also need to be made regarding which overall contractual arrangement is best for the situation. For example, larger projects may be better suited to a series of overall agreements, dividing the project into phases. One set of documents will apply to the first phase; another set to the second phase; etc. This is a common preference in the construction of school buildings and college campuses, as well as other multi-structured projects.

Furthermore, decisions will be needed on the contractual arrangements that will exist between the various parties: should the same type of contract be used for everyone? Often, the parties find it best to have one type of contract between the owner and the general contractor and another between the general contractor and all the sub-contractors.

Common types of construction contracts include:

1. Lump Sum. In lump-sum contracts, one party agrees to provide certain, named services for a set price; the other party agrees to pay that price either upon completion of the work or pursuant to a schedule. If chosen between an owner and a general contractor, the owner will pay a set amount. The general contractor takes the risk of loss if there are unexpected expenses and the possibility of gain if the project comes in under-budget.

2. Unit Price. Unit price contracts breakdown the work to be performed into parts with a set price for each portion. These agreements are common among subcontractors who take the risk of loss and the possibility of gain, while the general contractor (or the owner) pays the set, agreed-upon price.

3. Cost Plus. Cost-plus agreements have the general contractor's profit defined in the contract itself, as well as the estimated construction expense. If the actual expenses come in lower than the estimate, then the owner reaps a savings. Cost overage, and the owner has to pay more for the project. These contracts place the risks of cost overruns upon the owner, not the general contractor, who enjoys the security of knowing his exact profit. The general contractor may have little incentive to be efficient on-site, but the owner has the satisfaction that the ultimate project will be to his exact standards even if the expenses run high.

Standardized forms cannot address the needs and wants pertaining to an individual project: the templates will call for some revision in order to meet the requirements of the particular parties involved in each construction project. Moreover, the templates themselves cannot predict which set of forms best meets the needs of the individual parties. In addition to overall risk allocation, things like unique project delivery methods and systems must be considered; provisions included for specific insurance and indemnity issues; and dispute resolution methods outside of a formal courtroom negotiated and properly implemented.

Standardized forms do help. They assist in the creation of solid construction contracts which successfully do their job: defining who bears the brunt of the unexpected events or the unforeseen mistakes that naturally occur during the course of construction. The forms introduced by www.consensusdocs.org have the added benefit of authorship derived from all those involved in the process - from owner to subcontractor to surety - as opposed to those offered by one organization or group, which have lent themselves in the past to criticism that their language is slanted to favor their membership.

However, reliance upon any standardized form without molding its language to fit the needs and wants of the individuals involved in a specific project is foolhardy; failing to obtain expert legal assistance in the process is unwise. These forms should never be considered as replacing the assistance of legal counsel; instead, they should be seen as tools to better effect a harmonious and efficient construction process.

For example, of particular concern in each individual instance is the choice of law for the particular project. What state law controls the interpretation of the agreement can be key in determining which party bears the financial burden of a realized risk: for example, is there an indemnity clause, and will the state law respect that language?

Contractual provisions cannot trump the law: parties cannot contract around state legislation established in the public interest and attempts to do so are invitations to a time-consuming and expensive litigation process. However, contracts can realign risks in a manner that the law will allow in instances where the parties' rights to determine their own course is respected.

Different state laws can define this boundary between the parties' free will to contract and the need to protect the public interest in different ways. One state may allow a provision that another state will not (such as indemnification). Standardized forms cannot address issues to this level of detail.

For all those involved in construction but particularly small businesses, as well as residential contractors and home owners, the standardized form is an especially tempting danger as well a terrific tool, depending upon its usage. Without the input of a knowledgeable construction lawyer, these templates can open a Pandora's box of problems for the parties involved in the construction process, and a high risk of litigation expense -- if only to have a court's assistance in determining the parties' contractual intent. With the assistance of expert legal counsel, these forms offer a means to circumvent many pitfalls as well as decreasing an otherwise lengthy contract expense.

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