To Terminate Contractor for Cause Under the Standard Form of Agreement Between Owner and Contractor Where the Basis for Payment is a Stipulated Sum--AIA Document A141 (2007 EDITION)
In the majority of commercial construction projects, the design professional agrees to administer the construction contract between the owner and contractor. These services typically include observing the contractor’s work for purposes of recommending payment to the owner, responding to the contractor’s requests for information, and evaluating the contractor’s requests for change orders for additional money and extensions of the contract time.
In the Standard Form of Agreement Between Owner and Contractor Where the Basis for Payment is a Stipulated Sum, American Institute of Architects (“AIA”) Form A101-2007 Edition) (the “Prime Contract”), the architect’s construction administration duties derive from the A101 and the general conditions, which are incorporated by reference into the contract. Of all of the construction administration services provided by the design professional, few services are more certain to lead to litigation than addressing whether sufficient grounds exist to justify the owner’s termination of the general contract.
This article briefly examines the state of Florida law on the architect’s duties regarding certification and the defenses available to the architect to claims by the contractor that the architect wrongfully certified its termination. Finally, the article concludes with some practical advice to the architect and its counsel about minimizing the potential for being drawn into litigation over certification and maximizing the potential for a successful defense if sued by the contractor.
AIA Document A201- 2007 Edition
The intention of the AIA documents, 2007 Edition, is to establish a tri-partite relationship between the owner, contractor, and design professional. The relationship is created by incorporating a single set of standard general conditions into both the owner-contractor agreement, e.g., A101, and the owner-architect agreement, e.g., B101.
The architect’s construction administration functions are set forth in A101, B101, and the general conditions. The standard general conditions are contained in AIA Document A201, General Conditions of the Contract for Construction (“A201-2007”), which include the architect’s duty, upon the owner’s request, to certify whether sufficient grounds exist to justify the owner’s termination of the contract for cause.1
Paragraph 14.2 of the Conditions, Termination by the Owner for Cause, provides that:
The Owner may terminate the Contract if the Contractor:
1. persistently or repeatedly refuses or fails to supply enough properly skilled workers or proper materials;
2. fails to make payment to Subcontractors for materials or labor in accordance with the respective agreements between the Contractor and the Subcontractors;
3. persistently ignores laws, statutes, ordinances, or other rules or regulations; or
4. otherwise is guilty of substantial breach of a provision of the Contract Documents.
Paragraph 14.2.2 provides:
When any of the above reasons exist, the Owner, upon certification by the Architect that sufficient cause exists to justify such action, may without prejudice to any other rights or remedies of the Owner and after giving the Contractor and the Contractor’s surety, if any, seven days’ written notice, terminate employment of the Contractor.
Traditionally, the General Conditions have provided that the architect administering the Prime Contract makes the initial decisions in all claims between the owner and the contractor.However, the 2007 General Conditions allow the owner and contractor to choose someone other than the architect to serve as the “Initial Decision Maker” for most claims arising between them.2 If, however, the owner-contractor agreement fails to identify a third party selected to serve this function, the architect will, by default, serve as the Initial Decision Maker, as it has traditionally done.3
The owner’s request that the architect certify grounds sufficient to justify termination of the contract is a “Claim” under Article 4.3 of the General Conditions.4 While there is no Florida law on this particular issue, the New Jersey Supreme Court has squarely addressed the matter5, and the reasoning is solidly based on the broad definition of “claims” in the general conditions. Therefore, in addition to the duties conferred by Article 14.2, in its role as Initial Decision Maker, the architect is tasked with deciding if sufficient cause exists to justify the owner’s termination of the Prime Contract for cause.6
Article 14.2.2 provides that when any of the enumerated grounds for default exist, the owner may terminate the contract. However, before the owner can do so under the contract, the Independent Decision Maker must certify that sufficient cause exists to justify such action based on the grounds provided in the termination for cause provision.7 This is “without prejudice to any other rights or remedies of the owner” existing under common law.8
In other words, the owner may have additional bases to terminate the owner-contractor agreement based upon common law principles, or the owner may have the independent right to terminate the contract under common law for prior, material breaches based on the same conduct for which it requests certification.
What Should An Architect Do When Faced With A Request To Certify Grounds For Termination?
