Handling Litigation and Disputes in Construction
Like it or not, construction is a highly litigious industry. Contracts are legally binding documents that contain a lot of moving parts. The fluid nature of construction often leads to misunderstandings or other challenges that delay the project and hit contractors and project owners in their pockets. These disputes can be small and easily rectified, or large-scale lawsuits that freeze project progress and require attorneys, judges, and juries to settle.
While each dispute is different, this guide will explain some of the most common causes for disputes and litigation, as well as some possible solutions to help resolve the misunderstanding, make everyone whole, and possibly even save a strained relationship.
Construction Litigation vs Disputes
While the two terms are often used interchangeably, it’s important to note that “litigation” and “disputes” are not necessarily the same.
- A dispute is any contractual disagreement that occurs during the life of a project. These can be minor issues such as scheduling issues or delays, or major disagreements such as nonpayment, breaches of contract, or issues over the scope of work.
- Litigation is a dispute resolution tactic. It requires the dispute to be presented in a court of law in hopes of a legally binding verdict to be decided by a judge or a jury.
Main Causes of Disputes and Litigation in Construction
While every project is unique, there are some common reasons why disputes occur on construction projects. The following are some of the most common reasons why contractors, project owners, subcontractors, and other parties might face a dispute under a construction contract.
Scope of Work
Contracts are designed to clearly detail a contractor’s scope of work. This allows the contractor to bid appropriately and ensures that the project owner will be satisfied with the result. However, not all scopes of work are as clear as they should be.
Unclear or poorly-defined scopes of work usually result in an issue known as “scope creep.” Scope creep occurs when the project owner, project manager, or general contractor starts requiring more from the contractor than the contract outlines. This work is unaccounted for in the contract, so contractors and subs are not guaranteed to be paid for it, resulting in a dispute.
Another common cause for construction disputes is unsubstantiated claims. Essentially, a contractor or sub submits what they believe to be a legal claim, typically for money. However, the claim is either incorrect or the paperwork submitted is incomplete. In some cases, the work may be incomplete, as well. For this reason, the GC, owner, or project manager rejects the claim.
Incomplete or unsubstantiated claims are a major contributor to construction disputes. The contractor believes they have a right to something, but the parties up the chain do not. That’s basic Construction Disputes 101.
Nonpayment is a major issue in the construction industry. While there may be many reasons why it occurs, nonpayment is when a general contractor, owner, or project manager doesn’t pay a subcontractor for work performed according to the contract.
Since construction runs on cash flow, withholding payment is a major issue for most companies in the business. They might not be able to pay their suppliers or sub-subcontractors. This will impact their ability to float other projects as well as force them to carry high-interest loans for longer than expected. As a result, the project’s progress might come to a halt, causing issues for everyone on the job.
Breach of Contract
A contract’s entire purpose is to create a paper record of an agreement between two parties. In construction, it contains the exact details of what someone will do, when they’ll do it, and how much they’ll do it for. It also details the owner’s or general contractor's agreed-upon role and responsibilities. If everyone plays by these rules or amends them the correct way, everyone is happy.
However, when someone steps outside of the contract’s outline, it’s a breach of contract. There are varying levels of severity, but unless the breach is clearly communicated and agreed upon, it will often result in a dispute.
Most construction project timelines can absorb a few delays before going totally off the rails. However, there are times when the delays are so severe that they constitute a breach of contract. When the delays start to impact other subs, the delivery date, the amount of profit on the project, and the owner’s plans, it’s fairly common for a dispute (or several) to arise.
Poor workmanship—potentially another breach of contract issue—is a fairly common issue that can result in disputes. Quite often, this dispute is between a homeowner and a contractor, but it can also occur between contractors and their subs. Essentially, the work performed doesn’t meet the implied standards outlined in the contract, so the subcontractor’s payment is withheld or the contract is terminated.
Construction Dispute Resolution and Litigation Options
While there are countless causes for disputes on construction sites, there are just a few ways to resolve them. The following are some common construction dispute resolution methods that can help put an issue to bed. Well-written contracts will contain a dispute resolution clause that requires one or more of the following options should a misunderstanding occur.
Mutual negotiation is the simplest way to resolve a dispute, but it only works if the two parties are capable of sitting down and talking about the problem. When cooler heads prevail, the dispute issue can be resolved and the parties can come up with a new agreement that serves everyone’s best interests.
Professional mediation is an excellent option for disputes in business relationships that haven’t gone too sour. In this dispute resolution method, the parties hire an independent third party to review their cases. The mediator, however, doesn’t decide who is right. Rather, they help guide the two parties to a peaceful, reasonable resolution. However, this resolution is not legally binding.
Third-party arbitration is very similar to mediation. The two parties agree to hire a third party to review the cases and make a decision as to who is correct. Both parties have to agree upon the arbitrator, so it’s often a longer and more challenging process than mediation. Also, arbitration can be legally binding, so whatever the arbitrator’s decision is, the parties must abide by it.
Third-Party Expert Determination
For highly technical disputes that a typical arbitrator or mediator can’t handle, consider a third-party expert determination. While this method isn’t legally binding, it’s faster than arbitration. It also includes bringing on an experienced third party who can be the voice of reason.
Judge or court adjudication is where disputes start to enter the litigation territory. Under court adjudication, both parties agree to include a third-party decision-maker (typically a judge or court). This third-party’s decision is legally binding. This method only works if the parties are in agreement on using it, otherwise, they would have to file a lawsuit.
Small Claims Court
When it comes to contesting small contract amounts, small claims court is often the best form of litigation. Through this method, one party files a lawsuit against the other and their claims are heard in court. The resolution is legally binding so it’s important to have all of the lawsuit’s ducks in a row before moving forward.
Another option for resolving a dispute is to enter into litigation. Through litigation, one party files a lawsuit against the other and takes them to court. Both parties typically hire lawyers and the cases are heard before a judge and jury. The litigation process is long and very expensive. The judge’s findings are legally binding and the loser is typically responsible for court fees.
One final resolution method is to file a lien against the property. With the lien on the property, the project owner would have to pay any unpaid invoices before they can sell the property, secure more investment money, or refinance. If they don’t abide by the law, the project property can be forced into foreclosure. With the proceeds from the sale of the property, tax liens are paid, the bank is paid, and whatever is left over is disbursed to the liening contractors.
Each state’s laws and requirements are different for filing a lien against the property. However, contractors typically have to send specific documents within certain time frames and file for foreclosure before the lien expires (again, different in each state).
Understanding and Avoiding Disputes and Litigation
Unfortunately, disputes are typical in the construction industry—and they’re expensive and time-consuming. But when contractors know what causes them, they can limit how often these disputes arise by prioritizing communication and clarity in their contracts. Also, by understanding how to resolve these disputes, they can limit their impacts on their businesses.