Rising Construction Disputes Require Improved Legal Finance

Apoorva Patel | Construction Executive

Construction disputes are famously high stakes, and the industry is currently experiencing an uptick in the value and number of disputes resulting from contractual obligations and third-party or force majeure incidents. While this is not entirely surprising given COVID-19’s disruption of global markets and supply chains, the numbers are noteworthy.

For example, in 2020 alone, the International Chamber of Commerce (ICC)—the leading institution for construction disputes, partly because its clauses feature in many FIDIC standard form contracts—registered 194 construction arbitrations, and construction disputes now comprise over 20% of the ICC caseload.

In addition to the damage to business outcomes that the underlying disputes may present, parties can quickly spend many millions on legal fees and expenses, as well as technical experts and consultants, if and when those disputes progress through the courts or arbitration. According to Norton Rose’s 2020 Global Construction Disputes Report, the average construction dispute value rose sharply from $30.7 million in 2019 to $54.26 million in 2020.

Litigants’ financial profiles may be significantly impacted by construction disputes—not only because mounting legal costs can drag down balance sheets, but also because of the risk associated with these claims, which present duration risk (given that they may take many years to resolve) and binary risk of loss. Meanwhile, pending legal claims may represent hundreds of millions (if not billions) of dollars in captive value and traditionally haven’t been counted as assets.

With so much at stake given the increasing size and scale of construction disputes, companies in the sector are well served to be fully conversant in the tools that can help them maximize the value of their legal claims. Legal finance is one such tool.

MAXIMIZING LITIGATION ASSETS

In some instances, a construction claimant may simply lack the financial resources to pursue a single, high-stakes claim. Legal finance provides parties with access to capital, without which they might not be able to pursue a fair recovery through the courts or arbitral processes. Lacking the resources to engage the very best counsel for the full duration of a dispute can put the claimant at a significant disadvantage. Legal finance removes that obstacle—without impacting control of the claim, which remains with the client.

Legal finance is equally suitable in situations where parties are facing insolvency and where they have ample resources to pay their lawyers. In many industries, companies are increasingly using legal finance by choice, not just necessity: It may simply be a more efficient way to pay for legal costs, whether for respondents or claimants.

Further, finance is particularly important to construction contractors facing disputes. In most cases, any construction company facing a dispute will not only have to absorb legal expenses in existing legal budgets but must also deal with significant resources being tied up for an indeterminate time. The level of risk in a construction dispute is very high, with significant dependencies on complex technical knowledge as well as significant expense needed to bring the matter to fruition. Finance can support in reducing or eliminating the immediate legal costs of a claim, as well as bearing some or all the risk associated with bringing the claim in the first place.

In the simplest legal finance arrangements, capital is provided up front to pay legal fees and expenses for a matter to proceed, collateralized by the pending legal claim. Generally, capital is non-recourse, not debt, meaning the construction contractor has no obligation to repay its legal finance partner if their case loses. The financer is entitled to recoup its investment and gain a return from the settlement or damages should the claim be successful. In so doing, construction companies can defray the often-significant upfront costs or downside risk of pursuing disputes.

In more complex models, the financer may provide a capital facility for multiple claims and defense matters, in an arrangement called a portfolio. Additionally, a construction company can seek to advance some of the future value of pending claims, judgments and awards. In this “monetization” scenario, the finance provider advances an often significant portion of the expected entitlement—working capital that the construction company may put to immediate use for any business need.

QUALIFYING FOR LEGAL FINANCE

Among the most important criteria to a legal finance provider considering a matter for funding is whether a construction dispute is governed by an arbitration clause of a leading arbitral institution. Typically, legal finance providers look for claims involving tried and trusted arbitral institutions.

The size of the claim is also important. Many construction arbitrations involve multi-million dollar or even billion-dollar construction projects. Matters suited for financing are high-stakes commercial cases with significant value to the business, in which damages or returns are sufficient to appropriately balance the interests of the client, lawyers and an outside financier. The amount provided by the financier (not the size of the claim) may range from as little as $1 million for a single case to as much as $100 million for a portfolio of cases.

