Construction Dispute Resolution Threshold
In Disagreements Size Matters
by Thomas C Schleifer and Bob Rubin, Esq.
For many years we have studied the causes of construction business failures and how to avoid them. During my years in the surety consulting business and Bob Rubin’s decades as a construction attorney we have encountered a considerable number of contractors that failed as a direct result of a disastrous claim experience, often their first or first sizable dispute. There have been huge advancements in dispute resolution that are working well, particularly for the larger, more sophisticated construction enterprises, however many small to midsize contractors have limited experience with claims and, as such, little experience with claims resolution.
The failures typically occurred when small or mid-size contractors had disagreements on a larger project than perhaps they should have been involved in. The disagreements that got out of hand often involved more money than their anticipated profit and they would seek legal advice from an attorney lacking experience in construction matters. They would then pick a fight they could never win, or quit or be thrown off the job incurring staggering legal fees they couldn’t pay and end up out of business.
The attorney involved in the initial advice was not experienced in construction and we can tell you from first-hand experience, many are not even aware there is a construction law section of the bar. Unfortunately, neither the contractors nor their advisers knew there is a minimum size threshold below which you can’t afford a dispute. There are some disagreements too small to engage in legal battles or even other dispute resolution processes. Discovery and experts can cost as much for a $500,000 claim as for a five million dollar claim and can take just as long to resolve. The minimum threshold we have used is $500,000 to one million dollars, depending on the nature of the dispute.
Contractors having limited involvement with claims are fortunate. However, they should recognize that as a result, they have little or no experience in dispute resolution. They would not necessarily know how the claim process works and what the costs are. This is something you don’t want to learn by experience, so you need to learn in advance that there are practical thresholds below which you can’t afford to pick a fight. You need to know how to manage disagreements, prevent disputes, to seek advice early-on and only from an experienced construction advisor. Many of the organizations in question above were growing enterprises, entering the big leagues without understanding the magnitude of the consequences of their actions. They did not realize that their growth required new skill sets that are expensive to learn by experience, particularly in managing and avoiding disputes.
We all know that it is difficult to complete design and construction without disagreements or misunderstandings about something. These are complex undertakings compounded by the divergent interests of the parties involved. Each perceives the project from their unique perspective, roles and responsibilities. Owners define their needs, intentions and budgets. Designers determine what will accomplish the owner’s needs and how much of themselves to put into the design. And the contractors interpret the design, estimate the costs and produce the work.
Contracts are needed to memorialize this multifaceted arrangement, usually with separate agreements between the owner and the designer and the owner and the contractor. Designers often end up with authority over design and, to some extent, over the contractor, but with little or no responsibility for the finished product. As the owner’s “representative” they often find themselves united with the owner and at odds with the contractor, with whom they have no contractual relationship. This is complicated in itself, but when you add personalities to the mix, it can become a formula for disaster.
A necessary skill set for contractors is the ability to manage disagreements and prevent them from escalating. If disagreements can’t be settled, the contract usually defines the process for dispute resolution, which is complicated by the reality that the parties must continue to work together. Therefore, resolution is often put off until completion of the project when attorneys are often brought into the process. If they are not experienced construction attorneys they may be experts in the “process” rather than the facts whereby a disagreement over A and B grows into C, D, E, F; and if it goes on long enough, the entire alphabet.
The cost of dispute resolution in our industry can be extreme, which is the primary reason for the threshold, below which disagreements must be de-escalated if at all possible. Dispute resolution costs are magnified by the time required by key employees, a distraction from other business issues, and the damage to valuable business relationships. Successful contractors know that profitable projects are those where disagreements are avoided, managed and compromised; and not allowed to fester into disputes that add another party to an already complicated mix. Dispute resolution can cost both sides more than the original amount in question, so everyone loses.
A contractor had a disagreement with a regular client when a several million dollar completed and occupied project sustained damage during the one-year guarantee period. The client’s attorney put the contractor on notice that he was expected to correct the problem or a lawsuit would follow. The damage was described as having been caused by a third party. A compromise was not an option as the owner’s representative and the designer declined to discuss the issue on the advice of counsel. The cost of the repair was estimated at $130,000 and the contractor was particularly distressed because in 50 years they prided themselves in never having been involved in a lawsuit. They actually use that fact in their marketing.
The contractor was advised that because of the complexity of the problem resolution would likely result in a drawn-out “battel of the experts” that could cost him $200,000 or more if it went all the way to trial. This in addition to the distraction of his key people, lost time, and his personal attention. The recommendation was to explain to the owner that, while the damage was not a result of anything the contractor did, he would repair it at his own expense and to ask for written authority to enter the site to do the work.
The Owner’s Reaction
The day after receiving this information the owner called the contractor personally and said in light of this offer he had decided that he and the designer would each pay one-third of the cost of repairs. And without admitting anything declared the case was closed.
Resolve your own disputes if possible.
Inviting too many others into the process can be counterproductive
Draw Your Own Conclusions
Use good business judgment about how to manage disagreements, misunderstanding,s or disputes on your projects.