REALWorld Law

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The form of construction contract to use for a specific project can be selected in a multitude of ways. An architect, engineer, or contractor preparing a proposal for an owner may present the owner with a form document to consider. In those cases, the owner then may ask its lawyer to review and revise the document as appropriate. A proactive owner, however, may prepare a form of contract, preferably before the owner seeks bids, and then include that contract with a request for proposals. Owners that construct projects regularly may have their own original manuscript forms of contract, rather than relying on published forms.

Standard forms of contract are published and sold in the US by organizations associated with the construction industry. Among the most popular are the following:

AIA

AIA documents are by the American Institute of Architects. The AIA forms of agreement are the most widely used and the most heavily critiqued in the United States. Prepared by a professional association for architects, some perceive that the AIA forms allocate risk in favour of the architect and to the detriment of the owner. As a result, the AIA forms are generally modified by the parties before execution. The AIA provides a multitude of form contracts, however, they are most often used for general building and not heavy construction.

EJCDC

EJCDC documents are by a group comprised of the American Council of Engineering Companies, the National Society of Professional Engineers/Professional Engineers in Private Practice, and the American Society of Civil Engineers-Construction Institute. The EJCDC documents are most often used by construction projects driven by professional engineering, frequently called ‘horizontal’ projects.

ConsensusDOCS

ConsensusDOCS were created by a group comprised principally of general contractors and subcontractor groups, although they have been endorsed by some other groups. The ConsensusDOCS appeared in 2007 and purport to represent a consensus by all of the parties to a construction project, including those concerned with the allocation of risk in the AIA documents. ConsensusDOCS promote themselves as the successor to the Associated General Contractors of America documents.

FIDIC

FIDIC document are by the Fédération Internationale Des Ingénieurs-Conseils. Although well-known internationally, FIDIC forms of contract are rarely used in the United States.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Depending on the type of project, and the project delivery method selected by the owner, the main parties to a construction or engineering contract include the following:

Owner

A party who owns or develops a project, engages parties to design and construct the project, and compensates those parties for their services and work.

Architect or engineer

A party engaged by the owner to design the project. An engineer is required to design and engineer specialized projects, such as public works (eg bridges, highways) or plants (eg manufacturing facilities, utilities).

General contractor and subcontractor

A general contractor is a party engaged by the owner to construct the project. The general contractor typically hires subcontractors to perform and complete separate parts of the project. Those subcontractors, in turn, may hire sub-subcontractors to perform a portion of the part of the project for which the subcontractor is responsible. A phrase commonly used to describe the subcontractor and its sub-subcontractors is ‘subcontractors of any tier’.

Design-builder

A party engaged by the owner to design and construct the project. A design-builder takes responsibility for both the design and construction functions, either with respect to the entire project or a portion of the project.

Consultant

A party engaged by the owner, architect, engineer or contractor to render professional assistance regarding a particular aspect of the work. For example, an architect might hire a specialty engineer; a contractor might hire a remediation consultant; a design-builder might hire an MEP (mechanical-electrical-plumbing) engineer; an owner might hire a construction manager to oversee the entire project or a professional to provide expertise regarding a specialized project, such as a water park, golf course, or manufacturing facility. Several consultants may render professional services on a single project, each engaged by and responsible to a different party.

Supplier

An entity from whom materials are obtained that will become part of the project; for example, those who supply the steel, cement, wood, glass, tiles, and electrical and plumbing fixtures.

While not parties to the design or construction contract or any subcontract, the following are key parties in the process:

Lender

An entity providing funds to the owner for the project, which funds the owner must repay. Depending on the size of the project, a single bank or a syndicate of banks could loan the owner funds.

Legal counsel

The lawyers assisting each of the parties above with the negotiation and drafting of the contracts. In order to avoid a conflict of interest, a lawyer may only provide advice to one of the parties. Legal advice also may be provided for legal issues arising while the project is being constructed, such as delays, labour issues, or defective work. Finally, legal counsel may assist a party should dispute resolution become necessary, for example, by negotiating with the other party or parties to the dispute or assisting with mediation, arbitration, or litigation.

