Collections, Arbitration, or Litigation? How to Resolve Construction Payment Disputes

Payment in the construction industry can be fraught with peril. The pile of issues surrounding payment for construction companies include risk-shifting clauses in contracts, slow payment, difficult or complex pay app requirements, the need to exchange legal documents with every request for payment, and on and on.

Generally, most of these payment problems can be avoided through the diligent use of construction notices – but what happens when there’s a payment issue despite your best efforts?

Collections

Often, the first step in the attempt to recover a past-due invoice is to send it to collections, whether the collection team is internal or, in more extreme circumstances, an external collections agency. This can sometimes be sufficient, but it’s limited in both effectiveness and perception.

Nobody likes dealing with collections agencies – there’s a reason people hang up on anybody they think is a collections call. Unfortunately, it can be difficult to find a good collections team, and a bad team can make the situation worse. While there is something to be said for stopping short of litigation – (nobody likes lawyers, either…haha) collections, without some force behind it, may not prompt payment, causing the underlying debt to age. If you have found a quality collections procedure, though, it’s may be worth giving it a shot to make sure that the easy stuff is paid without even further escalation.

Alternative Dispute Resolution (Arbitration or Mediation)

It’s also important to note that the desired dispute resolution process can be different depending on not only the other party involved, but also, potentially, the stage of the project. In an effort to only minimally disrupt the project and payment chain, it may be a good idea to attempt to contract for immediate mediation of change orders (or similar issues) for price resolution, and to utilize binding arbitration for disputes arising out of final payment.

Since actually having these determinations set can vastly streamline the process, these mechanisms should be addressed during the contracting period, with every detail decided in advance. Generally, while arbitration or mediation clauses are beneficial to getting quicker (and confidential) results, the intersection of ADR clauses and mechanics liens can be a mess.

Alternative dispute resolution mechanisms can sometimes be at odds with mechanics lien statutes or processes because arbitration or other alternative dispute resolution processes are creatures of contract, and mechanics liens are creatures of statute. In most cases, these statutes give the mechanics lien claimant rights against parties who they have not contracted with, and this can cause ADR problems.

For example, consider a construction project in which no one has a duty to arbitrate. If a supplier to a subcontractor files a mechanics lien and needs to enforce it, the supplier will file suit against all parties up-the-chain. This means that the case will end up as: supplier v. subcontractor, prime contractor, and owner.

However, if an arbitration agreement comes into play, the proceedings can get messy. Say the owner and the prime do not have an arbitration clause, but the sub and the prime do. In this case, the supplier will sue the subcontractor in court, but the subcontractor must initiate an arbitration proceeding against the prime, and the prime and owner will be in court. The subcontractor and prime contractor will have two proceedings (the arbitration and the court proceeding) instead of one, and the judgment in one may be inconsistent with the judgment in another. While this is a thorny issue, a potentially more important issue is whether an arbitrator has the rights or power to determine the validity of a mechanics lien at all. While it is clear that they’re afforded the ability in some jurisdictions, that is not always the case. Which can lead to (even more) issues.


Further Reading: 

Top 4 Benefits of Making Sure Construction Disputes are Resolved Without Going to Court


Litigation

Litigation is a frightening word to many in the construction industry. Construction litigation is incredibly confusing, with seemingly few solid answers to setting targeted goals, limits, and expectations. Even in cases where a party has filed a valid mechanics lien, it is not uncommon for attorneys to struggle to sufficiently advise a client or potential client about the expected costs and presumed length of a legal proceeding – not because they are a poor attorney – but simply because there is absolutely no way of knowing what might come up during the course of a trial.

The nature of a lawsuit depends upon several factors: the parties involved, the extent of the claimed damage, the willingness or ability to settle, the requirements of outside contracts, the delays it may cause, the ability to afford legal representation, and more. There are just too many dynamic pieces of information to be able to accurately predict the time and expense of litigation in all but a small minority of cases.

Since many construction cases occur during the lifetime of the project giving rise to the dispute rather than after it has ended, and because it is often difficult to predict other parties’ willingness to go the distance with a proceeding, there are several risk factors that need to be examined: Is it worth the risk to lose your financing? Is it worth the risk to potentially derail the project? Is it worth the possibility of alienating customers? Is it worth the costs of obtaining adequate legal assistance?

While the answers to the above questions change on a situation-by-situation basis, it is always a good idea to streamline the process and have a dispute resolution process or plan in mind for each job, contractor, or customer.

While everybody should aim for the unicorn project of nothing but smooth payments, it’s a fact of life that things don’t always work out like you planned. While any method of resolution can be smooth or become messy, the more it is considered before the problem arises, the easier the process will be.

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Collections, Arbitration, or Litigation? How to Resolve Construction Payment Disputes
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The best way to avoid construction payment disputes is to always send notices | What happens when a dispute can't be avoided despite all efforts to avoid it
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levelset
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