By: Richard T. Ward III Published: January 2015

The Importance of Knowing YOUR Contracts

Editor: Thomas S. Tripodianos, Esq.

The construction industry requires a contract for just about everything. The contract you enter into, whether it is a construction contract, a performance or payment bond, an insurance agreement, a design contract or some combination of the above, contains language that will determine whether you are protected if the project goes awry. The necessity of risk allocation in construction projects has led to the widespread use of form contracts developed to reduce to writing what the form’s author believes to be a fair transfer of risk between contracting parties. However, using a commonly employed form contract is no guarantee of optimal risk allocation and no excuse not to read and understand the language of your contract.

A recent decision of the Appellate Division, Second Department in Archstone v. Tocci Bldg. Corp. of New Jersey, 119 A.D.3d 497, 990 N.Y.S.2d 44 (2014), highlights the importance of familiarizing yourself with your contracts, even when a form is used. In 2004, Archstone, a project owner, enlisted Tocci as the general contractor for the construction of a 396-unit apartment complex. Before construction, Tocci secured a performance bond from Liberty Mutual Insurance Company (Liberty Mutual) to ensure the completion of the contract. The bond format was a commonly used form performance bond from the American Institute of Architects (AIA) known as A312 – 1984. After Tocci had substantially completed the project, Archstone discovered extensive water intrusion damage which it alleged was attributable to Tocci’s faulty design and construction. In 2008, Archstone brought an action against Tocci and Liberty Mutual.

Liberty Mutual argued in response that Archstone failed to comply with notice provisions of the performance bond and was thus precluded from asserting any claim on the bond. Paragraph 3.1 of the bond required that Archstone notify both Tocci and Liberty Mutual if it was considering declaring a default and to further request and attempt to hold a conference within 15 days of that notice to discuss alternative solutions to declaring a default. Archstone, admittedly, had not complied with 3.1. The Supreme Court, Nassau County agreed with Liberty Mutual and granted summary judgment dismissing Archstone’s claim against it. The decision was affirmed by the Second Department, which cited other New York courts interpreting non-compliance with Paragraph 3.1 of A312 – 1984 to be a bar to recovery on the bond.

The AIA makes changes to its forms on a regular cycle in order to better suit the needs of contracting parties. Interestingly, in 2010, the AIA updated form A312 adding a new paragraph after 3.1 explicitly stating that compliance with 3.1 was NOT a condition precedent to recovery under the bond and therefore recovery could be had without compliance with that paragraph. The change reflects AIA’s opinion that the notice provisions of 3.1 were meant to protect sureties from actual prejudice from non-compliance, not to be an escape rope. Unfortunately for Archstone, its contract predated the 2010 changes, and so, although the outcome is contrary to the AIA intention as described in the 2010 change, it was barred from recovering on the bond.

Practice Tip: The Archstone decision is a reminder of a couple key points. The first is that form contracts provided by entities such as the AIA are constantly changing and so the parties that use those forms should stay apprised of what changes are occurring and why. Second, form agreements are only a good starting point. Each project is unique and the agreements used on that project should be drafted to take that uniqueness into account. Third, and most importantly, carefully read each of your contracts including ancillary agreements such as bonds and insurance contracts. When doing so, pay close attention for provisions that affect your ability to assert your rights under the contract and when in doubt, consult your construction attorney to help you draft or identify and understand these key provisions.

See other changes to A312-1984 and related AIA documents at the link below:

http://www.aia.org/aiaucmp/groups/aia/documents/pdf/aiab083075.pdf

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