construction dispute resolution: workers with machinery illustration of torn contract

Categories

Construction is a complex industry. Projects involve legally binding documents, a lot of money, and many moving parts. As with anything so multi-layered, disputes will arise. If they’re significant and disruptive enough, they can bring a project to its knees. For that reason, it pays to understand construction dispute resolution.

But just as no two projects are exactly the same, neither are any disputes that might arise. Each scenario involves different personalities, unique circumstances, and sensitive timelines. Thankfully, there are multiple ways to resolve a construction dispute, each of which we’ll cover in detail.

Common causes for construction disputes

According to Arcadis’s Perspective Global Construction Disputes Report 2020, the average dispute in North America in 2019 was worth $18.8 million and lasted 17.6 months. That’s a lot of time and money in contention. Identifying the causes can fast-track resolution.

Each project is unique, and the circumstances leading up to potential disputes are usually one-of-a-kind. But, when those situations boil down, they generally come down to a few common root causes.

Arcadis’s report takes stock of those root issues and compiles them into one document. It names many of the following points as the most popular cause for construction disputes.

Contract issues

Construction contracts are legally binding documents, but they’re not always spot-on. Whether it be from inexperience or an honest mistake, a construction contract can contain errors and omissions just like any other document. In fact, Arcadis states that errors and omissions rank number two on the list of most common causes for disputes in North America.

The mistakes or missing details can cause the contractors and the project manager or owner to be on completely different pages. With severe enough omissions, the contractor might not be able to deliver the project at all.

On the other side of the coin, the Arcadis report shows that contractors or subcontractors failing to understand or simply comply with their obligation under the contract is the number one reason for disputes in North America. This can manifest in many ways, but essentially, contractors are either not doing their job, or they don’t understand what their job entails. 

Scope changes

Most detailed contracts start with a relatively clear scope of work. On the best-planned projects, that scope stays clearly defined, and the contractor is able to deliver the project. However, if the details of the job change and the owner, project manager, or GC requires more from the contractor, scope creep looms in the darkness. 

The slippery slope of scope creep has claimed more than its fair share of contractor victims. It can happen so slowly or subtly that the contractor doesn’t even know it’s occurring until they’re wondering where the profit’s gone. Clearly, this can be a significant cause of disputes. In fact, “owner directed changes” tied with unsubstantiated claims for the the third most common reason for disputes. 

Delays

Everyone understands that construction projects are full of delays, but even still, they’re the cause of many disputes. From the owner to the GC to the subcontractors, everyone on the project has a schedule to keep. A schedule delay due to a material shortage, an accident, an issue with the governing municipality, or something as legitimate as a change order can have a ripple effect and throw the entire schedule out the window. 

Worse yet are payment delays. When a project owner or GC doesn’t send out the checks on time, every contract participant on the job suffers. Suddenly, subs become more concerned with filing liens and protecting their payments than they are with following the contracted schedule, but who can blame them?

Incomplete or unsubstantiated claims

According to the 2020 Arcadis Construction Disputes Report, “Poorly drafted or incomplete and unsubstantiated claims” is tied for third in the race for the most common causes for disputes in North America. And that makes sense, as a claim is essentially someone saying they’re entitled to something they have not yet received. This could be additional time, money, or a number of other things.

Most large GCs have in-house legal teams that will handle claims, and unfortunately, rejection is the standard first-line defense. Whoever is receiving the claim is going to look for any reason to send it packing. The smallest error or deviation from the specified claim process is certainly enough. Plus, if a contractor or sub doesn’t fully understand what they’re entitled to under the contract or general construction law, their claim might very well be unsubstantiated.

Workmanship issues

At the end of the day, when a contractor takes a job, they agree to perform a specific job in exchange for money. If they don’t perform that job to the expectation or standards of the project owner or GC, those parties are likely to request the contractor fix or finish the work, and they’ll withhold payment until they do so. As you might expect, this rarely pleases the contractor and often leads to disputes.

