CONSTRUCTION CONTRACTS: DRAFTING ISSUES, SPOTTING RED FLAGS AND

ALLOCATING RISK, PART 1 & PART 2

First Run Broadcast: August 28 & 29, 2018

Live Replay: March 27 & 28, 2019

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes each day)

Construction contracts are among the most difficult agreements to draft or review, and negotiate.

At every stage, building is fraught with substantial risk – timely regulatory approvals, cost

containment and price certainty, financing contingencies, building deadlines, and a host of other

risks. If these risks materialize, as is common, the bargained for exchange among the parties and

their expectations are radically unsettled. The construction contract is a comprehensive and

careful allocation of risks, a compromise between flexibility and price/cost certainty, and

establishes procedures for resolving disputes short of costly litigation. This program will provide

you with a practical guide to drafting the most important provisions of construction contracts and

cost-effective resolution of disputes.

Day 1 – March 27, 2019:

• Reviewing and drafting essential provisions of construction contracts

• Use and common mistakes in using AIA contacts in negotiations with builders

• Defining the scope of a project and planning for modifications

• How fees and costs are structured – and allocating risk of changes

• Tying performance standards and timelines to payments – progress payments and

retainage

• Issues involving contractor licensure and subsequent claims

Day 2 – March 28, 2019:

• Identifying, mitigating and allocating risk among property owners, developers and

investors

• Spotting red flags and identifying risks in construction contracts

• Insurance and indemnification provisions of construction contracts

• Role of subcontractors and mechanics’ and materialmen liens

• Anticipating disputes between property owners and builders, and building in cost-

effective dispute resolution

• Role and limitations of different type of damages

Speaker:

John Miller is the principal of John R. Miller, PLLC in the Charlotte, North Carolina and was

for 39 years a partner with Robinson, Bradshaw & Hinson, P.A. His practice encompasses

corporate and securities law, mergers and acquisitions, banking and finance, and construction

law. He was selected by his peers for inclusion in "The Best Lawyers in America" and for

inclusion in Business North Carolina Magazine's "Legal Elite" as one of the top business lawyers

in North Carolina. He received his A.B. from Duke University and his J.D., with distinction,

from Duke University School of Law.

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Construction Contracts: Drafting Issues, Spotting Red Flags & Allocating Risk, Part 1

Teleseminar March 27, 2019 1:00PM – 2:00PM

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Construction Contracts: Drafting Issues, Spotting Red Flags & Allocating Risk, Part 2

Teleseminar March 28, 2019 1:00PM – 2:00PM

1.0 MCLE GENERAL CREDITS

PAYMENT METHOD:

Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________

VBA Members $75 Non-VBA Members $115

NO REFUNDS AFTER MARCH 21, 2019

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 27, 2019 Seminar Title: Construction Contracts: Drafting Issues, Spotting Red Flags & Allocating

Risk, Part 1 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

Vermont Bar Association

CERTIFICATE OF ATTENDANCE

Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: March 28, 2019 Seminar Title: Construction Contracts: Drafting Issues, Spotting Red Flags & Allocating

Risk, Part 2 Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

CONSTRUCTION AGREEMENTS – RISK

ALLOCATION

By John R. Miller

John R Miller, PLLC

Charlotte, North Carolina

(O) 704-900-6500

jmiller@johnrmillerpllc.com

2

I. Introduction

It is an age-old notion that “time is money”1, but the other side of this coin is that “haste

makes waste.”2 Construction law in the future will be shaped by the tension between these two

proverbial concepts. The market for construction services will be driven by an increasing desire

for speed in delivery and lower costs, and these forces will no doubt produce mistakes and

failures and will engender an increasing amount of litigation. The keys to continued success in

this area will be for the legal structure allocating risk to the participants in the construction

process to evolve in a way that establishes a fair balance between the efficient delivery of

construction services and the avoidance of risk. Construction counsel can contribute to the

process by anticipating the risks and managing them through effective contract negotiation and

drafting.

II. Spotting Red Flags and Identifying Risks in Construction Contracts

The following is a checklist of some of the more important provisions in

construction contracts3 that represent potential risk.

1. Consequential Damages – Does the contract contain a waiver of consequential

damages? Is the waiver mutual or is it a one-sided provision? From the Contractor’s

perspective, are the subcontracts in harmony with the provision in the general contract?