The Initial Decision Maker is called upon to exercise independent judgment in deciding whether to certify a termination. In fulfilling this role, the design professional should conduct a due diligence investigation and, within a reasonable amount of time, render adecision. The claims mechanism in Article 4 provides a timeline for the Architect’s decision, which can be extended by the Architect’s request for additional information.
No matter what the architect ultimately decides, the decision will likely result in legal action against him. Certainly, the decision to certify grounds for termination will result in a disgruntled contractor and the decision not to certify will result in a disgruntled owner, leaving the architect with a Morton’s Fork.
As set forth in Article 4.2.2, the architect’s decisions must be consistent with the intent of the contract documents and without partiality to either the contractor or owner.9 Inmany cases, however, the considerations at issue will involve the drawings and construction administration provided by the architect, placing the architect in the awkward position of judging its own performance. This potential conflict and the fact that architects’ fees are paid by the owner may cause considerable unease in the contractor over whether the architect can truly serve as an impartial arbiter in the certification process.
The design professional’s only option under these circumstances is to render a decision in good faith and with impartiality to both the owner and the contractor. Having said that, that the architect will be sued for certifying or not certifying termination is a near certainty. When asked to address certification, the architect should keep this in mind and position itself for the successful defense of the litigation. There are several important defenses available to the architect that derive from both the contract and common law, and the architect is a unique position to be able to strengthen those defenses with its approach to the certification and the certification itself. Some of the pertinent defenses are discussed briefly below.
No Proximate Cause
It does not necessarily follow from the architect’s certification that the owner must terminate the contract or that the owner necessarily relies on the architect’s certification in deciding to terminate the contractor. The certification is a condition precedent to termination of the contractor’s employment under Article 14.2.2. Often, the owner will have its representative and its own counsel involved in evaluating whether to terminate the contractor.
More sophisticated owners will often have an owner’s representative administer the owner’s duties under the Prime Contract. Often, the owner’s representative is as qualified as the architect to evaluate the bases for certification identified by the owner and will have the knowledge to do so from his involvement in the project. In those cases, the architect’s certification, while a condition precedent under the contract, is a formality to the owner’s decision to terminate. When a sophisticated owner employs an owner’s representative, counsel for the architect should explore whether the owner truly terminated based on the architect’s certification or whether it exercised independent judgment in terminating the contract, relying on the opinions of its representative.
If the owner terminates the Prime Contract on a basis not certified by the architect, it has presumably exercised its common law termination right. In such cases, the architect’s defenses to a wrongful certification claim by the contractor or a professional negligence or indemnity claim by the owner should include that the architect’s certification was not the proximate cause of any damages.
The damages flowing from the architect’s certification, as opposed to the owner’s independent termination, may be speculative. The independent basis for the common law termination provides an opportunity for the architect to argue that the owner’s termination on the independent basis was the cause of any damages, rather than its termination based on the architect’s certification.
Prospective Release or Waiver
Generally, when the architect performs thisfunction, the contract provides that the architect “will not be liable” for the consequences of a decision rendered in good faith.10 Because the general conditions are incorporated into both the Prime Contract and owner architect agreement, this language should provide the basis for a release or waiver of any claims by the contractor or owner against the architect for a good faith certification. However, the enforceability of one type of exculpatory provision in favor of the design professional – the limitation of liability clause -- has recently been called into question11, and the practitioner should advise the architect accordingly.
Arbitral Immunity
When the architect agrees to serve as the Initial Decision Maker, it becomes an arbiter of claims between the owner and contractor. Article 4.3.2, Decisions of the Architect, identifies the architect as the initial arbiter of claims,12 and Article 4.4, Decisions of the Architect, provides that the architect’s decisions are final and binding, subject to arbitration or litigation. These provisions make clear the role of architect as arbiter, and the architect’s counsel should assert arbitral immunity as a defense.
Generally, arbitral immunity is absolute immunity from suit. However, the key issues of whether arbitral immunity for certification is immunity from suit or from liability and whether the immunity is absolute or qualified have not been addressed by Florida courts.
