This feature is a part of "The Dotted Line" series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.
Unpaid bills, defects and schedule and change order disputes — these are all circumstances that can raise the temperature on a project and push those who feel wronged to take their issue to court.
Most construction contracts specify some method of dispute resolution, but the matter doesn’t have to end up in front of a judge for it to be considered adversarial by one or both parties.
“I think that it is always in a [party’s] best interest to reach an amicable resolution prior to engaging in litigation,” said attorney Joseph Devereux III with Sandberg Phoenix & von Gotard P.C.
“Obviously, litigation is very time consuming and it can be very expensive,” he said. “It's also very risky, and we see that construction companies are trying to mitigate some of that risk and expense by having mandatory mediation provisions added to a lot of their contracts prior to the parties’ ability to actually file a lawsuit.”
So, contract allowing, when does it make sense to sue and when does it make sense to just try to work it out before things get that far? Here is advice from construction legal experts.
Determining when court intervention is needed
A lawsuit or some other court intervention might be necessary, said attorney Meagan Bachman with Crowell & Moring LLP, to address specific performance issues or obtain injunctive relief. For example, a court or an arbitrator might have to step in to prevent one of the parties from “changing the status quo” of a project before there is a chance to work out the dispute, she said.
An owner, for instance, might file a lawsuit for injunctive relief to prevent a contractor from taking actions that would be destructive, she said, such as removing falsework being used to support a building under construction or similar kinds of temporary works, as part of a dispute-related demobilization.
A contractor or owner also might be forced to sue if the other party refuses to negotiate, said attorney Michael Kurzman, partner in the law firm of Weiss Serota Helfman Cole & Bierman P.L. Willingness to negotiate is not a sign of weakness, he said, but more of an acknowledgment that litigation is expensive and that there are no guarantees of victory.
“It’s just the practical reality,” Kurzman said.
Figuring out the costs
When considering litigation, Devereux said, a contractor should evaluate the claim to decide whether filing a lawsuit will be a net economic benefit. In addition to the math — how much it will cost to sue vs. what the expected return will be — this analysis must take into consideration each plaintiff’s situation, and the answer could be different for each party, even when the dollar amounts at stake are similar.
For example, a contractor that has $10 million in revenue might be less likely to file a lawsuit over a $25,000 claim than a company with $200,000 of revenue, he said. That $25,000 has greater significance for the smaller company. On the other hand, a contractor earning $200,000 a year might think twice about spending a significant sum on legal bills without guarantee of success.
Another factor to consider: Even if a contractor prevails in court and wins a monetary judgment, Kurzman said, there’s no guarantee that the firm will be able to collect on it, particularly if the party that owes the money is low on cash and has few assets.
“Each company will have a different set of factors that will play into the decision [to sue],” said Devereux.
Future business relationships might also be a consideration. Moving forward with a lawsuit could mean that subcontractors get locked out of bidding on future work, Devereux said. By pursuing, for example, $50,000 in a lawsuit, will the company waive the opportunity to get $300,000 in future contracts?
Likewise, the general contractor and owner might have to say goodbye to a ready supply of subcontract labor or vendors that choose not to work for them after being sued.
Withdrawing from a lawsuit
One other reason that the decision to file a lawsuit must be considered carefully, Bachman said, is because it may not be easy to reverse course and drop it.
“Sometimes, once you start a lawsuit, you can't just get out when you want to without losing your rights,” she said. “Or you might be on the hook for the other side's costs if you drop your suit before it's resolved.”
Another risk is that the other side will file a counterclaim, Bachman said. In that scenario, the counterclaim can proceed even if the party that originally filed suit decides not to pursue the claim any longer.
“You're still stuck in that lawsuit,” she said.
And unlike methods of alternative dispute resolution, like negotiation, mediation and expert determinations used for technical issues, Bachman said, parties need to realize that once a lawsuit is filed they’ve lost a great deal of control over the outcome.
“You’ve turned over resolution of the dispute to someone else,” she said.
Devereux said when counseling contractor clients, he makes them aware of their rights to invoke statutory remedies, including filing mechanics liens and claims against surety bonds. The use of those mechanisms, he said, serves several purposes. First, all involved parties — contractors and the owner— are put on notice. Second, there are prelitigation tools that can create enough leverage to facilitate a settlement.
Filing these claims also gets the ball rolling as far as finding out details of what’s been going on with the project. Is there defective work? Is the owner or another project stakeholder having financial difficulties?
Communication early on, though, is probably one of the most important tools a contractor or owner can utilize if the objective is to avoid the courtroom. If your firm owes money to suppliers or subcontractors, for example, the first step is to explain the situation to them, Kurzman said.
“They’ll probably work with you in some way because … a bad settlement is still better than a good litigation,” he said. “So hopefully they would have that same mindset, and they would work with the entity that owes them the money to try to come up with a payment plan or time or something because they'd rather get paid than have to litigate.”
Lawsuits should be the last resort — even for those convinced they are in the right — because they’re expensive and the ultimate decision is an unknown, Kurzman said.
Those that want to litigate on principle, the lawyer said, and want to move forward with a lawsuit at any cost usually change their minds once they realize the expense. “That goes on until about the time they get their third bill and then suddenly the principle is not that important,” Kurzman said.
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