2. Indemnity – To what extent is risk shifted from one party to another through the

mechanism of indemnification? More importantly, to what extent does the provision cover

negligence of the indemnitees?

3. Notices – Are the notice provisions reasonable or unreasonable, i.e., do they

involve very short time periods or impractical content requirements?

1 See, e.g., Benjamin Franklin: Advice to a Young Tradesman 1748.

2 John Heywood, Dialogue of Proverbs 1546.

3 This Paper generally focuses on the relationships under the General Contract between the Owner and the

Construction Contractor. Most of the concepts and issues also apply to Subcontracts and, to a lesser extent, to the

Contract between the Owner and the Design Professional.

3

4. Design Liability – Are there provisions requiring the Contractor to review plans

and specifications and to assume responsibility for unreported defects? Are there provisions

shifting the risk of design errors to the Contractor or allowing the design professional to dictate

the result when design documents conflict?

5. Subsurface/Concealed Conditions – Does the contract provide equitable

protections in case the Contractor encounters unexpected subsurface or concealed conditions, as

is typical in industry-standard forms? Are there unreasonable site inspection provisions?

6. Warranties – What is the period of duration of the construction warranty and

when does it commence? Are the warranty provisions in the general construction contract in

harmony with the warranty obligations of the subcontractors? In guaranteed maximum price

contracts, does the contract allow the Contractor to use savings to cover corrective work?

7. Hazardous Materials – Does the contract purport to shift responsibility for

hazardous materials that are already on the site to the Contractor? Is the owner obligated to

indemnify the Contractor against pre-existing conditions?

8. Payment – Are the payment terms reasonable? Are the conditions precedent to

payment, such as producing affidavits from subcontractors and suppliers, workable? Is the

Owner adequately protected from double payment or non-performance by the Contractor?

9. No Damage for Delay – Is there a provision that purports to limit the Contractor’s

remedy for delay to an extension of time but no additional compensation? Are there liquidated

damages in the event of delays caused by the Contractor?

10. Insurance Requirements – Is the insurance coverage required by the contract

documents obtainable? Is there a waiver of subrogation provision, and is it mutual?

4

III. Understanding the Complex Financial and Risk

Relationships in Construction Contracts

The financial stakes for all parties involved in the construction process are extremely

high. Large commercial projects usually involve very large budgets, yet the work is frequently

awarded to the contractor or subcontractor with the lowest bid. This means that the successful

bidders are under additional pressure to economize, but they run a huge financial risk if they take

shortcuts and there is a failure of some sort. The results can be catastrophic, and the damages

can be enormous if there is a problem, such as a major structural defect, accident or other

construction failure. The role of counsel is to minimize the risk of liability undertaken by his or

her client and to advise the client as to ways to manage such risks, for example, through

insurance, indemnification arrangements and other techniques.

The biggest mistake that clients often make is that they simply fail to read and follow

their own contracts (i.e., they fail to appreciate some of the provisions of the complex

construction contracts that are entered into). For example, in a typical construction contract a

contractor would be required to give notice to the owner in the event the contractor encounters a

delay. All too frequently, this contractual obligation is ignored by contractors, leaving them

unnecessarily open to damages for failure to complete the work on time. Although courts have

demonstrated some leniency in such situations, courts often state that they will not rewrite a

contract for the parties and will enforce the contract as written. Because construction is such a

complex process and the demands on all of the parties are frequently great, many parties do not

take the time to follow the contract, keep contemporaneous records and send notices to other

parties as required. These practices expose the party to unnecessary risk. This risk could be

minimized or avoided by seeking and following the advice of competent construction counsel.

►Practice Pointer-- Do not ignore the obvious --read the Contract. Advise

clients to abide by its requirements.

►Practice Pointer-- Keep contemporaneous job records and observe all notice

requirements.

Construction is a very complex process, and most construction contracts contain a

provision authorizing the owner to make changes in the work. Disputes regarding changes are

5

commonplace, and frequently there is an issue as to whether a change was ordered by the owner

and whether the person who changed the scope of the work was authorized to order changes.

