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Prepare for Construction Disputes by Planning Resolution Strategies Beforehand

Business

Litigation is a frightening word to many in the construction industry. Construction litigation is incredibly confusing, with seemingly few solid answers to setting targeted goals, limits and expectations.

Even in cases in which a party has filed a valid mechanic’s lien, it is not uncommon for attorneys to struggle to sufficiently advise a client or potential client about the expected costs and presumed length of a legal proceeding – not because they are a poor attorney, but simply because there is absolutely no way of knowing what might come up during the legal process.

The nature of a lawsuit depends upon several factors: the parties involved, the extent of the claimed damage, the willingness or ability to settle, the requirements of outside contracts, the delays it may cause, the ability to afford legal representation and more. There are just too many pieces to be able to accurately predict the time and expense of litigation in all but a small minority of cases.

Since many lawsuits arise from disputes that occur during the project itself (as opposed to after the project has ended), and because it is often difficult to predict other parties’ willingness to go the distance with a proceeding, there are several risk factors that need to be examined:

  • Is it worth the risk to lose financing?
  • Is it worth the risk to potentially derail the project?
  • Is it worth the possibility of alienating customers?
  • Is it worth the costs of obtaining adequate legal assistance?

While the answers to the above questions change on a situation-by-situation basis, it is always a good idea to streamline the process and have a dispute resolution process or plan in mind for each job, contractor or customer.

It’s also important to note that a project participant’s desired dispute resolution process can depend not only on the other party involved, but also, potentially, the point on the project timeline when the dispute occurs. In an effort to minimally disrupt the project and payment chain, it may be a good idea to attempt to contract for immediate mediation of change orders (or similar issues) for price resolution, but to utilize binding arbitration for disputes arising out of final payment. Since having these determinations set in advance can vastly streamline the process, every detail of these dispute resolution mechanisms should be addressed during the contracting period, before the actual work on the project even starts.

There is an additional wrinkle that construction companies need to consider when deciding whether to introduce arbitration clauses for dispute resolution. To put it lightly, the intersection of arbitration clauses and mechanics’ liens can be a mess. Alternative dispute resolution (ADR) mechanisms can sometimes be at odds with mechanic’s lien statutes or processes.

Simply put, the origin of the discrepancy between mechanics’ liens and alternative dispute proceedings is this: arbitration or other ADR processes are creatures of contract and mechanics’ liens are creatures of statute. In most cases, these statutes give the mechanic’s lien claimant rights against parties who they have not contracted with. This can cause ADR problems.

For example, consider a construction project in which no one has a duty to arbitrate. If a supplier to a subcontractor files a mechanic’s lien and needs to enforce it, the supplier will file suit against all parties up-the-chain. This means that the case will end up as: supplier v. subcontractor, prime and owner. The subcontractor will sue the prime in that proceeding, the prime will sue the owner, and so on.

However, if an arbitration agreement comes into play, the proceedings can get messy. Say the owner and the prime do not have an arbitration clause, but the sub and the prime do. In this case, the supplier will sue the subcontractor in court, but the subcontractor must initiate an arbitration proceeding against the prime, and the prime and owner will be in court. The subcontractor and prime contractor will end up with two proceedings (the arbitration and the court proceeding) instead of one, and the judgment in one may be inconsistent with the judgment in another. While this is a thorny issue, a potentially more important issue is whether an arbitrator has the rights or power to determine the validity of a mechanic’s lien at all. In some jurisdictions this is clearly the case, and in others it is not. This legal conundrum can lead to more issues.

While everybody should aim for the unicorn project with no delays and disputes, the fact of the matter is that disputes will occasionally arise that require some sort of resolution that involves outside parties. While any method of resolution can be messy, the more thought that is put into preparing and streamlining the process beforehand, the better the likely outcome and quicker the likely resolution.

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