Insurer

The insurers who provide insurance for the project in order to assist in managing risk. Contractors generally obtain coverage such as commercial general liability insurance, workers’ compensation, employers’ liability, and vehicle insurance. Owners may obtain property insurance, referred to as builder’s risk or all risk insurance.

Surety

A guarantor of the obligations of the principal – in this case, the contractor – in the event the construction contract requires the contractor to obtain performance or payment bonds. Subject to the terms of the bond, the surety guarantees to the owner that the contractor will perform and complete the project and pay for the labour, material, and other items the contractor is obligated to pay for under the contract. In the event the contractor fails to perform its obligations, the surety becomes responsible for the losses incurred by the owner to the extent those losses are covered by the bond. The surety then is entitled to obtain reimbursement from the contractor.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The allocation of risk depends on several factors, including, among others, the project delivery method selected and the manner in which the contract price is calculated.

Design-Bid-Build

If the project delivery method is a traditional design-bid-build – whose defining characteristics include: (a) three principal participants (owner, architect, and contractor) and (b) two separate prime contracts (owner-architect agreement and the construction contract) – the general contractor is responsible for construction of the project as depicted in drawings, specifications, and other documents prepared by the architect and design team. Accordingly, the general contractor depends on the architect for the design of the project and the quality of the documents the architect prepares. The general contractor has little opportunity for input during the design process with respect to matters in which it has expertise, such as value engineering, cost estimating, constructability, construction scheduling, labour and material market analysis, equipment availability, design of specialized equipment and proprietary systems, and other similar issues.

Depending on the type of contract negotiated, the general contractor also may bear responsibility to complete construction of the project within a certain price. If the general contractor has agreed to construct the project for a fixed price or has guaranteed a maximum, not-to-exceed price, then the cost overruns (with certain exceptions) become the risk of the general contractor. Accordingly, the contractor assumes the risk of volatility in labour and material pricing. Conversely, if the contract is cost-plus, then the general contractor’s compensation is comprised of the actual cost of construction the project – whatever that cost may be upon final completion – plus a fee. In such a case, the owner bears the risk of escalating costs.

The general contractor also may assume the risk of completing the project on time and obligate itself to complete the project by a specific date or prior to the expiration of a certain period of time. Achieving completion of the project on time may be necessary for the owner to meet its obligations with respect to financing or third parties (eg future tenants in the facility being constructed), take advantage of business or seasonal cycles, otherwise generate needed revenue from the project, or limit expenses so the project remains viable. If the general contractor fails to complete the project within the agreed-upon time, then the owner may suffer losses due to the delay. Accordingly, the owner may require that the contractor guarantee the time in which the project will be completed and assume the risk if it is not. For example, the contractor could agree to pay liquidated damages, if the project is not completed by the agreed-upon date of final completion as set forth in the contract.

Another risk assumed by the general contractor arises from the architect’s limited role in the design process in a design-bid-build project (the design is completed by the architect before the project is bid or the contractor selected) and the corresponding limited remedies available to the contractor against the architect. Because the owner enters into separate contracts with the architect and the general contractor, the general contractor and architect are not in privity, ie the general contractor and architect have no contractual relationship. Lacking privity, the contractor’s remedies against the architect are limited, depending on the economic loss rule law in the US state in which the project is located. The general contractor’s only option to pursue a claim might be to bring the claim against the party with whom it has a contract – the owner.

Construction Management

The spectrum of a construction manager’s risks and responsibilities is wide and filled with variations. At one end of the spectrum, the construction manager operates as the agent of the owner. At the other end of the spectrum, the construction manager is ‘at-risk’ and operates similar to a general contractor.