Most construction contracts contain a provision stating that a written change order is required in

order for the contractor to be entitled to additional compensation for a change, but frequently this

requirement is ignored and a dispute ensues. Many parties are surprised to learn that in North

Carolina, for example, the provisions of a written contract can be modified or waived by a

subsequent parole agreement or by conduct which naturally and justly leads the other party to

believe the provisions of the contract have been modified or waived. This principle applies even

if the contract explicitly requires all amendments or waivers to be in writing. It offers an avenue

for a contractor who did not obtain a change order to argue that the change was orally approved

or approved by conduct of the parties.

►Practice Pointer -- Since a party’s oral agreements or conduct might be regarded as

effecting a change to the Contract, care should be taken at all times not to lead the

other party to believe that the provisions of the Contract have been waived or

changed.

Another significant trap for the unwary is the lack of appreciation of the significance of

the applicable General Contractor Licensing Law. In North Carolina, for example, the General

Contractor Licensing requirement has broad application and has engendered more litigation than

any other area of construction law.4 The reason for this is that the North Carolina courts have

determined that when an unlicensed contractor – in disregard of the licensing statute intended to

protect the public – enters into a contract with an owner to perform construction work costing

more than the minimum sum specified in the licensing statute, the contractor may not recover for

the owner’s breach of that contract. The result can be quite harsh because an unlicensed

contractor can be barred from recovering from the owner for non-payment, even if the amount

owed is substantial and undisputed. Likewise, in California and Florida, an unlicensed

contractor cannot enforce the contract; more significantly, the Contractor may be subject to the

remedy of disgorgement in those States—i.e., the Contractor may have to repay all sums

collected even if the Work is satisfactory.

4 See generally J. Miller and J. Taylor, North Carolina Construction Law, Chapter 1 (Prof. Educ. Syst., 14

th ed.

2007).

6

The courts have held that the importance of deterring unlicensed persons from engaging

in the construction business outweighs any harshness in these results. In some States, the courts

have also held that the licensing requirement cannot be waived by the parties.5 Any party,

including any out-of-state builder, should take special note of the applicable licensing laws

because the consequences for violation of the statutes can be severe. Moreover, some statutes

and courts have frowned on “loaning” of general contractor’s licenses, and this can also lead to

very harsh results for out-of-state contractors.

►Practice Pointer -- Pay attention to the contractor licensing provisions in the state

where the project is located before the contract is signed. After execution of the

contract, any deficiency may not be curable.

IV. Negotiating and Drafting the Most Important Construction Contract Provisions

A. Role of major form agreements, including AIA Contacts, in negotiations

The construction process is complex and involves multiple parties and an extensive

assortment of uncertainties. Accordingly, a well-crafted construction contract should be

comprehensive and should include a variety of provisions dealing with the various problems

that might be encountered during the course of construction and thereafter. For this reason,

most drafters of construction contracts start with an industry form that contains sufficient detail.

The American Institute of Architects (AIA) has developed a series of forms that pertain to all of

the various relationships in the construction process and cover a range of different approaches to

construction including a variety of fee arrangements. The AIA forms are comprehensive and

time-tested and represent a reasonably fair balancing of the relative risks, although some

observers maintain that the architect receives more favorable treatment under the AIA forms

because they were developed by their own profession.6

5 Even a settlement agreement will not be deemed to be enforceable if it was made in contravention of the North

Carolina licensing statute. 6 Indeed, one federal judge made the following insightful remark about the AIA forms:

No project of this scope with the attendant pressures on everyone concerned could possibly be

completed in accordance with the literal scheme envisioned by an architect-drawn agreement.

In truth, even the AIA standard contract would require a battery of Philadelphia lawyers on the

7

In addition, the Engineers Joint Contract Documents Committee (EJCDC), Association of

General Contractors and other groups have developed and promulgated similar forms. In 2007,

Consensus DOCS issued a set of forms in response to some of the criticisms of the AIA forms.7

These industry forms, when used as a starting point, often represent the “default” position, and

counsel for the parties must negotiate and draft any changes to conform to the agreement of the

parties on a specific project. Because of their widespread use, the AIA forms are often viewed as

representing what is “market.” Over the years, the AIA has made changes that have adjusted the

AIA forms to changes in the marketplace.

B. Anticipating Disputes Between Property Owners and Builders and Risk Mitigation

Techniques

The construction contract is the vehicle for allocating risks between the property owner

and the builder. The construction contract documents should be drafted in a way that anticipates

disputes between the owner and the contractor and establishes how this risk will be managed.