Another important consideration is the financial solvency of the respondent. A legal finance provider must be confident that if the case is successful, the losing party is creditworthy or has sufficient assets located in a favorable jurisdiction for enforcement. Oftentimes the respondent may be a state-owned entity or a special purpose vehicle. The legal finance provider will be keenly attentive to what will be required to enforce any favorable award.

A FINANCE PARTNER

Legal finance is a fast growing industry that has attracted many new entrants to the field. Parties seeking financing should be careful to perform their own due diligence in seeking out the right fit for their business and their needs.

Companies and law firms and that work with a professional legal finance provider get more than capital: They get a long-term partner in alignment with them who is focused on maximizing the value of the claim, which is the goal of bringing the case in the first place.

Because construction disputes are complicated and time-consuming, a sophisticated finance partner is essential as they can conduct diligence in-house, provide the scale of capital needed quickly and at competitive rate and offer value-add expertise.

With that in mind, construction companies should seek arbitration finance partners with deep expertise in funding high-risk disputes. While control of strategy and settlement decisions ultimately remain with the client, working with an experienced arbitration finance partner delivers a host of other benefits, including insights on case strategy, arbitrator selection, damages methodology and judgment enforceability.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The Independent Tort Doctrine (and its Importance)

David Adelstein | Florida Construction Legal Updates

A non-construction case raises an important legal principle.  Here it is because it applies to construction disputes.  It actually applies to many business-type disputes.  It is based on what is widely referred to as the independent tort doctrine:

Florida law does not allow a party damaged by a breach of contract to recover exactly the same contract damages via a tort claim. “It is a fundamental, long-standing common law principle that a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract.  A plaintiff bringing both a breach of contract and a tort claim must allege, in addition to the breach of contract, “some other conduct amounting to an independent tort.” 

Bedoyan v. Samra, 47 Fla.L.Weekly D1955a (Fla. 3d 2022) (internal citations omitted).

The reason this principle–the independent tort doctrine–is important is because it has become common for parties to assert many causes of action against another party in the same lawsuit.  Oftentimes, they deal with the SAME damages and underlying conduct.  Sometimes, it is the “throw everything but the kitchen sink” approach.  Thus, a party may assert a contract claim (or seek contractual damages) in conjunction with numerous tort claims (e.g., negligence, fraud, negligent misrepresentation, breach of fiduciary duty, etc.).  Yet, when push comes to shove, the damages sought are no different than the contractual damages, i.e., it is all the same damages based on the same conduct.  The damages do not derive from an independent tort (e.g, separate conduct) unrelated to a contractual breach, or contractual damages.

This case of Bedoyan is an example. Here, there was a partnership dispute that was tried. The plaintiff claimed the defendant breached their oral partnership agreement and breached fiduciary duties. The trial court granted defendant’s motion for a directed verdict on plaintiff’s breach of fiduciary duty claim. The plaintiff’s breach of fiduciary duty claim “was not independent from his allegation of breach of contract; the same conduct gave rise to both. As such, there are no damages for breach of fiduciary duty separate and apart from the breach of the contract, and the trial court correctly directed a verdict against [plaintiff] on this issue.”  Bedoyan, supra.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

The Credibility of Your Expert (Including Your Delay Expert) Matters in Construction Disputes

David Adelstein | Florida Construction Legal Updates

Here is a quote from a judge in an order after the bench trial of a complex construction dispute between a prime contractor and subcontractor on a federal project:

The evidence received in this case demonstrates the dynamic nature of complicated construction projects. At every step, the details matter, and coordination and cooperation among the companies tasked with performing the job is essential. Thankfully, as even this case shows, most disagreements that arise as projects evolve are handled during construction, far away from a courthouse, by the professionals who know best how to achieve the ultimate goal of a completed project.

