Legal Issues for New York Architects; Part 4 of 6 – Design and Construction Contract Law and Administration

This is a continuing article series regarding Legal Issues for New York Architects. Originally presented by John Caravella, of the Law Offices of John Caravella, and Kimberly A. Steele of The Steele Law Firm and produced by HalfMoon Education Seminars, this presentation touches on the following topics, Complying with the Rules and Regulations on the Practice of Architecture (Part 1), Complying with New York Rules on Unprofessional Conduct (Part 2), Understanding and Complying with Barrier-Free Requirements (Part 3), Design and Construction Contract Law and Administration (Part 4), Understanding and Complying with the law on Design Professional Service Corporations (Part 5) and Building Code Updates (Part 6). Each series of topics discuss informative summaries of Legal Issues for New York Architects.

UNDERSTANDING THE BASICS OF CONTRACT LAW

 A contract is a legally enforceable set of promises.

Contracts can be classified by how they form:

  • Express contracts (formed by language, oral or written)
  • Implied contracts (formed by conduct that indicates agreement)
  • Quasi-contracts (no contract actually exists, but courts allow one party to recover for a benefit it conferred on another party to avoid unjust enrichment)

Contracts can also be classified by their validity:

  • Void contracts have no legal effect and never did
  • Example: Contracts to commit crimes
  • Voidable contracts may be voided (cancelled) or ratified (accepted) by at least one of the parties
  • Examples: Minors and mentally incapacitated persons (or their representatives) may seek to void contracts, but they are not void per se)
  • Unenforceable contracts are valid but cannot be enforced because of outside circumstances
  • Examples: Time to sue to enforce contract under statute of limitations has run out; contract was not in writing but as required by the statute of frauds

CREATION OF A CONTRACT

A valid contract is created when all of the following are present:

  • Mutual assent (both parties agreed to the contract)
  • Offer by one party
  • Acceptance by the other party
  • An exchange of consideration
  • No defenses against creation of a contract
    • Mistake
    • Fraud
    • Duress
    • Illegality
    • Lack of capacity
    • Statute of Frauds
    • Unconscionability

MUTUAL ASSENT

Mutual assent to a contract refers to a “meeting of the minds” in which all parties to the contract agree to the same deal simultaneously.

Mutual assent begins with an OFFER, which is:

  • A promise or other suggestion that the person or persons making the offer (offeror) wishes to enter into an agreement with another person or persons (offeree)
  • With definite terms
    • Parties involved
    • Subject matter of contract
    • Price or other consideration (including type of work or quantity of a product)
    • Time of performance
    • Method of delivery (if applicable)
  • By operation of law
    • One party dies or loses mental capacity
    • The subject matter of the contract is destroyed
    • The subject of the contract is made illegal

Mutual assent only occurs when the offer is followed by ACCEPTANCE on the part of the offeree.

Elements of valid acceptance:

  • The offeree must be the person to accept the offer
  • The terms of the offer must be accepted without change
  • Changing terms from the original offer creates a counteroffer, which has the legal effect of a new offer on the part of the original offeree, which the original offeror may accept or reject
  • The acceptance must be communicated to the offeror
  • The manner of communicating acceptance may be limited by the offeror (but must be clear)
  • The Mailbox Rule – an acceptance is effective when mailed (unless the offer specifies otherwise)
  • Acts can also communicate acceptance (performing an act that is specified to indicate acceptance)
  • Silence occasionally indicates acceptance (when the offeree accepts benefits without protesting)

A valid offer and valid acceptance add up to mutual assent.

CONSIDERATION

Consideration is an exchange of something valuable that is required for a contract to be valid.

