October 2007

In This Issue

• Subcontract Changes are Coming Soon
• Subs Win Defective Work Dispute With Insurance Companies in Texas
• When Can Safety Contract Language Be Used Against You?
• Firm News

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Subcontract Changes are Coming Soon

Donald W. Gregory, Construction Law Chair

AIA is preparing its revisions to most of its key contract documents for the first time in a decade. While these changes are not yet finalized, it is anticipated that the following changes will be featured:

• Additional insured coverage will be required of contractors and subcontractors by virtue of the A201 general conditions.
• There will be limitations on the contractor’s ability to request financial assurances from the owner.
• The architect can be replaced by an Initial Decision Maker (IDM) who will act as a third-party neutral in disputes between the owner and contractor. Only if there was a demand within thirty (30) days could those decisions be “appealed” to mediation and ultimately arbitration or litigation. Otherwise, the decision of the IDM becomes FINAL.
• Mandatory arbitration, in AIA documents since 1888, is out and the parties can elect arbitration or litigation by checking a box. If not, the “default” is litigation.
• Owners will be able to inquire about the payment status of subs/suppliers, and make joint check payments if necessary.

The final AIA documents are expected to be released in the fall of this year.
In view of the proposed 2007 AIA revisions, including the revisions to the AIA A201 general conditions (which are incorporated by reference into the AIA A401), contractor and subcontractor groups are evaluating whether they want to continue to endorse the AIA A401 subcontract, which has been traditionally endorsed by ASA and ASC.

There is the likelihood that both contractors and subcontractors concerned about the inclusion of “additional insured” will choose not to utilize the AIA A401 form any longer. Some contractors and subcontractors believe that an additional insured requirement in effect mandates a broad form of indemnity, which many believe is unfair because it shifts the risk and cost of another’s negligence upon a non-negligent party or their insurer.

A coalition group called the Construction Industry Contracts Council (CICC), consisting of subcontractor, general contractor, owner and surety associations, including ASA, ASC, AGC, COA, CURT and other industry groups, is drafting its own contract documents, called ConsensusDOCS, which will be available later this year, together with the 2007 editions of the AIA documents.

ConsensusDOCS contain the following provisions favorable to subcontractors:

• Sub is entitled to payment within seven (7) days after the contractor is paid. (“PAY WHEN PAID.”)
• When the sub is not timely paid, the sub may stop work.
• Conflicts between documents are construed in favor of the subcontract terms.
• Indemnification is limited to the sub’s negligence.
• Review of plans/specs does not imply constructability.
• Unconditional lien waivers are prohibited.
• Liquidated damages are limited to the sub’s actual responsibility.
• Arbitration must take place where the project is located.
• Sub is not required to indemnify the contractor’s willful and repeated safety violations.

Some of the differences that ConsensusDOCS believes make their forms superior to AIA (2007) are the following:

• Options for dealing with the additional insured dilemma.
• Right of the contractor to request evidence of project financing before starting work and during the project.
• No Initial Decision Maker (IDM) (which could lead to inadvertent waiver of claims), but instead direct discussions between company representatives.
• The requirement of choosing arbitration or litigation by checking a box (AIA’s “default” is litigation if no box is checked).

The effect of these contract document changes on the construction industry remains to be seen, but end-users will have greater choice in selecting a form contract document that works best for them.

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Subs Win Defective Work Dispute With Insurance Companies in Texas

ASA filed a joint brief with the ASA of Texas, AGC Texas Building Branch and PHCC requesting that the Texas Supreme Court rule that property damage caused by a defective foundation is covered by a building contractor’s general liability insurance, which many contractors and insurance agents assume includes coverage for “completed operations.” The brief argued that the “marketing” of general liability insurance policies “emphasizes the availability of coverage for various categories of defective work,” and that “the premium charged …. would be excessive to say the least,” if the insurer’s argument – that defective construction is not covered by the standard policy language – succeeds.

In an August 31, 2007 decision the Supreme Court of Texas found that defective work constitutes an “occurrence” or “property damage” as defined in the standard commercial general liability (CGL) insurance policy. The court held that defective work falls within the definition of an “occurrence” when it is unintentional and unexpected, stating that the policy makes no distinction between damage to the insured’s own work and damage to a third party’s property. Further, the court found that the damages to a home arising out of the defective work of a foundation subcontractor constitutes “physical injury to tangible property,” and thus “property damage” as defined in the policy. Lamar Homes, Inc. v. Mid-Continent Casualty Co., Case No. 05-0832 (8-31-07).

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When Can Safety Contract Language Be Used Against You?

For years, contractors were encouraged to insert broad safety language in their subcontract so that they would have the contract muscle to enforce meaningful safety precautions on the jobsite and minimize the risk of jobsite accidents and OSHA citations.

However, a recent Court of Appeals decision has pointed out the risk associated with such language. A subcontractor sued a general contractor for the alleged increase in its worker’s compensation premiums associated with an injured employee of the subcontractor. While the contractor prevailed on a motion at the trial court level, the general contractor’s contractual authority to stop work and prevent accidents was cited by the Court of Appeals as giving the subcontractor a potential legal claim. A.H. Sturgill Roofing, Inc. v. Robert W. Setterlin & Sons Co., No. 06CA36, 2007 WL 1226042 (Ohio App., 4th Dist., April 23, 2007).

In view of this decision, contractors may want to rethink whether they want to assume express duties in the contract to ensure a safe workplace.

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Firm News

Kegler Brown has been named General Counsel to the Association of the Wall & Ceiling Industry (“AWCI”), a trade association of 2,500 members headquartered in Alexandria, Virginia.

Don Gregory and Mike Madigan presented “Ohio mechanic’s lien law” to the National Association of Credit Managers on September 19, 2007. Don Gregory and Eric Travers are educating the American Subcontractors Association on the new “ConsensusDOCS” in a seminar on October 4, 2007 and a national webinar on October 9, 2007.

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