Thinking Beyond the Dispute Resolution Provision in Construction Disputes

Benjamin Pollock | King & Spalding | June 5, 2017

When parties cannot resolve a claim during a major construction project, the contracts dispute resolution provisions do not always need to read as step-by-step instructions. To the contrary, the situation may warrant a different approach that can be negotiated after the dispute arises. While agreement certainly is required to deviate from the contractual obligations which themselves reflect the parties prior and current agreement other options can be considered and proposed whenever they would be beneficial to the Project or parties needs. This article discusses alternative methods by which a resolution to a construction dispute concerning costs or delays can be found in ways not necessarily proscribed by the contracts dispute resolution provisions.

Contracts Do Not Predict Every Situation

As an initial point, by no means is this article suggesting that the contract should be ignored or disregarded. Indeed, the contract provisions should be the embodiment of the good faith negotiations of the parties, often hard-won through sophisticated bargaining. But this does not mean that one size fits all, and the individual situation and claims should be considered when an actual dispute must be managed.

This can be particularly true when circumstances change between the parties, or when the companies develop a business relationship outside of the one specific project. To be sure, the contracts dispute resolution provisions establish the original framework by which the parties are to resolve disputes arising from construction of that individual project. But the realities can change when those companies subsequently enter into additional contracts regarding multiple projects, or agree to an Operation and Maintenance Agreement that binds them to each other at the same site for multiple years following completion. Suddenly, the prospect of filing for arbitration over the one construction dispute can become a challenging or unacceptable option. Indeed, preserving the relationship and maintaining peace may prove more valuable than escalating a dispute to a jury or an independent panel. And with arbitration or litigation seen as a last-ditch option, the parties may do well to think beyond the contracts instructions in order to get the dispute resolved.

Conditions Precedent Can Be Mutually Waived or Changed

In many ways, a contracts dispute resolution provision can be seen as the designation of the ultimate deciderarbitrator, judge, or juryand a series of conditions precedent that must be followed before reaching the final stage. These conditions serve various purposes, like promoting party communication in an attempt to avoid costly litigation, or ensuring notifications are being effected internally at appropriate levels of management. These interim steps can include formal notice, a mediation or other non-binding proceeding, various waiting periods, and/or a meeting between management personnel. When a particular dispute reaches impasse, however, these actions may not always serve their intended purpose. In such scenarios, the contract provisions do not always need to be strictly adhered to, but instead should be evaluated for their perceived effectiveness under the circumstances. When it serves both parties or the Project to take different action, consider seeking a mutual agreement to waive or adjust certain of these conditions.

Take waiting periods. It is not uncommon for a contract to mandate that arbitration cannot be filed until a certain number of days after a formal notice letter is served (or other triggering event). But what if the dispute is impacting critical path activities, and a quick resolution would allow the parties to mitigate the impact or at least would provide the parties more certainty regarding the risks of a situation already affecting cost and schedule? As an initial matter, the owner may do well to instruct the contractor to continue working, or enter into a temporary agreement that maintains Project progress while the claim is addressed. But in this scenario, both parties may wish to consider waiving the required waiting period and submitting the dispute on an expedited schedule. Similarly, both sides may benefit from adding strict time limits on the selection process of nominating one arbitrator eachwho then nominate a chairpersonor even forgoing this timely process in favor of selecting a single fact-finder.

Another example is mandatory meetings between managers. Sometimes it may be patently obvious that certain disputes will not be resolved at such meetings. Perhaps the representatives designated by the contract have personality conflicts, the parties positions are extreme and irreconcilable, or the contemplated meeting would present other challenges that may actually exacerbate the situation. If the parties are entrenched in their positions, more might be at stake than a waste of time and resources: ill will can result if one party believes the other is not participating in good faith. In certain circumstances, a discussion by the designated persons about the dispute can do more harm than good.

