One of the nice things about using the American Institute of Architects‘ (“AIA”) construction documents is that courts have given us ample guidance on how to construe the various clauses within each family of documents. On August 3, 2012, the Kansas Court of Appeals in Neighbors Construction Co, Inc. v. Woodland Park at Soldier Creek, LLC offered us a little more insight into how the AIA General Conditions work in regards to settling payment disputes between the owner and the general contractor.
In Neighbors Construction, the general contractor became embroiled in a dispute with the owner concerning progress payments on a multi-family housing project in Topeka, Kansas. The general contractor submitted a payment application for $845,273 to the architect and the architect approved the payment application. The owner subsequently disputed $200,000 of the architect’s approved payment application and the architect rescinded its certification. The general contractor demanded payment, the owner refused, and the general contractor filed a demand for arbitration.
The claim was arbitrated under the Construction Industry Rules of the American Arbitration Association. Prior to the arbitration hearing the architect certified all the general contractor’s payment applications (except the $200,000). At the arbitration the owner argued that under AIA’s General Conditions the architect’s decision on certifying payment was final and binding on the parties. The arbitrator disagreed and held that AIA’s General Conditions do not make the architect’s decisions final and binding but instead are merely a condition precedent to arbitration.
The matter was ultimately appealed to the Kansas Court of Appeals where the Court considered whether or not the architect’s decision on payment was final and binding. The Court of Appeals determined that under Section 4.6.1 of AIA’s General Conditions, an architect is the sole and final decision maker only on items concerning aesthetic effects and claims waived under Sections 4.3.10, 9.10.4 and 9.10.5. Such finality does not extend to decisions involving payment and any decision by the architect concerning payment is merely a condition precedent to arbitration.
There are a couple of lessons in this case for owners and contractors wanting the architect’s decisions on payment to be final. The first lesson is that if you want the architect to have such power, then you need to expressly state so in the General Conditions. The second lesson is that a party must demand arbitration within 30 days after an architect issues a written decision concerning payment or such party will lose its rights to argue that the architect’s decision is not binding. In short, owners, contractors, and subcontractors must be aware of the time limitations for demanding arbitration or they could very well be stuck with an unfavorable decision from the architect.