Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

When an owner and a contractor enter into a construction contract using a form from the American Institute of Architects (the "AIA"), they usually agree to special terms that limit how the amount of time either side can pursue a claim against the other. I often wonder how courts react to these kinds of terms and whether they'll really enforce them.

One court said yes today. It was the Illinois First District Court of Appeals (an intermediate appellate court sitting in Chicago) in the case of Federal Insurance Company v. Konstant.

The Backstory

Thomas and Anita Croghan (the "homeowners") contracted with a Konstant Architecture Planning, Inc. (the "architect") to design a home in the Chicago suburb of Winnetka, Illinois using a standard form architects agreement from the AIA.  Section 9.3 of that agreement said:

Causes of action between the parties to this Agreement pertaining to acts or failures to act shall be deemed to have accrued and the applicable statutes of limitations shall commence to run not later than either the date of Substantial Completion, or the date of issuance of the final Certificate for Payment for acts or failures to act occurring after Substantial Completion.

The contractor substantially completed the home in 1997. But in 2002 the home suffered water and mold damage. The homeowners submitted insurance claims for the damage to their insurer, Federal Insurance Company (the "insurer"). The insurer paid the claims and was subrogated to the homeowners' claims against the architect. Then in September of 2005 the insurer sued the architect for breach of the architects agreement seeking damages for the cost to repair the water and mold damage.

The architect asked the trial court to dismiss the the lawsuit because the four year statute of limitations expired before the insurer filed the lawsuit. The trial court: (1) applied a 4 year statute of limitations, (2) decided that based on Section 9.3 of the architects agreement, those 4 years started in 1997 and expired before the insurer filed the lawsuit in 2005, and (3) dismissed the lawsuit. The insurer appealed.

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Most prime construction contracts - the ones between owner and contractors - say that neither the owner nor the contractor may assign the contract without the other's consent. More often then not, the contract says that neither side will "unreasonably withhold, condition, or delay" their consent. One example is Section 13.2 of the American Institute of Architects's A201 General Conditions of the Contract For Construction.

The underlying reason for these kinds of restrictions is usually to preserve identity of the parties operating under the contract. When making the contract the owner and the contractor know each other, and to some degree, decided to enter in to the contract because of the identity of the party on the other side. These restrictions are the parties' attempt to ensure that the party on the other side at the beginning is still the party on the other side at the end. But these restrictions lack in at least two big areas:

• What happens if one side assigns the contract without the other's consent?
• What is withholding, conditioning, or delaying consent unreasonably?
• Should there be exceptions that allow one side to assign without the other's consent?

First, they often don't usually do a very good job of ensuring continuity. What happens if one side assigns without the other's consent? Usually this kind of defiance is considered a breach of the contract. But that usually doesn't stop the assignment and it usually doesn't allow the non-assigning party to suspend or stop their own performance.  The non-assigning party may sue for damages.But usually that is about all they can do. Continue Reading...

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How this blog works. The idea is simple: We're in a friendly pub sharing a round of beer and talking about construction law. As we talk, you have questions. And I answer them here in this blog talking like an ordinary and reasonably educated person, not a lawyer - straight and to the point, without the technical jargon and esoteric legalese.

Imagine turning to me and saying, "Hey, Josh, I'm going to hire a contractor to build a movie theatre for me. "Substantial completion" is really important isn't it? But what does that really mean? And I need to make sure my contract identifies when the work is substantially complete. Right? How do I do that?"

I don't reply with a filibuster about Section 9.8 of the 2007 edition of the American Institute of Architects's A201 General Conditions of the Contract For Construction or any of that stuff you can read in nearly any book about construction law (nearly any book - it really is in just about every one). Instead, I turn to you and say something like.....

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