Agreeing not to hold such a meeting is an option, although generally speaking, parties engaging in discussion before launching litigation is a good thing. If the contract requirements do not create an environment for success, they can be tweaked. Notwithstanding contractual restrictions on attendees, the parties can agree to select personnel best suited to attend, usually so long as there is someone present with decision-making authority. The presence of a mediator, expert, or third party neutral to facilitate discussions and offer opinions can be considered, regardless of whether the contract requires such a presence. And rather than meeting to discuss the merits of the disputewhich likely is encapsulated already in opinionated change documentation and argumentative claims letterscommercial settlements can be discussed instead. Indeed, such proposalsbonus milestones, additional resources, overtime, changes to the payment schedule, etc.may resolve the dispute without having to discuss, much less decide, the contentious issues, and can also benefit project progress itself. In these ways, parties can still hold the required meeting but tailor it to best position themselves for success.

Conclusion

A dispute resolution provision identifies the final arbiter of a dispute and contains other requirements meant to facilitate discussion and negotiation so that litigation can be avoided. Sometimes, however, the specific provisions will not best serve those purposes. In these situations, prudent parties will study the contracts requirements but also consider options that might more effectively resolve the particular dispute at issue, get the project back on track, and improverather than harmthe business relationship. Rather than view the various required stages as items on a checklist, parties can agree to waive or alter certain provisions and thereby adopt a procedure that may better facilitate resolution the specific dispute.

Hard To Handle

Brian L. Hill | Construction Law Musings | June 30, 2017

For the better part of twenty years, I’ve had a front row seat to over 1,000 construction lawsuits, claims and other disputes. Whether it is allegations over defective design, manufacture or installation, or claims of delay or cost overruns, or related to injuries, death, or even diminished value, there are some clear trends and patterns that have emerged over the years. The past decade in particular has seen sweeping changes to the nature of construction claims and disputes, and as a result, many veterans in the legal, insurance claims and expert services arena have struggled to adapt.

In this article, I will share some of the trends and insight I have picked up on from working with some of the top professionals in the industry when it comes to handling the increasingly complex nature of construction claims and disputes.

Single-family residential lawsuits involving dozens or hundreds of homeowners in a single tract, which at one point represented the bulk of claims in terms of both quantity and dollar value, are much more rare than ever before. The answer to why that is should be readily apparent to most: America’s home building productivity screeched to a halt during the recession and has yet to resume to previous levels. Similarly, condominium and other multifamily for sale projects just haven’t been in vogue for a decade, so we don’t see nearly as many lawsuits and claims involving homeowner associations as we used to.

Apartments, hotels, schools (K–12, and higher ed), governmental facilities, medical facilities, office buildings, skilled nursing and assisted living facilities, and other nonresidential projects are examples of the types of projects that are involved in disputes more often in recent history. Looking at that list, a common theme emerges — these are all more complex project types.

Not only that, but the stakeholders involved in these types of claims tend to have a lot more at stake, in addition to having the resources to retain top representation. The stakeholders themselves are more complex, often with sophisticated organizational structures, sometimes even involving foreign entities. For instance, one trend that insurance carriers are reporting is that more and more claims are coming forward on projects involving EB–5 Visa money.

Since insurance carriers are the entities that most often end up funding various claims, disputes and their ultimate resolution, you can be sure that insurance policy language is evolving in response to the new trends as well. Unfortunately, this means that the already high self-insured retention (SIR) requirements of many policies is only getting higher. (In case you don’t know, the SIR is like a deductible in that as an insured, your coverage doesn’t kick in until you’ve satisfied the SIR. Some publicly held builders have SIRs of $10-million.)

Because of the high SIRs, claims adjusters rarely have much if any involvement in a claim’s early stages, when early resolution is most beneficial to all parties. Another factor complicating the insurance coverage issue in today’s construction claims world is that even with the high SIRs, unless an actual lawsuit is filed, there may not be a claim for the carrier to respond to. That is a situation that can occur in an active construction project where a claim exists in absence of filing suit, or — in an increasingly common scenario — in a state where “right to repair” laws require certain criteria be met prior to actually filing a lawsuit that would trigger coverage.

The other “gotcha” that comes with the right to repair laws is that it can be extremely difficult to obtain a full release of liability in return for making repairs. Plaintiff counsel are reluctant to grant full release unless both the repair methodology and scope meets their experts’ requirements. In response, defense counsel are often reluctant to recommend their clients undertake repairs, congnizant of the additional risk that may result, without any guarantee of release of future liability.

How Best to Manage Complex Construction Claims and Disputes?

The increasingly complex nature of modern construction claims and disputes demand a completely different skill set and level of analysis in order to achieve resolution. That applies not only to the legal team, but also to the designated team of technical experts required to make sense of various claims.