Risks can be managed or mitigated by (i) shifting responsibility from one party to another or to a

third party, (ii) procuring insurance, bonds or another form of protection from a third party or

(iii) excluding or limiting responsibility for specific risks between the parties. The following are

more important contractual mechanisms for allocating such risks.

1. Indemnity. Indemnification is the obligation of one party (“indemnitor”) to reimburse

another party (“indemnitee”) for losses the indemnitee incurs or the damages for which it

may be held liable. Indemnification clauses are a method of shifting certain risks from

one party to the other, and these provisions have been used in the AIA forms for more

than half a century. There are many dimensions to contractual indemnity and multiple

ways to allocate risks by use of an indemnification clause. For example, the risk of

liability can be shifted from one party to the other regardless of the party at fault or it can

be allocated on the basis of a comparative fault. The indemnity may include a duty to

defend, reimbursement of attorney’s fees and other costs. The indemnity provision may

firing line each day. Under it, everybody is liable save the architects. J. A. Jones Construction

Co. v. Greenbriar Shopping Center, 332 F. Supp. 1336 (N.D.Ga. 1971)

7 ConsensusDOCS were a collaborative product of all participants in the construction process.

8

be accompanied by procedural requirements such as notice provisions and the right to

participate in the proceeding and in any settlement decisions.

Many states have enacted statutes that limit contractual indemnity or render such

provisions unenforceable as against public policy. These state statutes are by no means

identical. Some statutes merely prohibit indemnification clauses for the sole negligence

of the promisee while others prohibit indemnification to the extent caused by the

negligence of the promisee in whole or in part. Florida has a unique statue that prohibits

indemnification of both types unless the contract contains a monetary limitation that

bears a reasonable relationship to the contract, which cap must not be less than

$1,000,000 per occurrence when indemnity is provided to the owner of real property.8

Some statutes do not allow indemnification for certain types of conduct, such as gross

negligence of the indemnitee or its agent. Counsel negotiating the construction contract

must take into account the applicable law regarding the limitation of contractual

indemnification. For a survey of such laws, see “Anti-Indemnity Statutes in All States,”

http://www.mwl-law.com/wp-content/uploads/2013/03/Anti-Indemnity-Statutes-In-All-50-

States-00131938.pdf published by Matthiesen, Wickert & Lehrer, S.C., of Hartford, WI.

A properly drafted indemnification clause should consider potential defenses that might

render the indemnification obligation unenforceable. One technique is to include

“savings language” in the indemnification provision (e.g., “to the fullest extent permitted

by law….”). The AIA indemnification provision contains a savings clause, which courts

have used as a basis to enforce the indemnification provision to the extent allowed by

applicable law. In addition, the construction contract should contain a severability clause

that would permit a court to sever the language in the contract that would render the

provision unenforceable. Courts are reluctant to make a new contract for the parties but

will sever an unenforceable provision if the contract so provides.

►Practice Pointer-- Counsel drafting an indemnification provision should pay

close attention to the applicable anti-indemnification statute. The clause should

contain “savings language,” and the contract should include a severability clause.

8 Fla. Stat. § 725.06.

9

2. Exclusion of Specific Remedies or Types of Damages. Another method for allocating

risk in a construction contract is a provision limiting liability of one or both parties for

certain types of damages, typically the exclusion of consequential damages. Although it

is difficult to articulate a universal definition of consequential damages, it is basically any

damage or loss that does not result in the ordinary course of events from the breach as

determined in any manner that is reasonable, i.e., damages that are not direct damages.

Most notably, lost profits and loss of use are frequently seen as consequential damages.

There is no accepted definition of either type of damage nor is it possible to define them

precisely because the application of the relevant principles depends heavily on the facts

and circumstances.

The 1997 edition of the AIA General Conditions included a mutual waiver of

consequential damages provision. The AIA stated that the purpose of this new clause

was to provide predictability and to remove some of the uncertainties and risks inherent

in construction contracts. The 2007 edition of the General Conditions retained this

provision, which was relocated to section 15.1.6. This provision reads as follows:

§15.1.6 CLAIMS FOR CONSEQUENTIAL DAMAGES

The Contractor and Owner waive claims against each other for

consequential damages arising out of or relating to this Contract. This

mutual waiver includes

.1 damages incurred by the Owner for rental expenses, for losses of

use, income, profit, financing, business and reputation, and for loss of

management or employee productivity or of the services of such persons;

and

.2 damages incurred by the Contractor for principal office expenses

including the compensation of personnel stationed there, for losses of

financing, business and reputation, and for loss of profit except anticipated

profit arising directly from the Work.