U.S. f/u/b/o McKenney’s, Inc. v. Leebcor Services, LLC, 2022 WL 3549980, *1 (E.D. Va. 2022).

This is a true statement.  A statement that parties should remember as they navigate the nuances of a complicated construction project and dispute.

The facts of the case, however, would hardly be construed as a win for either party. Something else for parties to consider as they navigate the nuances of a complicated construction project and dispute.

While there were many components in dispute, one component is worthy of discussion.  That is competing delay claims between the subcontractor and prime contractor.  The prime contractor claimed the subcontractor delayed the critical path.  The subcontractor claimed the prime contractor delayed the critical path.  Both parties had experts supporting their conflicting delay theories.  The question became which expert is more persuasive? Stated differently, which expert is the most credible? Perhaps neither as neither party recovered delay damages against the other.

The subcontractor’s delay expert did not appear to assign much blame to the subcontractor.  The court did not find this to be credible because the evidence demonstrated the subcontractor’s “own shortcomings consistently delayed its work and, in turn, Project completion.”  Leebcor Services, supra, at *25.  The court understood that the subcontractor needed to prove that but for the prime contractor, the subcontractor would not have completed its work late. Yet, evidence demonstrated there was deficient and untimely work performed by the subcontractor. “Because [subcontractor] failed to disentangle its evidence of alleged [prime contractor]-caused delay from delay caused by its own shortcomings, it failed to demonstrate that [prime contractor] was required under the Subcontract to adjust its fixed-price to account for [prime contractor]-caused delay.”  Leebcor Services, supra, at *26.

The court found the prime contractor’s delay expert, while maybe more credible in certain respects, was not more convincing.  For instance, during a period of time, the court found that while the subcontractor may have been behind schedule, “[prime contractor] has failed to demonstrate by a preponderance of evidence that delays to the Project arising during this period are attributable to [subcontractor’s] failure to timely complete [the scheduled activity].  This is because the court concludes that other activities outside of [subcontractor’s] scope of work were delaying the completion of successor activities.”  Leebcor Services, supra, at *28.  In another instance, the court found that “concurrent issues within [prime contractor’s] control also delayed them, and no evidence was offered that would permit the court to disentangle [subcontractor’s] deficiencies from those attributable to [prime contractor].”  Id. at *29.

Remember, many construction disputes require expert witnesses including delay experts.  The expert needs to carry the day on an issue.  To do this, the expert needs to be credible and persuasive.  This case demonstrates why this should not be overstated and why, even with experts, a trier of fact may still find that neither carry the day.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Can I be Required to Mediate, Arbitrate or Litigate a California Construction Dispute in Some Other State?

William L. Porter | Porter Law Group

It is not uncommon in the construction industry for an out-of-state general contractor to include a provision in a subcontract requiring a California subcontractor to resolve disputes outside the state of California, even though the work is to be performed within California. Fortunately, most California subcontractors are immune from this tactic. California law generally prohibits clauses requiring subcontractors to travel outside California to resolve construction disputes.

California Code of Civil Procedure Section 410.42, [CCP 410.42 Link] renders “void and unenforceable,” any provision in a contract that “purports to require any dispute to be litigated, arbitrated, or otherwise determined outside this state,” so long as the contract is “between the contractor and a subcontractor with principal offices in the state, for the construction of a public or private work of improvement in this state.” Similarly, this law voids any similar contractual term that might prevent the California subcontractor from commencing an action, obtaining a judgment, or resolving its dispute in the courts of California.

The Third Appellate District of the California Court of Appeal has provided the only published opinion that analyzes and applies Section 410.42. In the case of Dick Emard Electric, Inc. v. Templeton Development Corp., (2006) 144 Cal. App. 4th 1073, Emard sued Templeton and various other parties in California for breach of contract and foreclosure of a mechanics’ lien after Templeton failed to pay Emard for the labor, services, materials, and equipment supplied by Emard pursuant to the contract, which was performed in California. Templeton unsuccessfully moved to dismiss the lawsuit, arguing that Emard must mediate before filing suit and that any mediation or lawsuit must take place in Las Vegas, Nevada, pursuant to the contract. Prior to Templeton’s Motion, Emard offered to mediate in California, pursuant to Section 410.42. Templeton refused the offer.

