AIA A401: THE “NEW” 2007 CONTRACTOR– SUBCONTRACTOR AGREEMENT FCA CONTRACT

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