  • Each party must give up something to which she or he was entitled before the contract, and each party must receive something to which she or he was not entitled before the contract.
  • The item of consideration can does not need to be an economic benefit; it can be a promise to do something the party was not legally required to do or to refrain from doing something the party had a legal right to do.
  • Performing an existing duty or obligation is generally not consideration
  • Both sides of the contract must supply consideration and be obligated by the contract.
  • Illusory promises do not amount to consideration (example: one party’s consideration is illusory if she or he only has to perform if she or he “likes” the other party’s performance or “feels like” performing)

DEFENSES

A contract does not actually form in the following circumstances:

  • Mistake – both parties are mistaken about an important fact relating to the contract
  • Fraud – one party misrepresented an important fact relating to the contract
  • Duress – a party was forced to agree to the contract
  • Illegality
    • Contracts restraining trade
    • Contracts involving gambling
    • Contracts involving illegal interest rates
    • Contracts that obstruct justice
    • Contracts to commit torts or crimes
  • Lack of capacity
    • Minors
    • Mentally incapacitated persons
    • Intoxicated persons
  • Statute of frauds – requires certain contracts to be in writing
    • Promises to pay estate debts
    • Promises to pay another’s debts (suretyship)
    • Contracts in anticipation of marriage
    • Contracts for an interest in land
    • Contracts that cannot be performed within a year
    • Contracts involving goods worth $500 or more
    • Unconscionability – in which a contract provision is too unfair to be enforced (e.g. because one party had superior bargaining power

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STANDARD FORMS OF AGREEMENT

The American Institute of Architects (AIA) publishes more than 100 standard form contracts for use in a variety of project types and delivery methods.

AIA Document A201-2007 is the General Conditions of the Contract for Construction, now in its sixteenth printing, and is referenced in Standard Form Agreements between Owner and Architect, Owner and Contractor, and Owner and Subcontractor.

The AIA B Series comprises Owner-Architect Agreements and includes the following:

  • B101-2007 Standard Form of Agreement Between Owner and Architect
  • B102-2007 Standard Form of Agreement Between Owner and Architect without a Predefined Scope of Architect’s Services
  • B103-2007 Standard Form of Agreement Between Owner and Architect for a Large or Complex Project
  • B104-2007 Standard Form of Agreement Between Owner and Architect for a Project of Limited Scope
  • B144-ARCH-CM-1993 Standard Form of Amendment to the Agreement Between Owner and Architect Where the Architect Provided Construction Management Services as an Adviser to the Owner
  • B163-1993 Standard Form of Agreement Between Owner and Architect for Designated Services
  • B181-1994 Standard Form of Agreement Between Owner and Architect for Housing Services
  • B201-2007 Standard Form of Architect’s Services: Design and Construction Contract Administration
  • Other Standard Form of Architect’s Services exist for site evaluation and planning; value analysis; historic preservation; security evaluation and planning; construction phase administration; facility support services; commissioning; LEED certification; interior design; and furniture, furnishings, and equipment design.

Additional Agreements and Project Management Forms exist, including:

  • G701-2001 Change Order
  • G702-1992 Application and Certificate for Payment, and G703-1992 Continuation Sheet
  • G704 Certificate of Substantial Completion
  • G709-2001 Work Changes Proposal Request
  • G710-1992 Architect’s Supplemental Instructions
  • G711-1972 Architect’s Field Report

AIA DOCUMENT A201-2007 PROVISIONS AFFECTING ARCHITECTS

A201-2007 and other Standard Form Agreements outline the roles and responsibilities of Owners and Architects (and other parties) and allocate risks between them.

General Provisions

  • Identify all documents that comprise the “Contract Documents”
  • Disclaim a contractual relationship between Contractors and Architects except where enforcement provides for the architect’s ability to perform his or her duties

Owner (Role/Responsibilities)

  • Including furnishing information about the project site

Contractor (Role/Responsibilities)

  • Including studying the Contract Documents and site conditions in relation to them

Architect (Role/Responsibilities)

  • Acts as Owner’s representative and administers performance of the contract
  • Determined by site observations that the work is being completed as specified in the Contract Documents (and inform the owner of the same)
  • Conduit for communication between Owner and Contractor
  • Prepare Change Orders
  • Review and certify progress payments
  • May reject work that is not as specified in the Contract Documents

Changes in the Work

  • Allows Change Orders to alter the Contract without invalidating it as agreed by the owner, contractor, and architect
  • Allows Construction Change Directives within the scope of the Contract Documents when the parties cannot agree

Time

  • Any specified time limits are “of the essence”
  • Allows extensions where the Contractor is delayed by acts of the Owner or Architect or other forces beyond his or her control

Other provisions govern progress payments, termination of the contract, and dispute resolution.