At the ‘agency’ end of the spectrum, the construction manager does not assume the traditional risks of a general contractor. Rather, the construction manager’s role is to act as an advisor to the owner while monitoring the project. The construction manager typically will attempt to minimize the owner’s risks while at the same time expediting the process – for example, obtaining bids before the design documents are 100% complete.

At the ‘at-risk’ end of the spectrum, the construction manager bears risks similar to the general contractor in the design-bid-build project delivery method. With respect to guaranteeing a price, an ‘at-risk’ construction manager may bear additional risk because the price it guarantees is an estimate based on incomplete drawings. Methods of mitigating this risk include factoring in a larger contingency in the guaranteed price or providing an estimate when the construction management agreement is executed, with provision for a guaranteed price only after the design documents are complete.

The body of law governing an at-risk construction manager is less than an at-risk general contractor or an agent construction manager. As a result, disputes may be more difficult and more expensive to resolve.

Design-Build

Under the design-build approach, a single entity undertakes to both design and construct the project, providing the owner with a single point of responsibility for the entire project. The entity bearing that responsibility is often the general contractor who either has in-house design expertise or takes responsibility for subcontracting with an architect for the design. As a result, some of the risk factors that an owner confronts in the design-bid-construct approach now belong to the design-builder with whom the owner contracts; and the owner is relieved of some of the challenges that accompany holding separate and independent contracts for the construction and design of the project.

Calculating the cost of the project and preparing a proposal presents a difficult exercise for a design-builder and, accordingly, a risk. In preparing a proposal, the design-builder faces a dilemma. The design-builder is arguably best served by developing the design to a point where the design-builder is reasonably confident in its ability to predict all elements needed to produce a final design. If the design builder is comfortable with the design, reasonable projections are possible for cost, time, performance, characteristics, and other matters. Therefore, the design builder can reduce contingencies accordingly and submit a more reliable proposal.

However, the design-builder’s effort to produce a more reliable proposal consumes limited resources and is very costly. For example, the design-build project may be structured as a two-step process, with a ‘go’ or ‘no go’ decision to be made at a certain point by the owner regarding whether to proceed with the design-builder or the project. If the owner decides not to proceed, then the design-builder will not recover those costs if another party is awarded the contract or if the project is abandoned. But, the alternative of putting forth only minimal effort in preparing a proposal is a risky venture. The resulting proposal may not be responsive to the owner’s needs and, therefore, a wasted effort. Moreover, the less-developed proposal may put the design builder at risk. The design-builder has made a wager that it will be able to complete the project for the cost and time proposed, although the design-builder may not have studied the project in detail and as appropriate to make such a judgment.

Force Majeure. The term ‘force majeure’ generally refers to an unexpected event of nature or civil unrest beyond the parties’ control, such as a flood, war, strike, or storm. A force majeure clause attempts to relieve the contractor of certain of its responsibilities for time and/or price upon the occurrence of a force majeure event, generally either by extending the time allowed to perform the contract or by increasing the price beyond the limit of any guarantee.

The extent to which a force majeure clause shifts risk from contractor to owner depends on how the term is defined in a contract and the specific provisions made for force majeure. The contractor will want the term defined as broadly as possible in the contract; the owner will want to narrow the definition. The contractor will want the delay caused by the force majeure event to be compensable, ie the contractor is entitled to claim both time and money. Conversely, the owner will want the force majeure event to be excusable, ie the contractor is entitled to claim only time – and then only if the force majeure event increases the critical path of the project.

Accordingly, the contract negotiated by the parties will determine what constitutes force majeure and how it shifts risk between owner and contractor with respect to a particular project.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Infrastructure projects can be delivered through the traditional design-bid-build delivery system or by other delivery methods more commonly used in the private sector; however, because of funding shortfalls and long-term objectives, methods used for private projects are not always viable or efficient in the public sector. Consequently, the public sector sometimes turns to more innovative approaches for the delivery of infrastructure projects, this often takes the form of public-private partnerships, sometimes referred to as ‘PPP’ or ‘P3s’.

