Fundamentals of Construction Contracts: Key Provisions in ......AIA101-2007 Article 1, p. 2 Article...

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Fundamentals of Construction Contracts:

Key Provisions in Subcontracts

Stephen D. Marso

February 27, 2017IRMCA 68th Annual ConcreteState Convention

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Incorporation-by-Reference & Flow-Down ClausesUnder the doctrine of incorporation, one document becomes part of another separate document simply by reference as if the former is fully set out in the latter.

Where a writing refers to another document, that other document, or so much of it as is referred to, is to be interpreted as part of the writing.

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Incorporation-by-Reference & Flow-Down ClausesWhether material is incorporated by reference presents a question of law.

Clear and specific reference is required to incorporate an extrinsic document by reference.

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Incorporation-by-Reference & Flow-Down Clauses

Examples are at:

AIA401-2007Section 1.1, p. 2Section 2, p. 3

Article 16, p. 14

AIA101-2007 Article 1, p. 2

Article 9, pp. 6-7

AIA201-2007Section 1.1.1, p. 9Section 5.3, p. 19

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Conditional Payment ClausesThe two most typical conditional payment clauses are pay-if-paid and pay-when-paid clauses.

A pay-if-paid clause transfers the entire risk of owner nonpayment to a subcontractor.

A pay-when-paid clause suspends a payment obligation for a reasonable period of time to allow a contractor to receive payment from an owner.

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Conditional Payment ClausesMost courts take the position that pay-if-paid clauses are enforceable, but disfavored. These courts will:

◦ Only enforce such pay-if-paid clauses if there is no ambiguity. Parties must agree explicitly and unambiguously that the subcontractor assumes entire risk of nonpayment by an owner. Must use “magic” words to do so.

◦ Will try to interpret provisions as a pay-when-paid clause.

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Conditional Payment ClausesExamples:

AIA201-2007

Section 9.6.2, p. 25

AIA401-2007

Section 11.3, p. 10

Section 11.7.4, p. 11

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IndemnityComplete shifting of a loss from one party to another

Not the sharing of a loss; that is contribution

Indemnity can be contractual, implied or equitable

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IndemnityLimited-Form Indemnity

Intermediate-Form Indemnity

Broad-Form Indemnity

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IndemnityLimited-Form Indemnity requires indemnitor to indemnify only for indemnitor’s own negligence

Intermediate-Form Indemnity requires indemnitor to indemnify for all liability except that which arises from indemnitee’s sole negligence

Broad-Form Indemnity requires indemnitor to indemnify for all liability regardless of who caused the liability

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IndemnityIowa courts hold that a party will not be indemnified for its own negligence unless the agreement provides for it in clear and unequivocal language.

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IndemnityIowa has an Anti-Indemnity Statute at Iowa Code § 537A.5:

◦ Makes void all broad-form and intermediate-form indemnity provisions in construction contracts.

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IndemnityWhat does the law cover?

◦ Section 537A.5 only applies to construction contracts

◦ It applies equally to both public and private construction projects in Iowa

◦ It renders void not just broad-form indemnity but intermediate-form indemnity to the extent it requires indemnity for indemnitee’s negligence

◦ Does not apply to public construction contracts for highways, roads, and streets

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IndemnityExceptions to the New Law

◦ The legislation has certain exceptions and it does not apply to: ◦ A principal’s obligations to its surety under a surety bond

◦ An insurer’s obligations to its insured under any policy of insurance

◦ A borrower’s obligation to its lender

◦ Strict liability obligations

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ClaimsBe sure to follow all claim-related procedures contained in contract documents.

Generally, it’s best to send written notice to the owner, architect/engineer, and contractor as soon as possible.

See, Cameo Homes. Kraus-Anderson Constr. Co., 394 F.3d 1084 (8th Cir. 2005) (applying Minnesota law and barring all claims for failure to send pre-lawsuit notice to architect and owner as required by contract). See AIA201-2007, Sections 15-1.2, 15-1.3, 15-2.1 & 15-2.6.1, pp. 35-37; AIA401-2007, Sections 5.2 & 5.3, p. 16.

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Attorney FeesGenerally, attorney fees are only allowed under Iowa law if permitted by a contract or statute. ◦ Iowa’s Mechanics Lien Statute allows a claimant to recover fees.

Each state’s laws are different, so entitlement to attorney fees can vary from state to state.

For example, attorney fee contract provisions are unenforceable as a matter of public policy in Nebraska. Steward v. Bennett, 727 N.W.2d 424 (Neb. 2007).

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Lien WaiversMechanic’s lien is defined as:

“a right or privilege given to a contractor to protect himself against loss for material and labor furnished. It is wholly a creature of statute.”

Eclipse Lumber Co. v. Bitler, 241 N.W.2d 696(Iowa 1932).

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Lien WaiversMechanic’s liens only apply to private projects. Do not apply to public projects because one cannot lien public property.◦ Loring & Co. v. Small, 50 Iowa 271 (Iowa 1878).

Therefore, lien waivers on public projects are worthless because the person is waiving a right he does not have in the first place.

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Lien WaiversHowever, public owners continually insist on including them in contract documents. See AIA201-2007: Section 9.10.2, p. 26

To waive lien rights, the waiver must be “sufficiently explicit as to avoid ambiguity or doubt, and it clearly and satisfactorily indicates, by necessary implication, that there is a waiver.”

Bitler, 241 N.W.2d, 696.

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Are Bids Enforceable?

◦ A subcontractor’s bid is “a promise to perform on such conditions as were stated expressly or by implication therein or annexed thereto by operation of law.”

Drennan v. Star Paving Co., 333 P.2d 757 (Cal. 1958).

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◦ Because a contractor is “bound by his own bid, it is only fair that [the contractor] should have at least an opportunity to accept defendant’s bid after the general contract has been awarded to him”

Drennan, 333 P.2d 757

Weitz Company, LLC v. Hands, Inc., 882 N.W.2d 659 (Neb. 2016)Debron Corp. v. Nat’l Homes Constr. Corp., 493 F.2d 352 (8th Cir. 1974) (applying Missouri law)

Double AA Builders, Ltd. v. Grand State Constr.,L.L.C., 114 P.3d 835 (Ariz. Ct. App. 2005)

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◦ Thus, a subcontractor bid is an offer that cannot be revoked. A contractor has the right to accept it despite a sub’s attempt to revoke it.

◦ However, if a contractor knows or should know that the bid was made in error, it can be revoked.


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◦ However, a contractor “is not free to delay acceptance after he has been awarded the general contract in the hope of getting a better price. Nor can he reopen bargaining with the subcontractor and at the same time claim a continuing right to accept the original offer.”


Debron, 493 F.2d 352 (applying Missouri law)

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Are Bids Enforceable?More specifically, a contractor cannot “bid shop,”which occurs by the “general contractor’s use of thelow bid already received by him to pressure othersubcontractors into submitting even lower bids,” and acontractor cannot “bid chop,” which “is the practice ofsubcontractors voluntarily reducing their own bids ortrying to get under the low bid in order to get thesubcontract from the general contractor.”

Constructors Supply Co. v. Bostrom Sheet Megal Works, Inc., 190 N.W.2d 71(Minn. 1971)

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Contact me with questions or comments.

Stephen Marso

699 Walnut Street, Suite 2000

Des Moines, Iowa 50309

515-288-6041

[email protected]

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