Choice of Law

Contractors and subs who don’t read and understand their contracts fully might be surprised to find out they’re playing by the away team’s rules. Choice of Law clauses allow contracts to be held to the laws and rules of another state — really, any state. 

A simple sentence buried in the back of a contract similar to “This agreement shall be construed in accordance with the laws of the State of California,” might be disastrous for a contractor used to abiding by New York construction law. 

This can be a significant cause for disputes as the rules involving construction contracts and their disputes vary wildly from state to state. For instance, laws around lien waivers, claim terms, and dispute resolution might not align with what the contractor believes to be the rules. Luckily, many states allow contractors to opt out of these laws and play by the home state’s laws. 

Alternative Dispute Resolution clauses

When a dispute arises in construction, it’s not always wise to jump directly to litigation. This approach to construction dispute resolution can sever the relationship and cost both parties a lot of time and money. For that reason, construction contracts typically contain Alternative Dispute Resolution (ADR) clauses.

An ADR clause will set out the methods that the contracted parties need to use before litigation. For instance, if an ADR clause states that arbitration is the mandated method of resolution, those involved in the dispute will have to attempt to find a solution through arbitration before any legal action can take place. Before an ADR clause can become part of a contract, both parties need to agree on the method chosen. 

Most standardized construction contract forms from the AIA, ConsensusDOCS, or AGC have a built-in ADR clause which calls for the use of the American Arbitration Association. The AAA has administered over 6 million disputes since 1926.  

7 methods of construction dispute resolution

Disputes are going to happen. Contractors and project owners can prepare for them by including dispute resolution clauses in their contracts. Here are several methods of construction dispute resolutions that both parties can agree upon in an ADR clause and use to come to an agreement (or at least a solution).

1. Mediation

Mediation is basically negotiation with the help of a third-party counselor, and Arcadis states it was the most common ADR method in North America in 2019. The mediator listens to both parties and helps them reach an agreeable solution. Mediators do not decide anything, but rather guide the disputing parties on their way to resolution.

Pros:

  • Usually inexpensive
  • It helps ensure understanding across the board

Cons:

  • It might be inexpensive — but mediators aren’t free
  • The agreed-upon solution isn’t legally binding

Mediation is helpful for smaller disputes where both parties struggle to see eye-to-eye or where one party might be upset. The downside is that mediators don’t work for free, and the solution that everyone agrees to isn’t legally binding.

Sample mediation clause

If a dispute arises between or among the Parties, and it is not resolved prior to or after recording, the Parties shall first proceed in good faith to submit the matter to mediation. Costs related to mediation shall be mutually shared between or among the Parties. Unless otherwise agreed in mediation, the Parties retain their rights to proceed to arbitration or litigation.

2. Negotiation 

Negotiation is the second-most-common ADR method used in 2019 to resolve disputes in North America, according to Arcadis. When a construction contract contains a negotiation clause, both parties agree to sit down and discuss the issue until they can come to an agreement.

The agreement needs to be fair and just for both parties. If they can’t work it out, they can move on to other resolution methods. But they have to give negotiation a chance first before trying another means of construction dispute resolution.

Pros:

  • Quick
  • Inexpensive

Cons:

  • Not legally binding
  • Not helpful if either party is upset

Negotiation is ideal for long-standing owner-contractor relationships or smaller disputes when neither party is particularly upset. Should a negotiation go well, it takes far less time than any other method. But, negotiations can be useless if one of the parties is upset or unwilling to work with the other party. Also, the agreement reached in the talks isn’t legally binding.

Sample negotiation clause: 

In the event of any dispute arising out of or relating to this Agreement, the affected party shall notify the other party, and the parties shall attempt in good faith to resolve the matter within ten (10) days after the date of such notice (the “Notice Date”). Any disputes not resolved by good faith discussions shall be referred to senior executives of each party, who shall meet at a mutually acceptable time and location within thirty (30) days after the Notice Date and attempt to negotiate a settlement.

3. Arbitration

When a construction contract contains an arbitration clause, it means that both parties agree to enlist the help of a third party who will hear both sides of the story and come to a decision on their behalf. 