Some of the first canals and commuter rail lines in the United States are examples of the private sector delivering infrastructure projects. Nonetheless, the P3 approach has been slow to catch on in the United States, and the US presents somewhat of an emerging market for public-private partnerships. P3 transactions are difficult to assemble and implement in the United States, even under the most favourable of circumstances. Moreover, P3 transactions are more common for major public improvement projects, which often:

• are technically complex and involve significant planning
• are controversial projects that can be de-railed or marginalized without the support of a multitude of stakeholders
• are subject to a range of legal regimes that may not contemplate procurement on a P3 basis, and
• place demands on financial markets that are difficult to satisfy and, therefore, tend to require significant financial engineering

In order to encourage the use of P3 transactions in the United States, the federal government has established programs to encourage the use of P3 transactions by making low-cost financing available for such transactions. Some of the more commonly used initiatives are:

• Private activity bonds (PABs). The US Internal Revenue Code has been amended to permit the issuance of PABs to finance privately developed and operated highway and freight transfer facilities. This allows the private sector to finance the development and operation of such improvements with tax-exempt bonds. In essence, PABs are issued by a public entity, which acts as a conduit issuer for the project company. The project company is deemed the borrower and responsible for repayment.
• The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorizes the US Department of Transportation to provide credit assistance to major transportation investments of national importance. TIFIA credit assistance is flexible, subordinated to senior debt, and may be provided in the form of a direct loan, a loan guaranty, or a line of credit. There are restrictions on the amount of such assistance that can be provided for a project, as well as other qualifying criteria. TIFIA was continued for another five years by passage of the Fixing America’s Surface Transportation Act (FAST) in 2015. TIFIA was extended for another five years and expanded the types of transportation projects eligible for funding through the passage of the Infrastructure Investment and Jobs Act in 2021.
• The Water Infrastructure Finance and Innovation Act of 2014 (WIFIA) is closely modelled after TIFIA and authorizes federal credit assistance for drinking water, wastewater, and water resources infrastructure projects. The WIFIA program is implemented and maintained by the EPA and the Army Corp of Engineers. WIFIA was also extended for another five years through the passage of the Infrastructure Investment and Jobs Act in 2021.

Finally, although a collaborative endeavour with the private sector, a P3 transaction is a public-sector procurement. Therefore, another consideration is that the P3 remains subject to whatever rules govern the public entity in its procurement of improvements. A public entity cannot proceed with a P3 transaction unless the applicable statutory or legal framework allow procurement of a project by such a method. At this time, 37 states in the US, the District of Columbia, and Puerto Rico have enacted some sort of legislation to allow public-private partnerships. While initially limited to toll roads, P3 transactions now include power, water, light rail, airport, and government building projects.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Yes, parties can enter into a ‘fixed price contract’, often referred to as a ‘lump sum’ or ‘stipulated sum’ contract, for performance and completion of the construction work. However, although the price is fixed, the lump sum amount might be increased for certain reasons, including additional work that the owner would like the contractor to perform, differing site conditions (see Limitation period), or force majeure (see Allocation of risk).

Additional work causing an increase to a lump sum contract likely would be performed pursuant to a ‘change order’, which is an amendment to the contract signed by both owner and contractor providing for the additional work. Change orders should describe the change in the work and state any change in compensation or time as a result of the changed work.

In a lump sum contract, the contractor generally takes the risk of increases in the cost of labour and materials, but also benefits in the event of any decrease. In such a case, fluctuations in price or the labour force will not change the lump sum amount.

