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.

Construction Disputes and ‘Baseball’ Arbitration

Charles Jeremiah | Jackson Lewis

A form of dispute resolution called “baseball” arbitration has increased in use and popularity in the construction industry to resolve all types of disputes, including employment disputes. The procedure has unique mechanisms that may be beneficial to construction industry employers in resolving disputes.

Basics

While long-used successfully in salary negotiations in major league baseball, baseball arbitration is not limited to salary negotiations or major league sports.

In baseball arbitration, the pre-arbitration proceedings and arbitration hearing itself are not necessarily any different than any standard arbitration. However, in this type of arbitration, each party submits a proposed award — a single figure — to the arbitrator. The arbitrator must select one of the two numbers submitted, period. There is no middle ground. This strict requirement creates an interesting dynamic, with heightened pressure on the parties to objectively take stock of their respective positions, be as reasonable as possible, and be able to justify their proposal.

Benefits of Baseball Arbitration

A compelling reason behind the use of baseball arbitration is that, all too often, arbitrators are at least perceived to render a compromised award by “splitting the baby.” This can be detrimental to parties who, in fact, are reasonable in their view of a claim’s value, but far from their opponent’s estimation.

Baseball arbitration forces the parties to focus on what relief they genuinely and realistically believe they are entitled to and, accordingly, can increase the efficiency of the process while creating pressure to promote a just (and, perhaps, agreed) resolution.

How to Implement Baseball Arbitration

Baseball arbitration is a creature of contract. It could be embodied in a two-party employee arbitration agreement or a collective bargaining agreement.

The American Arbitration Association, the International Centre for Dispute Resolution, and independent arbitrators have recognized and honored baseball arbitration contract provisions. See, e.g., ICDR Final Offer Arbitration Supplementary Rules at icdr.org.

While arbitration awards rarely are subject to court review (absent limited circumstances of impropriety), baseball arbitration provisions have been acknowledged and enforced by various courts over the years. See, e.g., Martin Marietta Materials, Inc. v. Bank of Okla., 2007 WL 3171533 (W.D. Ky. Oct. 25, 2007).

Baseball arbitration may not be well-suited to complex contractual disputes involving multiple claims between multiple parties and varied types of relief (e.g., specific performance). It may be a best fit for employment disputes, which typically involve two parties — employer and employee — and a discrete claim for damages.

Within the framework, there are many ways to structure a baseball arbitration provision to vary the timing and disclosure of offers by the parties and the rendition of the award. For example, a variation called “night baseball arbitration” provides that the arbitrator renders the award without being informed of the written proposals. Then, the award is modified to conform to the closest of the proposals. Indeed, care should be taken to address the details of the process in such agreements. However structured, this device creates pressure that often leads to a negotiated, amicable resolution before the parties spend resources trying the case.


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.

Death, Taxes and Attorneys’ Fees in Construction Disputes

Garret Murai | California Construction Law Blog

According to Benjamin Franklin there are two certainties in this world: Death and taxes. Let me humbly add a third if you’re ever involved in non-contingency civil litigation: Attorneys’ fees.

As such, when it comes to legal disputes, sophisticated parties know that it’s not just about winning but the cost of winning. While winning is never certain – remember Poor Richard’s proverb above –  what is certain is that it will most likely cost you to find out whether you’ve won or lost. That’s why the ability to recover (or at least threaten the recovery of attorneys’ fees – that’s a separate discussion altogether) in litigation and arbitration is so important.

A few facts:

  • According to the National Center for State Courts (NCSC) in their 2013 report, Measuring the Cost of Civil Litigation: Findings From a Survey of Trial Lawyers, the median cost of litigation (i.e., attorneys’ fees) for contract disputes, of which most construction disputes would fall under, was $90,575 from case initiation through post-trial disposition.
  • The NCSC survey was conducted in 2013. Adjusting for inflation, the median cost of litigation would be nearly $115,000 in 2022.
  • Further, attorneys responding to the NCSC survey were from across the U.S. According to Clio in its 2021 Legal Trends Report, California attorneys have the fourth highest average hourly rates in the nation behind Washington, D.C., Delaware, and New York. Adjusted by state, the median cost of litigating a construction dispute in California in 2022 is approximately $135,000.

In short, even if you win, and there’s no guarantee that you will win, the mere cost of litigation can comprise a large portion of or even exceed the amount in dispute. Thus, while most cases settle before trial – According to the California Judicial Council’s 2021 Court Statistics Report, 80% of unlimited civil cases (i.e., cases involving claims over $25,000) are resolved prior to trial – it is important to know from the outset whether you would be entitled to recover your attorneys’ fees if you do win.

So, are you entitled to recover your attorneys’ fees in a construction dispute? It depends. And here, it’s important to understand the difference between “the American Rule” and “the English Rule.”

The American Rule vs. The English Rule

Under the English Rule, the losing party in litigation is required to pay the winning party’s attorneys’ fees.

Under the American Rule, each party must pay its attorneys’ fees whether they win or lose, except if provided otherwise by statute or contract.

Among legal scholars there’s debate about how and why “the English Rule” and “the American Rule” were developed. However, we’ll leave that discussion to the academics on either side of the Atlantic. What’s more important for purposes of this discussion is when a party can recover their attorneys’ fees in a construction dispute.