Although characterized as “mutual,” this provision has been criticized by owners

as favoring the contractor because many observers believe that the owner is

giving up more potential damages while the contractor retains the right to recover

lost profits on the Contract itself.

10

3. Limitation of Liability Provisions. In addition to shifting contract risk through

indemnification or excluding certain remedies, the parties may agree to limit monetary

damages in their contract. In other words, the contract might place a cap on the amount

of damages recoverable by one party from the other. Unlike the exclusion of

consequential damages provision, caps on liability have not taken hold as a standard

provision in the construction contract, although they are becoming more commonplace in

design contracts. This is probably due to the fact that design professionals contend that

their liability risks are disproportionally high in comparison to the compensation to be

earned from their clients and their insurance costs may likewise be prohibitively

expensive.9 Caps on damages are also more common in other commercial contracts, such

as supply contracts and international project equipment installation contracts.

As is the case with drafting an indemnification clause, there are numerous variations for

limitation of liability clauses, including various ceilings on liability such as the amount of

the fee, the amount of available insurance, or a specific dollar amount, or some

combination of these types of limitation. Sometimes damages resulting from certain

conduct is carved out from the cap, such as gross negligence or willful misconduct.

Although limitation of liability clauses will generally be strictly construed, the courts

have typically determined that the parties to a commercial contract are generally free to

negotiate such terms for the allocation of risk or the limitation of remedies as they may

mutually agree, provided such provision is not in violation of an important public policy

or is unconscionable. Some courts have determined that a state’s anti-indemnification

statute should likewise constitute a public policy against a limitation of liability and that

such clauses might be unenforceable on that basis.10

4. Insurance Issues. Shifting construction risk to a third-party insurer is another very

common mechanism for allocating risk in a construction contract. A well-drafted

construction contract will describe in detail the insurance requirements imposed upon the

project owner and the builder, often including the requirement that the contractor name

9 See Beltzer and Orien, Are Courts Limiting Design Professionals’ Ability to Limit Liability?, 30 The Construction

Lawyer No. 2 at 7 (2010). 10

See, e.g., City of Dillingham v. CH2M Hill Northwest, Inc., 873 p.2d 1271 (Alaska 1994). See generally Bruner

and O’Connor on Const. Law §19:52.71 (Supp. 2009).

11

the owner as an additional insured on its comprehensive and general liability policy.

Moreover, the contract will often provide that the parties shall enter into a mutual waiver

of subrogation in order to maintain the agreed allocation of risk.

Subrogation is the assignment to an insurer, after payment of a loss, of the rights of the

insured to recover the amount of the loss from a party legally liable for it. The insurer’s

right of subrogation can arise by the terms of an insurance policy or operation of general

legal principles. Waiver of subrogation is the insurer’s relinquishment of its right to

assume the insured’s place, after payment of loss to the insured, to recover the amount of

the loss from a party legally liable for it. The mutual waiver of subrogation is especially

important where a number of parties have a commercial relationship and where the

parties are collectively looking to the insurance provided by one or more of the parties to

cover particular losses. The most common example is in the case of builder’s risk or

property insurance where one party provides the builder’s risk insurance, and the various

parties involved in the project all look to the insurance to cover the loss, regardless of

fault. Often the loss is caused by the actions of one or more of the parties, and the mutual

waiver of subrogation precludes an unfair allocation of risk among the parties. For

example, if there is a loss such as a fire, and the insurance carrier providing the builder’s

risk insurance covers the loss, under insurance law the insurance carrier would ordinarily

then be subrogated to the rights of the insured under the policy and could proceed against

any party who is legally responsible (in whole or in part) for the loss (standing in the

shoes of the insured who suffered the loss). Yet if the parties and the insurance

companies have agreed to a mutual waiver of subrogation, the insurance companies have

waived their rights to proceed against any party responsible for the loss. If the waiver of

subrogation is not mutual, then the party who does not have the benefit of the waiver of

subrogation would be exposed to the subrogation claim but the other parties would not be

liable. Thus, one party, who may only be partially responsible for the loss, would absorb

the entire loss even though the parties had intended to look to the builder’s risk insurance

as the exclusive means to cover the loss. The concept of the mutual waiver of

subrogation is that the insurance is for the mutual benefit of all the parties regardless of

which party provides the insurance.