With regards to the legal team, multiple layers of representation are often required, and that goes for both the plaintiffs, defendants and cross defendants. Sure, a solid understanding of contracts and construction practices is an obvious prerequisite. But you’ll also need someone on the team that has intimate knowledge of your state’s applicable legislation and case law as it applies to design and construction.

An essential resource that is needed on most cases I’ve been involved with is coverage counsel — an expert on your state’s insurance coverage policies and interpretations, with real world experience litigating such issues. One piece of advice I hear frequently is to also make sure that you have a strong line of communication with key decision makers for the parties you are representing and make sure those decision makers show up when required. (Too many cases drag on, with millions of costs/fees wasted, all because a representative of the carrier with proper signing authority failed to show up to a mandatory settlement conference, for example.)

Another critical aspect to managing complex claims and disputes is having the right technical experts, consultants and specialists on hand, as needed. Sometimes the choice of what type of expert is obvious, but not always. For example, if you are representing the architect or engineer, you obviously want an expert on standard of care for that profession, but you might also want to consider bringing in an expert on construction management standard of care to evaluate the design professional’s relationship with the rest of the team. You also need specialty experts, available on an as-needed basis, to answer the specific highly technical issues that will inevitably come up during the process.

Economic loss is often barred as a cause of action in claims involving one’s personal residence, but as more nonresidential projects end in dispute, the possibility of economic loss may become a factor. We’ve seen this come up in delay claims more commonly in recent years. Having an economic loss expert, in addition to an expert on estimated construction costs, has proven invaluable in some of those situations.

Of course there are some other economic realities that need to be considered when handling complex construction claims and disputes, such as the cost of these wonderful legal and technical experts that have now become critical. Whether you are working on behalf of the owners, the designers, the contractors, or some other party, the more manageable the costs, the happier your client will be, and the more likely you’ll get future assignments and referrals.

The biggest cost factor by far that we see in today’s claims and litigation world involving the built environment is dealing with the massive volume of evidence. In a single family home tract, besides the drawings and subcontracts, you aren’t going to typically find too much data to go through. On a $125-million mixed-use high rise however, you could easily find yourself with hundreds of thousands of documents. What’s worse is that those documents might be in hard copy spread amongst dozens and dozens of bankers boxes, or scanned into massive monolithic PDFs each containing thousands of pages, or even scanned into individual files per each page. And of course rarely are any of these document repositories ever well organized. The key is to retain a consultant or expert on document management to reduce wasted and duplicative effort on the part of your entire team.

What you don’t want to have happen is to have one of your experts miss a critical piece of evidence because they either weren’t provided with the document (in an attempt to reduce costs) or worse, because nobody knew the document existed. Having the right document on hand, at just the right moment, has been decisive in many cases I’ve worked on over the years. A six-figure cost for document management isn’t unwarranted in a high-stakes, bet-the-company claim when tens of millions of dollars are at stake.

Perhaps the most important factor in reducing the incredible cost of today’s complex construction claims and disputes comes down to plain old good project management. No one single person or even party can handle 100% of a complex claim. It is a collaboration between multiple lawyers, their staff, experts, consultants and others. Just like on an actual construction project, communication is key. Maintaining strict protocols for communication to ensure that what’s privileged remains so, while keeping everyone informed of what they need to know, is a dance that is not for the faint of heart.

What’s Next?

Just as the design and construction of the built environment has evolved greatly over the past several decades, so too has the handling of the claims and disputes associated with it. Two decades ago when I first started out in forensics, we took pictures on actual film, took notes using paper on clipboards, and stored our project case files in so many three-ring binders. Nowadays, we use digital cameras and tablets, and have terabytes of data stored in secure encrypted private clouds.