And that’s where the exception noted above takes on vital importance. Under the American Rule each party must pay their own attorneys’ fees whether they win or lose, except if provided otherwise by statute or contract. So under what statutes and under what contracts can a winning party recover their attorneys’ fees in a construction dispute?

Statutes and Contracts in Which Attorneys’ Fees are Recoverable by the Winning Party

Attorneys’ Fees Recoverable Under Contracts

We’ll start with contracts. First, parties to a contract can, with certain exceptions, agree to anything they wish in a contract. This includes the recovery of attorneys’ fees in the event of a dispute. A typical provision in a design or construction contract providing for the recovery of attorneys’ fee might read as follows:

Should any dispute arise relating to the work under this Contract, the prevailing party shall be entitled to recover its attorneys’ fees.

This is a rather straightforward example and there can be numerous variations. Some variations will provide for the recovery of attorneys’ fees arising from disputes relating to the work to be performed under the contract or to disputes concerning the terms of the contract itself. Other variations will cap attorneys’ fees to a certain dollar amount, to a “reasonable” dollar amount to be determined by a judge, jury, or arbitrator, or include no limitation at all and allow a party to recover all attorneys’ fees “actually incurred.”

One variation that is generally not allowed however is recovery of attorneys’ fees by one party alone. For example, in a construction contract between a general contractor and subcontractor (and, obviously, one drafted by the general contractor or its attorney), the general contractor might include a provision providing that in the event of a dispute only the general contractor is entitled to recover its attorneys’ fees but not the subcontractor. Civil Code section 1717 makes such provisions “reciprocal,” meaning that if the subcontractor prevails, the subcontractor would be entitled to recover its attorneys’ fees against the general contractor as well.

Attorneys’ Fees Recoverable in Arbitration: A Potential Trap for the Unwary

It is not unusual for design and construction contracts to provide that disputes be resolved through arbitration. In California, parties will often specify the arbitration provider and the specific rules that will govern disputes to be resolved through arbitration. A typical provision might read as follows:

Should any dispute arise relating to the work under this Contract, the parties agree to resolve the dispute  through the American Arbitration Association (AAA) under the AAA’s Construction Industry Arbitration Rules and Mediation Procedures.

The two most common arbitration providers in California are the American Arbitration Association (AAA) and JAMS. In Southern California, parties also use the Arbitration Mediation Conciliation Center (AMCC) in addition to AAA and JAMS.

A trap for the unwary is AAA’s arbitration rules. Under AAA’s arbitration rules, including its Construction Industry Arbitration Rules and Mediation Procedures, an arbitrator may award attorneys’ fees if: (1) all parties have requested such an award; (2) if it is authorized by law; or (3) if it is provided for in the parties’ arbitration agreement.

Many parties, including their counsel, will reflexively request attorneys’ fees in arbitration and litigation without consideration of whether there is an attorneys’ fee provision in the parties’ contract. Under the AAA’s rules, because an arbitrator can award attorneys’ fees if “all parties have requested such an award,” a party may inadvertently trigger recovery of attorneys’ fees even though the parties’ contract does not include an attorneys’ fee provision.

Attorneys’ Fees Recoverable Under Statute

Attorneys’ fees are also recoverable if provided for under statute. There are three common statutes in which construction claims are brought in which the underlying statute provides for the recovery of attorneys’ fees. The first is stop payment notice claims. Civil Code section 8558 provides for the recovery of attorneys’ fees in a stop payment notice action on private works projects.

The second is payment bond claims. Civil Code section 9564 provides for the recovery attorneys’ fees in a payment bond action on public works projects. A party may also recover attorneys’ fees if provided for under the terms of a bond on a private works project.

Finally, attorneys’ fees are recoverable on certain prompt payment penalty claims. Civil Code sections 3320, 3321, 8800 and 8818, Business and Professions Code section 7108.5, and Public Contract Code section 10262.5 provide for the recovery of attorneys’ fees in prompt payment penalty claims on private works projects and certain public works projects.

Attorneys’ Fees Recoverable in Discovery: Another Potential Trap for the Unwary

Attorneys’ fees can also be recovered through discovery. Specifically, requests for admissions served while a case is in litigation or arbitration. A request for admission is a discovery tool in which a party requests that another party “admit” to the truth to certain facts or documents. An example might be:

Admit that you were paid in full by the Owner for Subcontractor’s Pay Application No. 1

If this was discovery served by a subcontractor to a general contractor and the general contractor denies that it was paid by the owner for the subcontractor’s pay application no. 1, and this turns out not to be true, the subcontractor or its counsel can request that the court award the subcontractor its attorneys’ fees in proving the truth of the matter asserted.

Specifically, Code of Civil Procedure section 2033.420 provides:

(a) If a party fails to admit the genuineness of any document or the truth of any matter when requested to do so under this chapter, and if the party requesting that admission thereafter proves the genuineness of that document or the truth of that matter, the party requesting the admission may move the court for an order requiring the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney’s fees.

(b) The court shall make this order unless it finds any of the following:

(1) An objection to the request was sustained or a response to it was waived under Section 2033.290.

(2) The admission sought was of no substantial importance.

(3) The party failing to make the admission had reasonable ground to believe that that party would prevail on the matter.

(4) There was other good reason for the failure to admit.

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.