The Appellate Court ruled that Section 410.42 dictates that the out-of-state mediation provision was unenforceable and that Emard fulfilled any mediation requirement by offering to mediate in California instead of Las Vegas. Templeton filed a petition for a writ of mandate with the Third Appellate District seeking to have the decision set aside, in part because Section 410.42 does not specifically mention “mediation.” The Appellate Court upheld the prior ruling, determining that the phrase “or otherwise determined,” includes mediation. The Court published its opinion, establishing a legal precedent for future California cases.

The out of state forum selection clause seems a daunting hurdle to a subcontractor contemplating whether to enter into a subcontract where it would appear that the subcontractor could only enforce its rights by traveling out of state. The prospect of bringing witnesses and legal counsel to another state sets an unequal bargaining position from the outset. Fortunately, CCP Section 410.42, and the Emard case avoid the prospect of dragging California subcontractors to another state to resolve their dispute.

As a final bit of advice, when subcontracts contain a provision that would force a California construction dispute between a contractor and subcontractor to be mediated, arbitrated or litigated in another state, be sure to consider the impact of the Federal Arbitration Act, 9 U.S.C., §1, et seq. (“FAA”). To avoid any confusion, and to keep the dispute resolution process within California, be sure that the agreement also unambiguously states that California procedural and substantive law will govern the agreement rather than the provisions of the Federal Arbitration Act.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

“That’s a Wrap!” How Wrap-Up Insurance Policies Have Streamlined Construction Defect Litigation

Michael P. Zech | Koeller Nebeker Carlson & Haluck

Construction defect litigation was traditionally slow-moving, contentious, and costly for several reasons.

First, the sheer number of parties—the property owner, the general contractor, and many subcontractors—typically involved in the litigation made prompt and efficient resolution difficult.  With so many parties having various interests that sometimes aligned with but frequently diverged from other parties’ interests, it was difficult to quickly come to a resolution that all the parties and their lawyers could agree on.

Second, emotions frequently came to a head.  The owner might have felt betrayed by the general contractor.  The general contractor might have been angry that its workmanship was being called into question and felt betrayed by its subcontractors whose workmanship might have been shoddy.  And the subcontractors, many of whom likely had smaller operations, might have been angry their workmanship was being called into question but also terrified that a key business relationship with the contractor could be irreparably damaged and, perhaps, cause them to go out of business.

Add in the occasional lack of contractual formalities between the parties, lawyers who were involved in the litigation but who rarely practiced construction law, “Right to Repair” laws that were often flouted by litigants and their lawyers, and the various insurance policies held by the litigants that might come into play, and you had all the trappings of a complicated—and messy—litigation.  With litigation already a costly proposition, a complicated and protracted construction defect dispute could have long-term effects on litigants’ finances and ongoing operations.

But today, thanks to the prevalence of wrap-up insurance policies, most construction defect disputes proceed in a more streamlined fashion than disputes of days past, allowing the parties to resolve their disputes quicker and cheaper.  By providing a unified and fixed pool of money to litigants with which to fund the litigation and any resolution of it, wrap-up insurance policies have changed litigants’ strategies and behaviors.  Simply stated, there’s nothing they can do to increase the amount of money available to them to fund or resolve a case.  These altered strategies and behaviors manifest in several ways, all of which have helped to streamline the construction defect litigation process.

This article discusses four ways wrap-up insurance policies have improved the construction defect litigation process by streamlining it.

A wrap-up insurance primer

Before examining how wrap-up insurance policies have streamlined construction defect litigation, a brief overview of wrap-up insurance is in order.