Some of the upcoming trends I see:

  • An increasing percentage of claims will be resolved in mediation and/or alternative dispute resolution, and outside of the courtroom
  • More claims related to occupant health and indoor environmental quality can be expected
  • Failure to achieve certain sustainability goals or incentives will become a cause of action in more jurisdictions
  • Operations and maintenance of facilities will play a larger role in building performance, and will thus come into play more in future claims
  • Insurance technology, particularly enhanced through artificial intelligence, will be greatly beneficial to the carriers, less so for insureds
  • As BIM and other collaborative construction technologies become more mainstream, the need for digital forensics will become more critical in e-discovery
  • Drones, robots, LiDar, 3D scanning, Infrared, and other advanced technologies will facilitate more advanced and less costsly/risky investigations

The one key factor that I have seen proven time and time again for handling complex construction claims and disputes is agility. Bamboo’s strength comes from its flexibility. By adapting and adjusting your approach to a given situation, and perhaps most importantly, by actively listening to opposing parties, even the most complex and contentious of claims can be resolved with minimal wasted expense.

Construction Disputes Becoming Faster and Cheaper, says Report

Out-Law.com | June 22, 2017

The value of construction disputes and the time taken to resolve them have both fallen over the past year, according to the annual Global Construction Disputes report from construction consultancy company Arcadis.

The global average value of disputes dropped by $42,800,000 while the time taken fell by one month, to 14 months, the report said.

Disputes in North America tend to last the longest, at an average of 15.6 months, the report said.

Asia took the top spot from the Middle East with the highest average construction dispute value at $84 million, it said, and the UK saw a double-digit increase in both average dispute value at US$34 million and dispute duration of 12 months.

The most common cause of disputes globally was ‘failure to properly administer the contract’. This has been the most common reason for four years running, Arcadis said. It is followed by ‘poorly drafted or incomplete/unsubstantiated claims’, and ’employer, contractor or subcontractor failing to understand and/or comply with contractual obligations’.

The social infrastructure and public sectors had the most disputes, Arcadis said.

When it comes to resolving disputes, party to party negotiation remains the most popular alternative dispute resolution method.

Construction law expert Fraser McMillan of Pinsent Masons, the law firm behind Out-Law.com, who contributed to the report, said: “The report highlights the most common cause of disputes. As construction contracts become increasingly complex, the allocation of risk and the administrative requirements of these contracts are not properly appreciated by those who have to operate them, at all levels of the supply chain.  Something is being lost between the contract and the site.  Parties in the process need to find a way ensure their people get the commercial understanding they need if disputes are to be avoided.”

Avoid Policy Pitfalls and Maximize Insurance Coverage for Construction Claims

Gabrielle T. Kelly | Brouse McDowell | February 9, 2017

Insurance Companies will often raise multiple exclusions that are contained in a standard Commercial General Liability (CGL) policy to deny coverage for a claim arising from a construction project. The most frequently raised issues in construction disputes are the group of exclusions known as the “business risk” exclusions, and are designed to eliminate coverage for risks that are within the normal consequences of an insured’s business activities. Although insurers tend to cite every possible exclusion as a bar to insurance coverage for construction claims, this blog will focus on the ongoing operations exclusion and how courts have interpreted the language.

Ongoing Operations Exclusion

The ongoing operations exclusion, also referred to as the work-in-progress exclusion, states the CGL policy does not apply to property damage “to that particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the property damage arises out of those operations.” The ongoing operations exclusion is drafted in the present tense (“performing”), and applies only to property damage where construction is still in progress. Further, the exclusion applies only to “that particular part” on which the operations are actually being performed at the time of the property damage. Although this issue is heavily debated, if a contractor completed performance on one area of work, such as framing, and damaged that framing while performing other work, such as roofing, the exclusion should not apply.

Courts generally apply the ongoing operations exclusion “to bar coverage for the work being done by a contractor when claims arise at the time the work is being performed.” Erie Ins. Exchange v. Colony Dev. Corp., 2003-Ohio-7232, ¶ 73 (Franklin Cty. 2003). In Interstate Priorities v. Prasanna, Inc., 9th Dist. No. 22734, 22757, 2006-Ohio-2686, May 31, 2006), the Ohio Ninth District Court of Appeals considered the application of the ongoing operations exclusion to property damage during the building of a hotel. After first finding that the exclusion unambiguously included work performed by others on behalf of the insured (i.e. subcontractors), the court held that the insured failed to establish that the damages suffered by the third-party plaintiff were not the direct result of excavation while construction was in progress. Id. at ¶ 40. The insured asserted that the damage was covered because the contractor was on adjoining property, and not the worksite, when sand and gravel broke loose. The court rejected this argument, and ruled that the insured was not entitled to coverage since damage stemmed from property on which the contractor was still working. Id. at ¶43.