12

►Practice Pointer-- Where the contract documents call for a mutual waiver of

subrogation, it is imperative that the parties confirm that the insurance carrier has

acknowledged this waiver by appropriate endorsement to the policy prior to

commencement of the Work.

V. Performance Standards and Payments

One of the Owner’s principal objectives is, of course, for the Contractor to complete the

Work according to the terms and conditions of the Contract. The Contractor, on the other hand,

is mainly concerned about getting paid for the work. Because construction projects are generally

quite complicated and are performed over a period of months or years, it is commonplace for the

Contract to provide that the Contractor will be paid as the work progresses. In order to protect

the parties’ respective interests, the Contract usually contains one or more of the following

features:

1. Progress Payments and Retainage. The Contract usually provides that the Contractor is

required to submit applications for payment, which are verified by the Owner’s

representative (usually the Architect) in order to ascertain the status of the work. The

Owner retains an agreed portion from the progress payment as security for the continued

performance of the Contractor. In addition, the Contract often contains provisions

permitting the Owner to withhold additional amounts for specific problems.

In some States, subcontractors may have payment rights that are superior to the prime

contractor. This is because some State legislatures have enacted statutes to the effect that

when a subcontractor has performed, it is entitled to payment by the prime contractor

even if the prime contractor has not been paid by the Owner. See, e.g., N.C.G.S. §22C-1

through N.C.G.S. §22C-6. Clauses in the subcontracts that provide that a subcontractor

will be entitled to payment only if the Contractor is paid by the Owner (“pay-if-paid”

clause) or only when the Contractor is paid by the Owner (“pay-when-paid” clause) may

not be enforceable under the laws of a particular jurisdiction. For a survey of such laws,

see “50 State Survey Pay-if-Paid / Pay-When Paid, and No Damage for Delay,”

13

published by Woods & Aitken LLP http://www.woodsaitken.com/wp-

content/uploads/2011/12/PayIfPaid_PayWhenPaid_NDFD-Provisions.pdf

2. Surety Bonds. The Contractor usually has the right before commencing work to some

assurance that the Owner has the requisite funds to finance the job. In addition, there

may be a surety bond to insure payment in the event of default, thus shifting the financial

risk to a third-party surety. Bonds are usually required on public jobs. In international

projects, bank guarantees or letters of credit are often used to manage credit risk instead

of surety bonds.

3. Mechanics or Construction Liens. In the event of non-payment, the contractor and its

subcontractors usually have the right to file a lien against the Owner’s property or against

funds that may become due under the Contract as a means of securing payment.11

The

theory underlying the establishment of the statutory remedy of a construction lien by state

legislatures is to provide the lien claimant with a form of security for the collection of an

indebtedness owed to the builder. A construction lien claimant has a security interest that

general creditors do not have. Each State has its own system for filing liens, and counsel

for the lien claimant must be familiar with the requirements of the applicable jurisdiction.

4. Payment by Joint Check. The most recent version of the AIA forms give the Owner the

right to make payments to the Contractor and a subcontractor or supplier if the Architect

has withheld certification for payment because of the failure of the Contractor to make

payments properly to subcontractors or suppliers.12

The Owner should exercise caution

in making joint checks because the Owner does not have a contract with the

subcontractors and suppliers and might be viewed as asserting direct control over these

entities.

11

Usually there are no lien rights on public property, which is why payment and performance bonds are mandatory

on public jobs. 12

AIA Document A201 (2007 Edition), Section 9.5.3.

14

VI. Conclusion

As the foregoing discussion demonstrates, the effective drafting and negotiation of

construction contract documents can certainly be challenging. There are a multitude of

significant contract issues and numerous mechanisms for managing and adjusting these risks.

Although parties to a commercial contract typically have the freedom to allocate risk by mutual

agreement, construction counsel must also consider the effect of the law of the applicable

jurisdiction that may impose limitations or restrictions, as a matter of public policy, on the

parties’ ability to apportion risk by negotiation.