Standard Form Agreements can be used as they are or can be modified with additional terms as desired by the parties (example: liquidated damages for delays or bonuses for early completion).

NEGOTIATING CONTRACT TERMS

Contracts are the written terms of an agreement which both parties intend to be bound by and intend for the agreement to be enforceable. Before the signatures are placed on the page however numerous variables which impact the architect can be subject to negotiations. Even a ‘Standard Form Agreement’ can be subject to having its terms and conditions to meet the requirements of the project or the parties.

When my office working to prepare an agreement for an architect client, whether the agreement is a short form one page written agreement or a full AIA Agreement, often times the project owner has counsel. Numerous adjustments can be negotiated between counsel for owners and counsel for the design professional beyond the default terms of the AIA which can work to both parties advantage on a project by project basis.

When preparing and negotiating the terms of an AIA agreement for an architect, the following are terms and conditions usually subject to negotiation, or can be made subject to negotiation.

Timeframe: Typically an owner will be looking for a project completion date that may not be realistic, especially where environmental, ARB, and/or zoning variances may be required. Through negotiations establishing an anticipated timeframe while taking care to note the time facts within the architect’s control, and those factors beyond the architect’s control. This helps to set the proper understanding between architect and owner so as to avoid disagreements and misunderstandings.

Payment: All the terms as to when the owners would be required to tender payment to the architect can be subject to negotiation. Depending on the project, its complexity, and locale, it may even be possible for the architect to be paid in advance of each phase of the work, which greatly minimizes architect’s risk of non-payment on work performed.

LEED: Where projects are contemplating green construction or achieving any specific LEED designation these are important issues which can greatly impact an architect’s potential liability on the project. As discussed previously where a design professional agrees by contract to achieve a specific performance objective, and the project fails to achieve this objective, the design professional may be liable to the owner. To avoid this confusion in my architectural agreements I have it noted that the project is a non-LEED project and the architect has not been charged with obtaining any environmental certifications on the project.

Basic or Extra Services: What work the architect is willing to perform on the project as its ‘basic services’ and whether any’extra’ or ‘additional services’ may also be subject to change or negotiation based on the needs of the owner and architect. Should an owner wish to add additional services through the performance of architect’s work, the agreement can be set up to provide that option to owner.

Owners’ Responsibilities: The agreement for architectural services not only details what the architect is to do, but it is the architect’s opportunity to have whatever owner tasks (beyond payment) the architect may be needing from the owner. For example, the architect may wish for the owner to provide the architect with its written objectives, schedules, criteria, equipment, materials, etc. This can greatly reduce confusion or disputes down the road.

Copyrights and Licenses: Especially on high end custom projects architects will often have a legitimate interest in seeking to protect their designs through the use of copyrights and licenses. These are often subject to negotiations and I routinely seek to protect my architect clients’ legitimate copyright interests in negotiations and tailor the agreement accordingly.

Claims and Disputes: Although no one wants to think of a new project turning into a future dispute, advance planning can go a long way in making the situation less damaging to the architect. Typically the agreement should provide for litigation, mediation, or arbitration of the dispute. Some parties may have preferences as to the forum the dispute is resolved in and the ultimate decision on dispute resolution should be tailored to the specifics of the project and preferences of the parties.

Marketing / Publication Rights: Although not usually found in the standard agreement language through negotiations obtaining a prominent location on the jobsite for the architect’s business signage as well as being provided design credit in any sales or marketing materials that may be generated for the project are often quite important to the architect.

