Since litigants brought their disputes before King Solomon, combatants have petitioned the wisdom of designated “authorities” to resolve their differences. No one, it seems, can settle matters without a designated judge “forcing” them to see things his way. This authoritarian approach has evolved into the current courthouse nightmare that presently plagues our land. We have, it seems, morphed into a society of unrelenting hagglers reducing our system of jurisprudence to a contentious swap meet. The cost of admission to this legal sideshow insures that only the lawyers win in any civil dispute.
The Construction Industry – A Legal Land of Plenty
Construction projects 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 misunderstanding, dispute, and litigation. In other words, the complexity of our industry is fertile fodder for the legal profession.
Danger – Blind Curves Ahead
During my years in the surety consulting business, and my co-author 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 litigation experience.
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. Often, they would quit or be thrown off the job incurring staggering legal fees they couldn’t pay and end up out of business.
Because of complexity and the big money involved, the cost of dispute resolution in the construction industry can often overwhelm small to midsize contractors.
Caution – Workmen Present
Dangers that could lead to catastrophic failure require cautious behavior. 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. Our thoughts on dispute resolution for smaller to midsize contractors might be summed up as follows:
- Avoid litigation at all costs.
- Clearly, construction disputes are inevitable. Therefore, as a precaution, make sure that your contract identifies the dispute resolution process. It’s essential that the agreements make it clear that you have the right to mediate and/or arbitrate disputes that arise on the project or with respect to the contract.
- Having said that, avoid them all, if possible! The best way to resolve disputes is to keep control over the process and not give anyone the ability to make decisions about your issues. Be reasonable and rational and make every effort to personally work out the dispute and avoid court, arbitration, or mediation. Many businesses we’ve worked with routinely avoid having any third party—be it a judge, jury, arbitrator, or mediator—make any rulings or decisions about their issues. Those contractors resolve most issues and disputes before they go to court or arbitration, even though the result is often far from what they want. In the more contentious situations, those companies would rather work out a bad settlement—where they wind up paying more than they want or taking less than they want—instead of going to court or arbitration because a bad settlement on one dispute is looked at as actually saving money and problems.
- Finally, apply our “threshold rule” in all cases. A thorough review of past dispute resolution cases in construction revealed that discovery and experts alone can cost as much for a half-million dollar claim as for a five million dollar claim. Set the minimum threshold for litigating any claim at $500,000 to $1,000,000 depending on the nature of the dispute.
Mitigate – Don’t – Litigate