Six Tips: Reducing the Likelihood of Construction Litigation
By James R.A. Dawson, TAFT LAW
What makes the strongest case in construction litigation can also help the parties avoid litigation altogether. This principle applies to owners, project managers, project partners, general contractors and sub-contractors alike.
Although the vast majority of construction projects are completed without any major disputes (much less those requiring litigation), almost all projects involve unforeseen issues and delays — each one requiring a determination of who is responsible and what are the potential costs. If these issues cannot be resolved, litigation sometimes becomes unavoidable.
Unfortunately, regardless of who’s in the right and who’s in the wrong, litigation always proves costly, time consuming, and a drain on resources and employee work hours that the parties would rather spend on, well, construction.
By following the six tips below, litigation may not always be avoided, but the risk of litigation can be greatly reduced. If litigation nevertheless ensues, the costs and time spent in litigation will undoubtedly be much less.
Construction litigation usually consists of a factually intensive dispute involving what went wrong, who knew about it and when, and which party is ultimately responsible for it. To prevail, a party must show not only that it has been damaged and is entitled to relief, but then must also show what those damages are. Good documentation will often be the difference between winning and losing a case in litigation. However, good documentation also can greatly reduce the likelihood that a problem ever even makes it to litigation.
Good documentation starts with having a formalized agreement detailing the scope of work, schedule of work, payment and payment schedule. The agreement should be signed by the parties. It is amazing how often an agreement is not signed and therefore results in the first dispute being whether the purported agreement even properly documents the parties’ intents. It is also amazing how often parties do not read agreements before signing them. So, take the time to read, question, offer revisions to and think about what you are being asked to sign.
Consider using a no-lien contract on residential construction projects (no-lien provisions in commercial construction contracts are unenforceable), and if you do, be sure to comply with the recording requirements. Also consider using pay-if-paid clauses (which are different than pay-when-paid clauses, which only permit withholding payment for a reasonable period of time). Regardless, make it clear that any payment to any subcontractors or material suppliers will require lien waivers. Having liens filed on the property is the quickest way for an owner/contractor relationship to turn sour.
Good documentation does not end with the initial agreement. All change orders also should be detailed in writing and communicated as soon as possible. It is not always possible to immediately document changes while in the field, but documenting later that day by email or text should usually be possible. Make sure both sides acknowledge acceptance of the terms in some written form. Although it is helpful when just one party sends an email memorializing the terms, it is a much better practice to require the other side to then acknowledge those terms in response. Silence can be held to be acceptance, but an affirmative acceptance leaves no room for doubt.
Additionally, keeping all invoices, receipts and evidence of payments in an orderly manner also is a best practice.
Having documents in order will go a long way toward keeping an issue from heading to litigation. But even if it ultimately results in litigation, having good documentation almost always saves an enormous amount of attorney time and fees otherwise spent unnecessarily investigating what should be non-issues. In a close case, good documentation can often carry the day.
When a problem arises, take plenty of photographs. No attorney anywhere ever has lamented that there were just too many photographs of the problem. Take photographs from different angles and in different lighting. Take photographs of the problem when it is discovered and, if the problem is corrected, take additional photographs of the corrected work.
Keep in mind that the photographer may later need to authenticate the photographs. Therefore, be sure to document who took the photographs, when the photographs were taken and what the photographs depict.
It is difficult to dispute well-taken photographs of a problem. Having strong photographic evidence of the problem not only can mean the difference between winning and losing in litigation, but could bring the parties to the table well short of litigation.
Deal with Issues as Soon as Possible
Few projects do not have some type of change orders or delays that arise from unforeseen issues. Deal with these as soon as possible. Sorting them out after completion for fear that dealing with them immediately could disrupt the project timeline is not a good idea. Memories fade. Evidence disappears. The spirit of cooperation decreases once the project is completed.
Moreover, a party presently working on a project is more likely to sit down and resolve an issue while the workers, equipment and materials are still there. The parties also are more likely to reach an agreement when they can physically review the problem and determine how it occurred. The only thing better than photographs of the problem is the actual problem live, front and center, with the parties standing around discussing it.
If at all possible, never release the final payment until all issues have been resolved.
Build Dispute Resolution Provisions into the Agreement
Many construction contracts now include builtin dispute resolution provisions and procedures. These could be as simple as requiring any dispute be addressed within so many days or it is waived, or as complex as requiring pre-suit mediation or arbitration in lieu of litigation. Built-in provisions also can include liquidated damages for delays or code violations. Prevailing party attorneys’ fees provisions also are common, but draft the agreement to entitle a prevailing party to attorneys’ fees even if the dispute is resolved short of litigation or arbitration.
Make an Effort to Identify Potential Problems Upfront
While it is a good practice to resolve issues as soon as they arise, it is an even better practice to attempt to identify potential problems upfront and determine who is responsible for dealing with them. For example, will there be issues with permits or code compliance? Is it springtime with rainy days expected? If so, identify that these could be issues and assign responsibility for addressing them.
Be Open to Compromise
In any dispute, assume the other party has a legitimate concern and try to see it from its perspective. Be willing to compromise. If a problem heads to litigation, it is still likely to be settled (90-plus percent of all cases get settled), but only after much money has been spent on legal fees. A 100 percent victory with an award of all attorneys’ fees is rare.
“Keep communication open even if it appears to be getting ugly or at an impasse. Cooler heads may prevail after a weekend of reflection. Try not to set positions in stone. Egos alone could prevent further compromise beyond that point.”
– James R.A. Dawson
Consider the potential risks, costs and time involved for each possible outcome. It may not always be worth taking a dispute all the way if it can be resolved with neach side taking a hit. A small immediate hit may be better than a protracted legal battle that could take years, regardless of the ultimate winner. Litigation also can affect reputation, creditworthiness, bonding ability and future business with adversaries regardless of outcome.
Try to get the other side’s position in writing and take some time to think about it. Keep in mind that all problems should be dealt with fairly, even if it means possibly taking a slight financial hit even when maybe not legally or contractually required to do so. Money motivates. If one party feels not just that the profit is not going to be what was anticipated, but rather that money is actually being lost, the incentive to go the extra mile may no longer be there. Too good of a bargain can be a bad thing.
Keep communication open even if it appears to be getting ugly or at an impasse. Cooler heads may prevail after a weekend of reflection. Try not to set positions in stone. Egos alone could prevent further compromise beyond that point.
A compromise with a handshake and a pat on the back (followed by proper documentation, of course), instead of a permanently destroyed relationship, may lead to further future business, far outweighing the costs of the compromise.