{"id":900364,"date":"2022-09-14T16:41:43","date_gmt":"2022-09-14T22:41:43","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=900364"},"modified":"2022-09-14T16:41:48","modified_gmt":"2022-09-14T22:41:48","slug":"construction-authority-being-responsible","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/construction-authority-being-responsible\/","title":{"rendered":"Having Authority\u2014and Being Responsible\u2014for Another in Construction"},"content":{"rendered":"\n

D. Gary Christensen and Linda Degman | Miller Nash<\/a><\/p>\n\n\n\n

Some folks just don\u2019t get it\u2014especially doctors. Classic case: healthcare construction. A doctor happens by the new medical office building you\u2019re constructing for a hospital system to see the new clinic space and immediately starts telling a trade foreman to \u201cMove that light switch to the other side of the door\u201d and \u201cPut a bigger sink in that exam room.\u201d Of course, at this point, the clinic\u2019s drywall is ready for paint and the cabinets have been delivered and installed. But the foreman, wanting to be helpful to the \u201cowner,\u201d starts to make the changes. When the change order hits the desk of the hospital system\u2019s project manager, sparks fly! \u201cWho authorized this?\u201d \u201cWhy was this not approved first?\u201d And so the legal dispute begins.<\/p>\n\n\n\n

The doctor, of course, is to be an employee of the tenant clinic that will lease the space in the building owned by the healthcare system. Even with his M.D., the doctor has no authority to make changes to the construction plans on behalf of the true owner, the healthcare system, who has to pay for the changes. But as the ultimate user-to-be of the clinic, the doctor thinks<\/em> he or she has that authority. And so does the accommodating foreman on site.<\/p>\n\n\n\n

Agency is all about who has authority to act\u2014and it comes up in many different ways on a construction project, potentially causing disputes between subcontractors, subcontractors and general contractors, architects and contractors, and of course owners and almost everyone else. Deciding and understanding who has agency to act for another\u2014whether to bind it to a change order, cancel its contract, authorize payment, or change the project schedule\u2014is the key to many a project dispute. And the answers are not always easy or apparent to everyone.<\/p>\n\n\n\n

The parties to design and construction contracts are usually corporate entities of some kind. Corporations can act only through human beings, who are given titles, authority, and restrictions on their authority to act for the corporate entity (their \u201cprincipal” in legalese). The contracts between the parties can and should define who may act for another for specific issues. For example, may an independent construction manager retained as an owner\u2019s representative approve change orders for payment? Or agree to a change in the project schedule on behalf of the owner? How does one determine this answer if the \u201claw\u201d (contract) and the reasonable belief of the persons involved (who may not have access to the contract but relied on the other\u2019s position or title) differ?<\/p>\n\n\n\n

Let\u2019s consider some ways that agency can create chaos\u2014and how to avoid it.<\/p>\n\n\n\n

1. Apparent authority<\/u><\/strong><\/p>\n\n\n\n

Most of us would think that a \u201cpresident\u201d is an agent with authority to legally bind the company for most types of decisions. When a principal gives a title, position, or prominence to a person, allowing third-parties to reasonably believe the person has authority to act for the principal, others may properly infer that the person is the principal\u2019s agent. For purposes of the law, the agent has apparent authority from the principal, whether or not the principal intended to make the person its agent. The statements or acts of the agent can be considered as the statements or acts of the principal.<\/p>\n\n\n\n

The key is whether it is \u201creasonable\u201d for others to infer the agent\u2019s authority, and that of course depends on the circumstances of the case. What about that construction manager? Or a site superintendent? There, most in the industry would ask themselves, \u201cWhat is the scope of their authority?\u201d For some decisions, the site superintendent\u2019s approval may generally be considered to be legally binding on the contractor, but for other types of decisions, not so much. What is \u201creasonable\u201d to assume about the authority of our doctor? Was the foreman reasonably entitled to rely on the doctor\u2019s directions? Probably not, but it is a question that has been debated in construction disputes.<\/p>\n\n\n\n

Every company must be careful about how it presents its personnel to the public and to those who contract with it. And every person must understand the agency authority of the company representatives with whom they are dealing.<\/p>\n\n\n\n

2. Construction managers<\/u><\/strong><\/p>\n\n\n\n

This title covers a wide variety of agents with very different levels of authority, from an owner\u2019s representative to a construction manager\/general contractor (CM\/GC). The former may have almost no real authority and is merely an active adviser to the owner, one who merely transmits information upward and decisions and directions downward from its principal. The latter may have the authority to decide certain matters on the owner\u2019s behalf, or at least reasonably be seen by others as being able to do so. Many disputes have arisen because of the construction manager\u2019s supposed decision for the owner, its principal.<\/p>\n\n\n\n

Projects involving construction managers of any stripe should identify the extent to which that agent has authority to act for the owner, and that same authority must be communicated to others who will interact with the construction manager. Usually that is done in the other\u2019s contract or by some notice issued by the owner. Otherwise, someone may reasonably but incorrectly assume the extent of the construction manager\u2019s authority and rely on those decisions to its detriment.<\/p>\n\n\n\n

3. Construction agents<\/u><\/strong><\/p>\n\n\n\n

For purposes of Oregon\u2019s Construction Lien Law, a project owner is deemed to be represented by the contractor for purposes of contracting for labor and materials to build a project. The contractor is typically considered to be the \u201cconstruction agent\u201d of the owner. What is the extent of this agency? At a minimum, the contractor-agent can bind the owner to pay for work or materials provided by specific trade contractors, whether or not the contractor-agent in fact had that authority through its contract with the owner. Unless this authority is limited by the owner-contractor contract, the contractor-agent can create substantial liability for an owner without the owner\u2019s knowledge. For this, construction contracts contain indemnification clauses and other protections to keep the \u201cconstruction agent\u201d on the hook for charges or claims that it causes or authorizes.<\/p>\n\n\n\n