Wrap-up insurance refers to centralized insurance programs that can cover a property owner, a general contractor, and subcontractors under a single insurance policy.  Such policies gained popularity in the mid to late 1990s and have since become increasingly common, if not the norm.  They came about because of the outrageous cost of construction defect litigation and the difficulties many subcontractors had securing the right type and amount of insurance before being able to work on a job.  Wrap-up policies are commonly used for large single site projects but can be adapted to insure multiple projects under a single program.

The programs typically come in one of two forms.  In an owner-controlled insurance program (“OCIP”), the owner sponsors and controls the program and is the first named insured.  Other parties, like the general contractor and subcontractors, are also named insureds.  In a contractor-controlled insurance program (“CCIP”), the general contractor sponsors and controls the program and is the first named insured.  Subcontractors and other parties are often named insureds, but the owner could be an additional insured or a named insured.

Though conceptually simple, wrap-up insurance has changed the face of construction defect litigation when the parties are covered by such policies.

Wrap-up insurance reduces the claims filed in construction defect litigation

One way that wrap-up insurance has streamlined construction defect litigation is by reducing the number of claims filed by the parties.  The litigation process can proceed faster because fewer claims need to be disputed, litigated, and resolved.

In construction defect litigation without wrap-up insurance, a general contractor would typically want to bring in as many subcontractors as co-defendants/cross-defendants as it could based on the plaintiff’s claims.  Many of these subcontractors—but usually not all of them—would have their own insurance policies that could have contributed money towards a settlement of the case and allowed general contractors to minimize or eliminate their potential legal liability and financial contributions towards a global settlement if they could show these additional defendants were liable for the defects at issue.  With these additional claims came more lawyers causing friction and racking up fees, more squabbles, and more finger-pointing.

In litigation where there is wrap-up insurance, these additional claims are usually unnecessary.  With a unified pool of insurance, there need only be one named defendant: the builder/general contractor.  Armed with an insurance policy that covers themselves and all or most of their subcontractors, the builder/general contractor has no reason to bring its enrolled subcontractors into the case.  It doesn’t have to expand the pool of insurance money available, nor does it need to seek indemnity or a defense from its subcontractors.  With fewer parties to the litigation thanks to fewer indemnity and cross-claims being asserted, and fewer lawyers involved, the litigation can proceed faster.

Wrap-up insurance changes the insurance coverage landscape

Another way wrap-up insurance has streamlined construction defect litigation is by changing the insurance coverage landscape.

When working on projects without wrap-up insurance, general contractors would require subcontractors to maintain certain levels of commercial general liability (CGL), workers’ compensation, and auto liability insurance.  Additionally, general contractors would require subcontractors to insure them as additional insureds under those policies.  As a result, the general contractors’ cost of defending themselves in construction defect litigation regarding those projects would be paid, in whole or in part, by those subcontractors’ policies.  Small subcontractors might have had trouble qualifying for, or affording, the levels of insurance required by general contractors.  This could have caused them to miss out on working on jobs or left them exposed to having to self-fund the cost of defense or their share of a settlement.  For those subcontractors who had the required insurance, their insurance companies’ lawyers would likely be actively involved in the litigation in one way or another, creating perhaps another roadblock on the way to promptly resolving the litigation.

With projects that have wrap-up insurance, defense costs and settlements are paid for by one insurance carrier.  Subcontractors do not have to carry the levels of insurance that would be required of them if there was not wrap-up insurance.  This allows them to work on a job at a lower cost to them than if they had to carry those levels of insurance.  But more importantly, with wrap-up insurance policies, there are fewer insurance companies—usually only one—that need to be involved in the litigation and in settlement negotiations.  This helps streamline the litigation.

Wrap-up insurance reins in the discovery process

In most types of litigation, the discovery process is the costliest phase thanks to the time and resources needed to request, review, and produce relevant information and documents, and to take and defend depositions.  While wrap-up insurance doesn’t eliminate the cost of discovery in construction defect litigation, it can reduce it dramatically.