The Florida Supreme Court has addressed the architect’s immunity for decisions regarding the quality and quantity of the contractor’s work. 13 In that context, the Court held that the immunity conferred on the architect, as arbiter, is qualified, and the architect is immune from liability unless decision was rendered fraudulently or with such gross error as to amount to fraud.14
Because the architect may be called to assess the quality of its own design and construction administrative services when evaluating certification and because the architect is paid by the owner, the Florida high court would most likely hold that arbitral immunity is qualified. In our opinion, the immunity should be suit immunity, and the contractor should be required to specifically plead the factual basis for a claim that the architect has rendered its certification fraudulently, or so grossly in error that the error amounts to fraud.
Sovereign Immunity
During the construction phase of the project, the architect is appointed by the owner as its limited agent for certain construction administration functions.15 These functions arguably include addressing whether grounds exist to justify termination of the contractor upon the owner’s request.
When the project involves a public owner, the architect may be entitled to sovereign immunity, as an agent of the State of Florida or its political subdivisions.16 For governmental agents, the immunity is qualified suit immunity. To circumvent the immunity and establish tort liability, the claimant must plead and prove that the agent acted outside the course and scope of its agency or acted with willful and wanton disregard of the claimant’s rights.
A key issue in the agency analysis will typically be whether to apply tort or contract law principles to the agency determination. The tort concepts of agency turn on the control retained or exercised by the principal over the purported agent. The determination is often one a disputed fact requiring resolution by the judge or jury.
However, under the standard tri-partite contractual relationship created by the AIA 2007 documents, the contract law concepts of actual and apparent agency may be more appropriate to the application of sovereign immunity from contractor claims based upon wrongful certification. This is because the contract documents clearly identify the architect as the owner’s representative for certain construction administration functions, and, by incorporating the general conditions into the Prime Contract, the contractor agrees to accept the architect as the owner’s representative. The issue of agency, therefore, is not necessarily one of control, but one of the owner’s appointment of the architect as agent and the delegation of certain authority to the architect to act on the owner’s behalf.
Once again, Florida courts have not addressed the issues of agency involved in the architect’s certification of grounds to terminate a construction contract with a public owner. Nevertheless, counsel for the architect should raise sovereign immunity as a defense to the contractor’s claim based on wrongful certification.
Risk Minimizing Strategies
The architect has two important opportunities to eliminate or minimize its exposure to the contractor’s claim for wrongful certification. The first is at the contracting stage, and the second is when the architect is requested by the owner to address certification.
At the contracting stage, the architect should take the opportunity to eliminate or minimize its risk by reviewing the Prime Contract, the owner architect agreement and the General Conditions and eliminating its role as the Initial Decision Maker for claims and disputes its certification of grounds sufficient to justify termination as a condition precedent to the owner’s contractual termination for cause rights.
The architect should also suggest to the owner that it negotiate with the contractor to include a “Termination for Convenience” clause in the Prime Contract or make the termination for cause provisions as broad as possible to afford the owner greater latitude in terminating the contractor. For instance, the phrase “persistently or repeatedly” can be deleted from subsection 1 of Article 14.2 to allow termination for only one reasonable period during which the contractor fails to provide sufficient manpower or materials.
During the construction phase, if the architect has not agreed to act as Initial Decision Maker or to address certification, it can and should simply refuse to do so. If the architect then voluntarily assumes the duty to address certification, it should require the owner to defend, indemnify, and hold it harmless for any claims arising out of or related to the decision and require the owner to prospectively release the architect from any claims arising out of or related to the decision. Because limitations of liability operate to prospectively exculpate design professionals from exposure to damages greater than an agreed to amount or arising from agreed to conditions, the practitioner should counsel the design professional about the possibility that the risk shifting and exculpatory provisions may not be enforceable. Nevertheless, the architect should insist on them when agreeing to assume the certification duty.
If the architect agrees to provide the service, it must be objective and conduct a bona fide, due diligence investigation into the bases for certification and termination requested by the owner. Upon receipt of the owner’s request for certification, the architect should immediately notify the contractor and its performance and payment bond surety of the owner’s request and solicit their participation in the investigation.
The architect’s initial acknowledgment of the owner’s request should call attention to the gravity of the consequences of termination, including the likelihood of litigation to result from termination. It should also remind the owner of its common law right to terminate the Prime Contract based on any prior, material breaches by the contractor and, if applicable, remind the owner that some of the bases for certification may involve legal analysis and judgment which is outside of the architect’s expertise.