Absent the ability to add to or reduce the scope of work (and thereby increase or decrease the lump sum amount), an owner would not be able to make any material change to the project after execution of the contract, which is often too rigid for most owners. Thus, fixed price contracts generally have some mechanism where compensation can be changed under certain circumstances.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Each party to a design or construction contract should always confer and obtain advice from its own risk manager or insurance agent regarding the types and limits of insurance that will best protect the risks with respect to each project. Architects generally carry professional liability insurance. Both architects and contractors carry the following types of coverage:

• Commercial general liability insurance providing coverage for the following: bodily injury, property damage, products/completed operations, premises/operations, contractual and personal/advertising injury liabilities, explosion, collapse, and underground hazards
• Business auto liability insurance covering all owned, non-owned, and hired vehicles
• Employer’s liability insurance that covers loss, damage, injury, or disease to employees
• Excess/umbrella insurance in excess of the required commercial general liability, business auto liability, and employer’s liability coverages
• Workers’ compensation insurance as required by state and federal requirements

In addition to the above, other requirements with respect to insurance may be desirable. Examples include:

• setting forth the required rating for the insurance company providing the coverage
• requiring that the insurance company is authorized to do business in the jurisdiction of the project
• prohibiting cancellation or material changes in the policies
• providing for a waiver of subrogation to the extent permitted by the insurer
• naming additional insureds
• requiring subcontractors to obtain the same insurance, and
• requiring evidence of insurance

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Common forms of bonds that protect various parties to the construction process are performance bonds, payments bonds, and lien bonds. A contractor can post a performance bond whereby a surety guarantees to the owner that the contractor will complete the construction work. A contractor also can post a payment bond whereby a surety guarantees that the contractor will pay its subcontractors and suppliers. A lien bond protects the owner’s property from mechanics liens.

The contractor’s surety, however, not only shares some of the obligations of the contractor but also has the right to assert some of the contractor’s defenses. For example, if the owner does not pay the contractor and, in turn, the contractor does not pay the subcontractor, then the surety can assert owner’s lack of payment as a defense to the obligation to under the bond to pay the subcontractors.

A guarantee by a parent or holding company may be desirable, if the assets against which a party to the contract would make a claim are held by that parent or holding company.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Several payment methods exist in order to compensate the above-described parties. Some of those methods are described below.

Contractors and sub-contractors

For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price (known as GMP or GMAX):

Lump sum

See fixed price contracts.

Cost plus a fee

Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc. The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.

Guaranteed Maximum Price (GMP or GMAX)

A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.

Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).

A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.

Design consultants

For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Yes, parties to a construction contract can fix the time/date to complete the entire project. In addition, they can agree to the time/date when a portion or portions of the project must be completed (usually called milestones), including fixed time/dates for both substantial completion and final completion.

A common method of dealing with delays is to provide for liquidated damages, often referred to as ‘LDs’. If the parties decide upon LDs, the contractor agrees to pay a certain sum for each day (or some other increment) of delay for each portion of the project and/or for the entire project not completed on time. Liquidated damages are often used where the amount of actual damages would be difficult to calculate and prove.

The sum determined by the parties should be an estimate of actual damages, not a penalty – a penalty is not enforceable under US law. As a result, it is important for the owner to perform the exercise of attempting to calculate what its damages will be if the project or any portion of the project is not finished on time (even if difficult or speculative). In addition, the liquidated damages must be the sole remedy available to the owner for delay, ie the owner cannot have the choice of demanding payment of liquidated damages or pursuing the actual cost of delay through litigation.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Generally, changes to the work can be made to the drawings and specifications by using one of three methods, as follows:

Minor changes ordered by architect

Construction contracts typically provide that the design professional may make minor changes in the work without change to the contract time or contract price. For example, the AIA A201 General Conditions of the Contract for Construction gives the architect the authority to order minor changes as long as those changes do not require adjustments to the contact price or contract time and are consistent with the contract documents. Changes meeting those criteria are binding on both owner and contractor.