Conversely, in Beaverdam Contracting Inc. v. Erie Ins. Co., 2008-Ohio-4953, the court held that the ongoing operations exclusion did not apply when damage arises from work that is completely outside the contracted project. In that case, the insured was sued for clearing land beyond the boundaries of its customers, leaving the property of the customer’s neighbors barren of any trees or vegetation. The insurer sought to avoid its duty to defend through the ongoing operations exclusion, arguing that the insured was still performing work, even if the work had been performed on the wrong property. In rejecting this contention, the court found that the damage was not caused during the operations the insured should have been performing. Id. at ¶ 47. Moreover, the third-party plaintiffs did not allege poor workmanship—i.e. that their property had been poorly cleared of trees—but rather that the removal of vegetation was wrongful in the first instance. Id. at ¶ 48. Accordingly, the exclusion did not apply.

Insurers regularly contend that the ongoing operations exclusion prevents coverage for property damage on a construction project, because the damage began while the contractor or subcontractor was performing work on the property. However, the policyholder is not without a defense to this limitation of coverage. Policyholders can:

• Separate the project into sections to bolster a claim that the damage occurred to work already completed.

• Be clear about the scope of work that the contractor is performing.

• Remove the exclusion through an endorsement. This is the easiest way to make a finding of coverage likely, particularly if the insured is a general contractor and responsible for the completion of the whole project.

Ruling Reinforces Need to Abide by Contracts in Construction Disputes

Lindsey Thurswell Lehr | Daily Business Review | January 24, 2017

Disputes arising from construction projects are fairly common, and as a result construction contracts and Florida law feature many provisions that establish the protocols for resolving any disputes that may develop.

Strictly adhering to the modus operandi for addressing and resolving disputes that is codified in construction contracts is essential to prevailing in any resulting litigation.

The Florida Third District Court of Appeal recently reinforced the obligation of construction defect litigants to adhere to the terms of their contract, finding that property owners which forgo the contractual mechanisms for resolving disputes will not succeed in Florida’s courts.

The ruling by the Third DCA in the case of Magnum Construction Management v. City of Miami Beach relieved the contractor of liability for alleged safety concerns with a playground that it installed at the city’s South Pointe Park. The appellate panel ruled that the city did not give the contractor the opportunity to fix the purported issues with the playground as required under its contract. Instead, the court stated that the city replaced the playground in its entirety without considering that the safety concerns could have been corrected by the contractor.

The court’s decision in this case reinforces the importance of abiding by all contract terms and requirements in construction disputes. Construction contracts often allow the contractor which performed the work to have the opportunity to fix and cure any purported problems and defects. If a property owner ignores this contractual stipulation, as the city of Miami Beach appears to have done in this case, Florida’s courts are very likely to rule against them.

Speculative Damages

The Third DCA also reversed the lower court’s landscaping defects award to the city for approximately $1.3 million. The trial court had concluded that the difference between its $1.3 million award and the $3 million sought by the city constituted a betterment for aspects “which improved upon and differed significantly from the original designs and specifications in the contract documents.”

However, the Third DCA found that the city had not cited any evidence as to the value of the betterments in its remediation plan or what it would have cost to restore to the condition set under the contract. It ruled that the city’s damages were speculative because it only provided the costs associated with the planning, permitting and construction of a park that is fundamentally different from the one it contracted for with Magnum Construction, i.e. a betterment.

The panel concluded that “the trial court speculated as to the value of the betterments in the city’s remediation plan and thus speculated in its ultimate calculation of the damages owed to the city in connection with the landscaping defects in the park.” In addition to reversing the lower court’s final judgment against Magnum for the alleged playground defects, it also reversed the court’s award of damages as to the landscaping defects and remanded the case for a new trial solely on the landscaping damages.

The takeaway from this aspect of the ruling for property owners is that they must provide clear evidence to support their damages calculations, which cannot be speculative or based on the costs for improvements that will be considered betterments.

The contracts used in the construction field have been carefully honed by attorneys who focus on construction matters for generations, and they typically include detailed provisions to establish the procedures for pursuing any defect claims that may develop. As this case illustrates, strict and careful adherence to all of these contractual stipulations is critical to the success of any resulting litigation.