In construction defect cases without wrap-up insurance, the discovery process would often quickly spiral out of control.  Even though judges issue case management orders to keep the discovery process from going off the rails, with so many parties to a litigation, discovery would more closely resemble herding cats.  At any one time, there could have been dozens of outstanding (and duplicative) information and document requests, notices of depositions, and motions arising from both.

Because the parties might have had unique records regarding the work they did on a project, even a relatively small construction defect case could have seen thousands of documents exchanged during discovery—all of which would have needed to be reviewed by each party’s counsel, many of which might have had no bearing on the case.  Making matters worse, small subcontractors with limited resources may have been represented by lawyers lacking in construction litigation experience. Without such experience, a lawyer might have engaged in common business litigation strategies that are rarely employed in construction defect litigation, such as protracted discovery and motions practice.  These strategies were expensive and time consuming for both a court and the parties.

Wrap-up insurance streamlines the discovery process and promotes judicial efficiency.  First, case management orders are simpler and more efficient when there are only two parties to the case—the plaintiff owner and the builder/general contractor.  This means there will be just two sets of experts, two witness lists, and two parties litigating discovery disputes.  Second, when there is a single insurance policy or set of policies at issue, the parties can avoid extensive discovery into which parties are covered by what insurance and who is obligated to defend and indemnify whom.

Wrap-up insurance shortens the time required to resolve a construction defect case

Given the complexity of the typical construction defect case (for the reasons mentioned throughout this article), it is not surprising that these cases were rarely resolved promptly.  Wrap-up insurance has changed this aspect of these cases as well.

Wrap-up insurance reduces the time it takes for the parties to resolve a construction defect case because there are fewer moving parts.  Gone are the days of protracted settlement negotiations and serial mediations involving a multitude of parties and their insurance carrier(s) all jockeying to minimize their respective contributions towards a global settlement of the plaintiff owner’s claims.  More often than not, wrap-up insurance helps cull those negotiations down to the owner, the builder/general contractor, and the wrap-up insurer.  The latter is particularly motivated to convince the parties to resolve their case as soon as possible to reduce the amount of legal fees that will be incurred and it will have to pay for.

In addition, when there is wrap-up insurance, a construction defect case is more likely to be resolved during the pre-litigation process.  Many states have enacted “Right to Repair” laws that require those that would be parties to a construction defect case to first engage in a prelitigation process that provides an opportunity for an early resolution of the dispute without the parties ever having to see the inside of a courtroom.  However, the difficulty with those processes is that, absent an ongoing relationship between the builder/general contractor and the subcontractors, there is frequently little incentive for the subcontractors to willingly and actively participate in the “Right to Repair” process.  Indeed, builders/general contractors would often resort to litigation to force the subcontractors to take an owner’s claims seriously during the pre-litigation process and to enforce their contractual and indemnity rights.  But with wrap-up insurance, such actions are unnecessary.  Because the insurance policy covers subcontractors, they do not necessarily need to be involved in a claim during the pre-litigation process or need to be part of the settlement negotiations.  This helps move the resolution process along faster than in a traditional construction defect case without wrap-up insurance.

Will wrap-up insurance become the norm for the construction industry?

Wrap-up insurance policies streamline the often-messy world of construction defect litigation. By limiting the number of parties in a construction defect case, simplifying the question of insurance coverage, turning down the heat during the discovery phase, and shortening the time it takes to resolve such a case, wrap-up insurance has helped countless owners, general contractors, and subcontractors alike reduce the legal uncertainty and costs involved in such cases.

An owner or contractor wishing to purchase wrap-up insurance coverage for a project will need to consider several factors before making a final decision, most of which revolve around their business practices and the project at issue.  But if there is a concern about the costs—both in time and money—associated with a potential construction defect lawsuit arising from a project, a wrap-up insurance policy would go a long way in alleviating it.


When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.