Change order agreed to by all parties

If the change is more extensive than a minor change to the work, then the change can be made by a written amendment to the construction contract, known as a change order. A change order provides for variations in the work where the architect, owner, and contractor agree as to the scope of the changed work and any increase or decrease to the contract price or time. The compensation for changed work might be a lump sum agreed upon at the time the need for change in work arises, or unit prices already provided for in the construction contract, or the cost of the work plus a fee, which fee is a percentage set forth in the construction contract to be applied to the cost of the work. Generally, the architect prepares the written change order and all parties execute it. As stated in payment, the change order should set forth all of the details of the work, including the scope, cost, and time of the changed work.

Construction change directive issued by owner

If the parties cannot agree on the changed work, the owner may unilaterally order a change in the work by issuing a construction change directive signed only by the owner. The method of calculating the contractor’s compensation for changed work in the event the parties cannot reach agreement should be set forth in the contract and that calculation is then applied to the changed work should the need arise. For example, a common method of calculating compensation for changed work absent mutual agreement is to pay the contractor the cost of the work plus a percentage of such cost for profit and overhead. The AIA A201 General Conditions of the Contract for Construction uses that approach, providing that the contractor is entitled to the sum of the costs of the following: labor, equipment, material, supplies, supervision, premium for any additional insurance coverage required and additional field office costs. The contractor also is entitled to a percentage of the foregoing sum as compensation for profit and overhead.

Cardinal changes

Variations to specifications that far exceed the scope of the work are known as cardinal changes. A contractor cannot be forced to perform a cardinal change; rather, a cardinal change constitutes a breach of the contract. Whether a change is a cardinal change is decided on a case-by-case basis, but an example might be adding a fourth story to building that initially was to be three stories. The contractor generally cannot be forced to perform changed work that far exceeds the scope of the work.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The common law ‘doctrine of substantial completion’ provides that the project is substantially complete, if it is ‘nearly equivalent’ to what was bargained for. Ocean Ridge Develop. Corp. vs. Quality Plastering, 247 So.2d 72, 75 (Fla. 4th DCA 1971). Courts and the construction industry in the US generally interpret this to mean that the owner can use the building for the purpose intended. One of the significant indicators that a building can be used for the purpose intended is the issuance of a certificate of occupancy by the relevant authority stating that the building is ready to be occupied, with all mechanical, electrical, ventilation, elevator, safety and other systems and features in place and operational.

The foregoing aside, the parties to a contract typically define the term ‘substantial completion’ in the contract with greater specificity and include conditions that the contractor must meet in order to achieve substantial completion. For example, the parties might provide that substantial completion only can occur where the remaining work is comprised of minor punch list items and require that the architect must certify that substantial completion has been achieved.

The contract also should set forth the procedure for certifying that the project is substantially complete. If an architect performs construction administration for the project, the architect likely will certify substantial completion. However, the contract also might provide for input from the owner, such as requiring that the owner be satisfied with the work or requiring that defective work be corrected prior to issuance of the certificate of substantial completion.

If the owner does not engage an architect during the construction phase of the project, then the contract might provide that the word ‘architect’ refers to the owner’s representative.

The parties are free to negotiate many of these provisions privately. However, a certificate of occupancy generally, if not always, must be obtained from the relevant governmental authority after construction but before a building can be occupied and used. The requirements for such certificate of occupancy are determined by the issuing governmental authority, and the parties to the contract cannot vary or change those requirements.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The times within which a party to a contract may bring a claim generally are imposed by state statutes if the parties do not provide otherwise in their construction contracts. As such, the times differ from state to state in the US and there are different limitation periods for different types of cause of action.

For example, in Illinois, the statute of limitations for construction defects is four years (735 ILCS 5/13-214(a)) and the statute of repose is 10 years (735 ILCS 5/13-214(b)). Together, these Illinois statutes provide that a person must bring a claim within four years of learning of the defect (statute of limitations) but in any event must bring the claim within ten years of substantial completion of the project (statute of repose). The Illinois statute of repose also provides an extension: if the defect is learned of anytime within the 10-year statute of repose, then the entity still has four years to bring a claim from the time of learning of the defect, even if the 10-year statute of repose is exceeded. Not all states, however, permit extensions for late-discovered defects. As indicated above, the requirements vary from state to state.