4. Architect as the owner\u2019s agent<\/u><\/strong><\/p>\n\n\n\n

Historically, the architect-of-record on a construction project was deemed to represent the owner for many purposes, including authorizing changes, approving payment applications, and the like. Over time, architects and engineers have moved far away from this agency relationship and specifically provide that they are not the owner\u2019s agent for any purpose except as expressly set out in the contract. There remains the practical consideration, however, of whether a design professional of record on a project is an agent of the owner to direct changes in work, stop or correct ongoing work, or make representations to public authorities. These duties should be negotiated in the design contract and the contractor(s) should be made aware of the extent of the design professional\u2019s authority to represent the owner. This is often cited as one reason for using a family of contract forms (e.g., ConsensusDocs, AIA, EJCDC). Those documents are coordinated so that the agency relationships are consistently identified in the different tiers of contracting.<\/p>\n\n\n\n

5. Licensure<\/u><\/strong><\/p>\n\n\n\n

To be licensed as a contractor, a corporate entity must be represented by a statutorily defined agent, a \u201cresponsible managing individual\u201d or RMI. This person must pass the contractor\u2019s examination and be the active, supervisory authority over the construction activities of the business. Issues arise when the RMI leaves the company, is otherwise disqualified, or is promoted and no longer serves the function of the RMI. A contractor\u2019s license may be in jeopardy and subject to challenge if the RMI is not replaced promptly by another qualified individual according to Construction Contractors Board regulations.<\/p>\n\n\n\n

6. Service of legal process<\/u><\/strong><\/p>\n\n\n\n

Even if a company has an official registered agent for formal contacts, court process (like a summons and complaint) and other official claims or notices may also be served on an officer, a person apparently in charge of the company\u2019s office, a manager, partner, or other responsible individual (depending on the type of the entity). This form of agency is created by statutes and regulations, regardless of an entity\u2019s designation of that person\u2019s actual authority. Consequently, delivery of a formal claim or notice may be binding even if it is given to someone that the company doesn\u2019t consider to be its agent for these purposes.<\/p>\n\n\n\n

7. Safety<\/u><\/strong><\/p>\n\n\n\n

The role of safety in the construction industry has always been paramount. Legally, safety requirements are often imposed by making one responsible for the safety of the project site. Employers, of course, have such duties. In Oregon, the Employer Liability Law or ELL (ORS 654.305) can make a remote entity (not the worker\u2019s direct employer) a statutory \u201cemployer\u201d with duties to make the project site safe. In some cases, even the project owner may become the ELL employer responsible for injuries or death of a subcontractor\u2019s employee.<\/p>\n\n\n\n

Environmental risks and liabilities are much the same. Statutes often impose liability on those who own, transport, release, or improperly contain hazardous substances, for example.<\/p>\n\n\n\n

In all good contracts, the risks of safety are allocated to various parties. Be aware, however, that statutes and regulations may nevertheless make others (or all) of the parties responsible for certain safety risks.<\/p>\n\n\n\n

8. Commercial Activity Tax (CAT)<\/u><\/strong><\/p>\n\n\n\n

Oregon implemented the CAT in 2020 as a new tax on almost all commercial activity in the state, including construction work. Under CAT contractors of every tier must pay tax on the gross revenue that they generate annually, modified by only a few exceptions. Thus, a third-tier subcontractor installing fixtures must pay CAT on its work, which it passes up in its payment application to the second-tier subcontractor. That subcontractor must also pay the CAT, thus adding it to its payment application to the first-tier subcontractor, and so on, until the owner ultimately pays the CAT many times over for the same commercial activity.<\/p>\n\n\n\n

This \u201cstacking\u201d of the CAT can be reduced if an upstream contractor is its principal\u2019s \u201cmere agent\u201d to transmit payments downstream to the subcontractors. But the definition of this \u201cmere agent\u201d places a heavy burden on upstream contractors. The risk that must be taken by the \u201cmere agent\u201d to establish an actual agency relationship requires the upstream contractor to accept responsibilities of more than just passing a payment along. Many of these risks are typically, and rightly, excluded in construction contracts, which negates the ability to be a mere agent for tax purposes. Consequently, use of this agency exception in the CAT has not been widely used in the construction industry and, if used, would require significant renegotiation of the relationships involved.<\/p>\n\n\n\n

These examples are some\u2014but not all\u2014of the ways that the law can create an intentional or unintentional agency relationship in the construction industry. Many of these risks can be allocated by the parties in their tiers of contracts, but not all. It is wise to consider on each project how one might be considered to represent another and be responsible for the risks that others may have or take.<\/p>\n\n\n\n

\n\n\n\n

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net<\/a>.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

D. Gary Christensen and Linda Degman | Miller Nash Some folks just don\u2019t get it\u2014especially doctors. Classic case: healthcare construction. A doctor happens by the new medical office building you\u2019re constructing for a hospital system to see the new clinic space and immediately starts telling a trade foreman to \u201cMove that light switch to the… Continue reading Having Authority\u2014and Being Responsible\u2014for Another in Construction<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,9],"tags":[9895,12,224],"class_list":["post-900364","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-construction-contracts","tag-advise-consult","tag-construction","tag-construction-contract","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nHaving Authority\u2014and Being Responsible\u2014for Another in Construction - 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