Pros:

  • Both parties agree upon an arbitrator
  • Arbitrator’s decision can be legally binding

Cons:

  • Expensive
  • Arbitration is a slow process

Arbitration can be a helpful resolution tactic in high-stakes disputes. During the arbitrator selection process, both parties are able to review eligible arbitrators and remove the ones they’d prefer not to work with, leaving one agreed-upon arbitrator to handle the job.

When the arbitrator reviews all the important documents and information, they’ll decide which side wins the arbitration. The process is slow, but in some jurisdictions, it is legally binding.

Sample arbitration clause

Any dispute arising under or in connection with this Agreement shall be settled by arbitration, in accordance with the Construction Industry Arbitration Rules set forth by the American Arbitration Association. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that the Contractor shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute arising under or in connection with this Agreement.

According to the American Arbitration Association, many times, negotiation and arbitration can run concurrently. This means that negotiations can continue while the arbitrator is working toward a resolution.

See R-10 in the AAA’s Rules and Mediation Procedures guide for more clarification.

4. Adjudication

Adjudication clauses also include a third-party decision-maker who will look at the facts and come up with a solution. It often involves a court and a judge, and the decision is usually legally binding. While adjudication is the most popular source of resolving construction disputes in the UK, it is not as common in the US.

Pros:

  • More cost-effective than litigation
  • The decision can be legally binding

Cons:

  • You don’t get to agree upon the judge making the decision

Adjudication can be a cost-effective means to an end, but it’s not as flexible as mediation or arbitration. Since a judge typically oversees the resolution, the agreement is usually legally binding. The issue is that disputing parties don’t have the opportunity to agree upon the magistrate like they might in arbitration.

5. Small claims court

Small claims court offers resolution in the form of money, where disputing parties can bring their case before a court without hiring an attorney. The court will decide who wins the case, and the decision is legally binding.

Pros:

  • More cost-effective than other avenues
  • It can be fast, depending on court caseload

Cons:

  • It’s only appropriate for cases involving less than $10,000

Small claims court can be an attractive option for a smaller contractor or disputes valued at less than $10,000. They’re fast and cost-effective. However, since $10,000 is the upper limit amount you can sue for, they’re not effective for larger disputes.

6. Litigation

When a dispute goes to litigation for resolution, it’s a full-blown court case involving lawyers, judges, and juries. Lawyers representing both sides will make their clients’ cases, and the court’s decision will be legally binding.

Pros:

  • Decisions are made by a panel of people, not a one-person third-party

Cons:

  • Very expensive
  • It can take a very long time

Litigation is effective for disputes involving large sums of money or huge projects. These cases are very expensive, as both sides need to secure lawyers and pay legal fees. They also take a long time. The benefit of adjudication is that it puts the legal system to work, with a decision being made by a panel of people rather than just one. 

7. Expert determination

Expert determination can be a very attractive option for solving a construction dispute, particularly when the subject matter is highly technical. In this method of dispute resolution, an objective third party with a specific skill set or experience is hired to make a determination.

Pros:

  • The expert should have the necessary experience to make an informed decision
  • Less time consuming than other routes

Cons:

  • Not legally binding

Expert determination is a very effective way to come to a fair and reasonable decision. The expert has the experience and knowledge to understand both parties’ points of view, and their goal is to come up with the most logical solution, given the details involved. This can be a much faster process than any legal resolution method, but the decision isn’t legally binding.

Filing a mechanics lien can go a long way toward avoiding disputes

When it comes to payment disputes, protecting your lien rights can go a long way toward avoiding a full-blown dispute. With the right documentation, such as preliminary notices and notices of intent to lien, a GC or project owner will recognize that you know your rights and treat you accordingly.

Since the lien attaches to the property instead of the owner, it can make completing the project more difficult for the owner. It also makes the property less liquid and less likely to receive additional financing if necessary. For those reasons, owners take mechanics liens seriously, making them the fastest route of construction dispute resolution.