Some folks just don’t get it—especially doctors. Classic case: healthcare construction. A doctor happens by the new medical office building you’re constructing for a hospital system to see the new clinic space and immediately starts telling a trade foreman to “Move that light switch to the other side of the door” and “Put a bigger sink in that exam room.” Of course, at this point, the clinic’s drywall is ready for paint and the cabinets have been delivered and installed. But the foreman, wanting to be helpful to the “owner,” starts to make the changes. When the change order hits the desk of the hospital system’s project manager, sparks fly! “Who authorized this?” “Why was this not approved first?” And so the legal dispute begins.
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 he or she has that authority. And so does the accommodating foreman on site.
Agency is all about who has authority to act—and 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—whether to bind it to a change order, cancel its contract, authorize payment, or change the project schedule—is the key to many a project dispute. And the answers are not always easy or apparent to everyone.
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 “principal" 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’s 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 “law” (contract) and the reasonable belief of the persons involved (who may not have access to the contract but relied on the other’s position or title) differ?
Let’s consider some ways that agency can create chaos—and how to avoid it.
1. Apparent authority
Most of us would think that a “president” 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’s 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.
The key is whether it is “reasonable” for others to infer the agent’s 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, “What is the scope of their authority?” For some decisions, the site superintendent’s approval may generally be considered to be legally binding on the contractor, but for other types of decisions, not so much. What is “reasonable” to assume about the authority of our doctor? Was the foreman reasonably entitled to rely on the doctor’s directions? Probably not, but it is a question that has been debated in construction disputes.
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.
2. Construction managers
This title covers a wide variety of agents with very different levels of authority, from an owner’s 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’s behalf, or at least reasonably be seen by others as being able to do so. Many disputes have arisen because of the construction manager’s supposed decision for the owner, its principal.
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’s contract or by some notice issued by the owner. Otherwise, someone may reasonably but incorrectly assume the extent of the construction manager’s authority and rely on those decisions to its detriment.
3. Construction agents
For purposes of Oregon’s 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 “construction agent” 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’s knowledge. For this, construction contracts contain indemnification clauses and other protections to keep the “construction agent” on the hook for charges or claims that it causes or authorizes.
4. Architect as the owner’s agent
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’s 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’s 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.
5. Licensure
To be licensed as a contractor, a corporate entity must be represented by a statutorily defined agent, a “responsible managing individual” or RMI. This person must pass the contractor’s 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’s 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.
6. Service of legal process
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’s 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’s designation of that person’s actual authority. Consequently, delivery of a formal claim or notice may be binding even if it is given to someone that the company doesn’t consider to be its agent for these purposes.
7. Safety
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’s direct employer) a statutory “employer” 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’s employee.
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.
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.
8. Commercial Activity Tax (CAT)
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.
This “stacking” of the CAT can be reduced if an upstream contractor is its principal’s “mere agent” to transmit payments downstream to the subcontractors. But the definition of this “mere agent” places a heavy burden on upstream contractors. The risk that must be taken by the “mere agent” 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.
These examples are some—but not all—of 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.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.