Conclusion of Architect’s Scope of Work: Often contracts will seek to have architect’s scope of work continue until a final C.O. is issued on the project, often delaying for considerable time any remaining payment due architect despite the facts that there is noting usually remaining for the architect to perform. Often times I am able to negotiate that the architect’s scope of work is completed upon certifying of final payment due contractor.

BREACH OF CONTRACT

Breach of contract is a failure by a party to perform his or her obligations under a valid contract.

Breaches of contract are classified as:

  • Minor/immaterial breach
  • Small delays/minor deficiencies in performance
  • The non-breaching party gained the substantial benefit of his/her bargain despite the defective performance of the other party
  • The non-breaching party is not relieved of contract duties
  • Material breach
  • The non-breaching party did not gain the substantial benefit of his/her bargain
  • The non-breaching party is relieved of contract duties and may immediately seek redress

REMEDIES FOR BREACH OF CONTRACT

DAMAGES (money)

  • Compensatory damages (to put the party in the position she or he would have been in if the other party had performed)
  • Consequential damages (losses resulting from the breach that were foreseeable at the time the contract formed)
  • Punitive damages (to punish intentionally wrong behavior; generally not awarded in commercial contract matters)
  • Nominal damages (a token amount awarded where breach exists but no dollar loss has been proved)
  • Liquidated damages (agreed to by the parties in the contract in the event of breach; are unenforceable if they are designed to punish rather than compensate for actual loss)

SPECIFIC PERFORMANCE (a court order requiring the breaching party to perform)

  • Available for land and rare/unique goods
  • Not available for service contracts

RESCISSION AND RESTITUTION (the non-breaching party cancels the contract and seeks to recover the value of any benefit that has already been given to the breaching party)

TORT ACTIONS (suits for civil wrongs such as negligence where there is a foreseeable risk of harm; often seen in products liability)

QUASI-CONTRACT

  • May be available even to a party who breaches (if there was no seriously wrongful conduct)
  • Available where a contract did not form but one party provided a benefit to the other and the second party would be unjustly enriched if allowed not to compensate

Kimberly A. Steele is the founding member of the Steele Law Firm, P.C., a multi-jurisdictional practice with offices throughout the United States that represents clients in commercial litigation, commercial transactions, construction law and suretyship.  The Steele Law Firm, P.C. was awarded the New York State Certified Woman-Owned Business Enterprise designation in 2010.  The Steele Law Firm, P.C. has extensive dealings in large volume banking and collection matters with attention to commercial foreclosures, loan workouts, UCC Article 9 issues, lender liability, creditors’ rights, judgment enforcement, priority disputes, trust diversion and bankruptcy.  The Steele Law Firm, P.C. also assists clients with collateral accounting, preservation, seizure and liquidation.  In addition, The Steele Law Firm, P.C. represents commercial parties with respect to land development, financing, economic incentive programs, zoning, land use issues, environmental cleanup, minority business status, and multi-party program participation including with the Small Business Administration, Certified Development Companies, and Industrial Development and Community Development Agencies.

Ms. Steele graduated magna cum laude from Elmira College on a full academic scholarship, attended the Université de la Sorbonne in Paris, France also on full academic scholarship, and received her Juris Doctor from Albany Law School of Union University.  Ms. Steele has previously served as corporate counsel and vice president of commercial sales of a Central New York community bank.

In addition to practicing law, Ms Steele is the founding member of H.T. Grace & Associates, LLC, a full service consulting firm that assists small business owners throughout the country.  Ms. Steele is also the owner of Turnaround Credit Repair, providing consumers with credit repair services and business owners with risk rating repair services for purposes of risk management, insurance and bonding.  Currently, Ms. Steele is partnering with a newly-formed venture that procures bonding and competitive loans for Veteran Business Entrepreneurs, Disabled Veteran Business Entrepreneurs, Minority Business Entrepreneurs and Woman Business Entrepreneurs.

Ms. Steele is originally from Lake George, New York.  Ms. Steele makes her home in Oswego with her two rescued dogs.  Ms. Steele enjoys playing the piano, competitive sailing, cooking and wine collecting.