Of all of the things that can go wrong during a construction project, a contractual dispute is the most likely problem.
That’s according to the 2018 Global Construction Disputes Report, which found that contractual errors and omissions, poor contract administration and contractual misunderstandings are the leading causes of conflict. The report further found that such disputes take, on average, 18 months to resolve — an increase over 2016.
Construction law practitioners know this reality well. Contractual disputes are as common as heavy machinery in their line of work, and for good reason. Every aspect of a construction project — from time to the budget to the allocation of liability and more — is laid out in black and white in a contract that must be signed by all relevant parties.
“It’s all defined by contract terms,” said Greg Cafouros, a partner at Kroger Gardis & Regas, LLP. “That’s why contracts are so essential.”
If contracts are essential to the construction process, it follows that attorneys and their clients in the construction industry must move quickly when resolving contractual disputes to continue the project’s progress. Reaching this goal is a matter of employing various dispute resolution techniques that will be appropriate at different times based on the facts of the dispute at issue.
What can go wrong?
Contracts in the construction world are more prone to disputes than others largely because they are written in real time, said Faegre Baker Daniels partner Mark Voigtmann. Every time even a small change is necessary in a project, the change must be documented in the contract via a change order, which Voigtmann likens to rewriting the contract.
According to Sam Laurin at Bose McKinney & Evans LLP, disputes over project delays are among the most common contractual issues that can arise. When a delay occurs, the parties must revisit the contract to determine how to get back on course. Additionally, delays can often lead to additional costs, Voigtmann said, which forces the parties to determine who is responsible for paying those costs.
Payment disputes also commonly arise. Sydney Steele, senior counsel and partner at Kroger Gardis & Regas, pointed to the difference between “pay if paid” and “pay when paid” situations. In a “pay if” case, subcontractors will only get paid if contractors get paid — meaning that if a project owner fails to pay the contractor, the subcontractors also will not be paid. But in a “pay when” situation, the subcontractor must be paid after a reasonable period.
A simple failure to read the terms of a construction contract can also cause a dispute. Steele noted subcontractors often fail to read the terms of their contracts with general contractors, even though those contracts incorporate provisions of the contract between the project owner and the contractor. Thus, when something goes wrong and those incorporated provisions are implicated, subcontractors are unaware of the implications, he said.
Similarly, some construction parties may not read the terms of their contracts because they have a strong relationship with the other party, Cafouros said. But that can be dangerous, as a solid working relationship between two parties is not a guarantee that one of them will not put a provision in a contract that disadvantages the other party, he said.
When the inevitable contractual dispute arises, Steele and Cafouros said lawyers often look to the 2010 case of Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., et al., 06S05-0907-CV-332, for guidance.
“Justice (Frank) Sullivan wrote a very insightful opinion about construction contracts and how they play out in resolving construction disputes,” Cafouros said. “It’s the seminal case that defines how we deal with construction disputes.”
In the library case, which Cafouros was involved in, the Indianapolis-Marion County Public Library hired Woollen Molzan and Partners, Inc. to serve as the architect for a library renovation project, and WMP subsequently subcontracted with Thornton Tomasetti Engineers and Charlier Clark and Linard, P.C. for architectural and engineering services. WMP also had a contract with Joseph G. Burns, who served as the “engineer of record,” but the library did not have a direct contract with any of the subcontractors.
When construction and design defects on the library’s parking garage were discovered during the project, the library sued WMP and the three subcontractors, among others, alleging negligence and seeking damages. The case turned on the application of the economic loss rule, which holds that in situations “where loss is solely economic in nature, i.e., where there was no damage to other property or person, ‘such losses are more appropriately recovered by contract remedies.’”
In the context of construction contracts, the justices unanimously held that “the economic loss rule precludes participants in major construction projects connected through a network or chain of contracts from proceeding against each other in tort for purely economic loss.” Applying that ruling to the library, the court upheld the grant of summary judgment to the defendants on the library’s negligence tort action.
Reaching a resolution
With the holding of the Indianapolis-Marion County Public Library case in mind, the construction law attorneys said there are three main methods to resolve contractual construction disputes: mediation, arbitration and litigation.
Mediation clauses are often found in construction contracts, Laurin said, noting most construction disputes will go to mediation at some point. About 85 percent of disputes that are sent to mediation are resolved in one day, Cafouros said.
But Laurin also noted a successful mediation is dependent on the parties finding the “sweet spot” where they have been given enough time to understand the facts of the case and make an intelligent decision. He also said its preferable to go through mediation while the project is still ongoing in order to provide a sense of certainty.
Like mediation, arbitration allows the parties to resolve contractual disputes outside of court, though unlike mediation, the results of an arbitration are binding and harder to appeal. Litigation becomes appropriate when dealing with large claims worth millions of dollars, Cafouros said, though the attorneys agree that settling disputes outside of court is the best option, when possible.
Voigtmann has also seen some new dispute resolution methods in his practice, such as a “technical mediation” wherein a group of engineers will review a technical construction problem and make a recommendation for how the issue should be resolve. Parties can also try a “mini-mediation,” which involves half a day spent presenting evidence followed by the executives and mediators sitting down and sifting through the evidence to reach a resolution.
Time is money
As construction attorneys work to resolve their clients’ contractual issues, the old adage “time is money” is almost always running through their minds. Though contractual disputes don’t often bring a project to a halt, they can extend the project and create attorney fees, adding to the overall cost.
While the 2018 Global Construction Disputes Report found an 18-month resolution average, the attorneys said it’s not uncommon for the resolution process to stretch on for years, especially if the matter goes to court. Despite that reality, the attorneys said their goal is always to resolve their clients’ disputes as quickly as possible to avoid racking up additional fees that could lead to additional litigation.•