Parties in Illinois also may agree to a different limitation period, as long as reasonable. To illustrate, AIA documents generally provide that construction defects must be brought within ten years of substantial completion, with no provision for an extension. Thus, if parties in Illinois use an AIA document and want to provide for the extension allowable by Illinois law, the parties could modify the applicable provisions in the AIA document. Absent modification, the parties to such AIA document would not be entitled to the four-year extension granted by the Illinois statute of repose.

No matter what the limitation period is, it is necessary to determine at the outset of any new claim whether the limitation period has expired. If it has, the claim will be barred, and the claimant may be prevented from bringing a claim against the alleged wrongdoer. The defendant will be able to plead the defence of limitation, and the claimant will have the burden of proving that the cause of action arose within the relevant statutory period.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The pursuit of claims against the developer by the end user of the facility for physical damage or economic loss, and how the developer can exclude those claims, depends on whether the developer is in privity with the end user, ie whether the end user and developer have entered into a contract. If they have entered into a contract, they are in privity, and the answer likely is found in contract law. If developer and end user are not in privity, the answer likely is found in tort law. The answer also depends on the economic loss rule in the state where the action is brought. Not only can the economic loss rule be complicated, it is applied differently from state to state.

No privity

Physical damage

In most states, claims for physical damage against the developer by those who ultimately use the facility but are not in privity with the developer would sound in tort, not contract. As a tort, the claim must satisfy four elements in order to be a viable cause of action: duty, breach, causation and damage. The developer would attack each of those elements in an attempt to exclude the claim. The developer also would attempt to assert affirmative defenses that might exclude the claim, eg an expired statute of limitations or repose (which likely is far less for property damage sounding in tort than for construction defects sounding in contract).

Economic loss

In its purest application, the economic loss rule provides that parties must be in privity in order for one of the parties to assert a claim against the other for purely economic loss. However, a claim for economic loss can be brought where there is no contract, if the economic loss arises out of physical damage to other property (ie to property not the subject of a contract). Again, the economic loss rule varies from state to state in the US.

Privity

Physical damage and economic loss

Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end user, if the two parties are in privity and the contract so permits. The developer can limit its liability via contract provisions and insure for risks it cannot eliminate.

One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations or repose in the state where the project is located (see limitation period). Another method, which may be beneficial to both parties, is to provide for delay damages via a liquidated damages provision; the liquidated damages likely will include economic loss by the end user (see delay).

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

The answer to this depends on whether the architect, other designer, building contractor, or subcontractor is in privity with the entity against whom the claim is to be made. With the exception of mechanics' liens, the answers will be the same as developer's liability to end user. To the extent the economic loss is non-payment for services and the unpaid party is not in privity with the developer (eg the subcontractor is only in privity with the contractor), then such unpaid party can claim a mechanics lien over the real property where the project is located; provided, however, a mechanics lien typically cannot be claimed on public property.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

A contract may extend certain rights to third parties who are not parties to the contract. Such third parties are referred to as third-party beneficiaries, and both the third-party beneficiaries and the rights afforded the third-party beneficiaries must be provided for expressly in the contract. However, because third-party beneficiaries are not parties to the contract, they do not have corresponding obligations. Accordingly, third-party beneficiaries may enforce certain of the owner’s rights as expressly set forth in the contract, yet not be subject to claims.

A simple example is a right of the owner to audit contractor’s records. If the owner has the right to audit the contractor’s records under a contract, then a third-party beneficiary also has such right and could arrange directly with the contractor to exam the contractor’s records without first seeking permission from the owner.

A more significant example is the right of the third-party beneficiary to a warranty by the contractor; the third-party beneficiary could enforce a warranty against the contractor, even though the third-party beneficiary did not enter into the contract with the contractor and has no privity.