The architect should advise the owner to consult its own counsel and owner’s representative before terminating the contract and remind the owner while certification is a condition precedent to the owners’ contractual termination rights, the owner is not required to terminate upon receiving the certification, and it should exercise its own independent judgment in determining whether the terminate the contract for cause. Again, a copy of the acknowledgment and request should be provided to the contractor’s performance and payment bond surety.
If the architect certifies, it should assume that the certification letter will be an exhibit at trial and craft the language accordingly. The letter should include the following key provisions:
a. A quote or paraphrase of Quote of the waiver and release provision in the general conditions for decisions made by the Architect in “good faith”;
b. If the contractor refuses to meaningfully participate in the due diligence process, a reminder of the Architect’s invitation and the contractor’s refusal;
c. A description of the investigation conducted by the Architect and the reasoning by which the Architect arrived at the conclusion that one or more of the bases for certification and termination requested by the Owner exist;
d. A caveat that some of the Architect’s opinions may be legal in nature, and that the Owner should consult with counsel before terminating the contract and that certification does not require termination; and
e. A reminder that the Owner may have a common law right to terminate the contract for cause and, if applicable, a contractual right to terminate the contract for convenience.
The architect should once again copy the payment and performance bond surety with the certification letter. While the owner’s request and the architect’s certification may not create a duty on the surety’s part to perform under the bonds, they may persuade the surety to intervene and attempt to avoid the inevitable litigation that follows termination.
By employing these strategies, the architect can eliminate or reduce its exposure to wrongful certification claims by a contractor. If litigation ensues, by employing these strategies and asserting these defenses, the architect should be a strong position to defend the contractor’s claim for wrongful certification.17
1 AIA Commentary to A201-2007, http://www.aia.org/aiaucmp/groups/aia/documents/pdf/aias076835.pdf
2 A101 - 2007 § 6.1.
3 Id.
4
5 Ingrassia Construction Company, Inc. v. Vernon Township Bd. of Education, 345 N.J. Super. 130, 137-138, 784 A.2d 73, 78 (N.J. Super. 2001). See also Bolton Corp. v. T.A. Loving Co., 94 N.C. App. 392 (1989)(Architect’s determination of certification is prima facie correct, and the burden is upon the other parties to show fraud or mistake).
6 A201 - 2007 § 1.1.8.
7 A201 – 2007 § 14.2.1.
8 A201 – 2007 § 14.2.2.
9 A201 – 2007 § 4.2.12.
10 A201 – 2007 4.2.11 provides that “The Architect will interpret and decide matters concerning performance under and requirements of the Contract Documents on written request of either the Owner or Contractor.”
Paragraph 4.2.12 provides:
Interpretations and decisions of the Architect will be consistent with the intent of and reasonably inferable from the Contract Documents . . . When making such interpretations and decisions, the Architect will endeavor to secure faithful performance by both Owner and Contractor, will not show partiality to either and will not be liable for results of interpretations or decisions so rendered in good faith. [Emphasis supplied].
11 See Witt v. La Gorce Country Club, 2009 WL 1606437 (Fla. 3d DCA 2009). Cf. Fla. Power & Light Co. v. Mid-Valley, Inc., 763 F.2d 1316 (11th Cir. 1985).
12 A201 – 2007 §4.3.2, Decision of Architect. Claims . . . shall be referred initially to the Architect for action as provided in Paragraph 4.4. A decision by the Architect, as provided in Subparagraph 4.4.4, shall be required as a condition precedent to arbitration or litigation of a Claim between the Contractor and Owner as to all such matters arising prior to the date final payment is due.
A201 – 2007 § 4.4, Resolution of Claims and Disputes.
If a Claim has not been resolved after consideration of the foregoing and of further evidence presented by the parties or requested by the Architect, the Architect will notify the parties in writing that the Architect’s decision will be made within seven days, which decision shall be final and binding on the parties but subject to arbitration. Upon expiration of such time period, the Architect will render to the parties the Architect’s written decision relative to the Claim.
13 See Duval County v. Charleston Engineering & Contracting Co., 101 Fla. 341, 352 (Fla. 1931). See also, Willcox v. Stephenson, 30 Fla. 377, 11 So. 659 (Fla. 1892): James A. Cummings, Inc. v. Young, 589 So. 2d 950 (Fla. 3d DCA 1991).
14 Id.
15 Cite to Article 2 – Owner’s representative.
16 Florida Statute § 768.28(9)(a) (2010).
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