A contract also may provide specific requirements with which the contractor must comply in order to afford protections to a purchaser, tenant, or lender. For example, the contractor may be required to cooperate with a purchaser, not interfere with tenant’s business, cooperate with lender, enter into an escrow if requested by lender, and obey the landlord’s rules and regulations etc.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Generally, construction disputes are heard in the civil court of the state where the project is located. If the claimant asks for something other than damages, for example, a party requests an injunction or specific performance, then the case will be heard in the state’s equity court, often called chancery court. Otherwise, the case will be heard in a court of law.

However, construction disputes can be heard in federal court, if the resulting claim arises from a federal construction project, involves a federal question of law, or meets certain other criteria that allows the claim to be heard in federal court, such as diversity jurisdiction.

Final decisions of these courts generally can be appealed to an intermediary court of appeals. Any appeals thereafter to a higher court are at the discretion of the higher court.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

In order for a dispute to be referred to arbitration, the parties to the dispute must mutually agree to submit their dispute to arbitration. The parties may do so when the dispute arises, or, more likely, the parties will have provided in their contract that any dispute will be decided by binding arbitration.

Arbitration and litigation are different in many respects. In arbitration, disputes are resolved in private; in litigation, the procedure is public, as are the documents and evidence filed by each of the parties. In arbitration, the parties generally have a voice in selecting the arbitrator or panel of arbitrators. However, in the court system, judges are assigned randomly to cases without any input from the litigants; in some jurisdictions, a litigant may (but may not) have the ability to strike one judge without a reason.

Although not always the case, arbitration is intended to be an informal and streamlined process when compared to litigation. Absent a mutual agreement by the parties, arbitration does not involve discovery – no interrogatories are submitted to the other side, no depositions are taken, and the rules of evidence are not applicable. Because of this, disputes generally can be resolved more quickly. However, once the arbitrator renders its decision, there is no appeal to a higher authority except under extremely narrow circumstances, such as fraud or conflicts of interest. Courts encourage private resolution of disputes by parties and will avoid setting aside decisions made by arbitrators. Although laws vary among states, arbitration decisions generally can be set aside only for a ‘manifest disregard of the law’ or if a party can prove the arbitrator was biased.

An analysis of the cost of litigation as against arbitration depends on the size of the dispute and other facts. The fee for arbitration generally is a graduated percentage of the amount in dispute; the court filing fee generally is nominal. The arbitrators are paid an hourly fee for preparation and study time, travel, attendance at the arbitration, and deciding and preparing the award. The judges, however, are not paid by the litigants. Lawyers’ fees may be less in an arbitration, depending on the nature of the dispute. Because the process is quicker, less lawyer time may be required.

Last modified 22 Mar 2024

Are any terms and conditions imposed or implied by law or mandatory in contracts for the design or carrying out of building works?

Disputes generally are resolved by litigation unless the parties mutually agree upon an alternative method to resolve the dispute, which might include mediation, arbitration, or a combination of methods. However, even if a party commences litigation, a judge may require the parties to enter into mediation in an attempt to resolve the dispute without further litigation. In such case, the parties would return to court and pursue resolution of the dispute via litigation only if the mediation is unsuccessful and the parties fail to reach a consensus. While not altogether uncommon, such requirement by a judge for mediation as a condition precedent to further litigation in court is the exception rather than the rule. It likely is more often used in family court than in resolving construction disputes, although each state has varying requirements.

A recent trend in some US states is to require a form of mandatory ADR as part of a state’s construction law reform, but these requirements generally relate to disputes involving residential/condominium construction. Otherwise, there generally has been no mandatory alternative dispute resolution method required by law as a first step in the dispute resolution procedure. Parties mutually may agree to submit to mediation prior to arbitration or litigation, but this has been voluntary on the part of the parties, not a legal requirement. However, the AIA construction contracts (see industry forms of agreement), without revision, provide for mandatory mediation as a prerequisite to engaging in binding dispute resolution, such as litigation or binding arbitration.

Last modified 22 Mar 2024