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Although watching Better Call Saul, Judge Judy, Perry Mason or other courtroom dramas on TV may be entertaining for some people, these shows do a poor job of showing contractors what to expect if they get involved with the legal system. What is it really like? In a word, expensive! Add to this the value of your lost work and mental anguish (ordinarily not compensable, even if you win) and litigation is terribly costly — in terms of time, stress, and money.
The best legal advice you’ll ever be given is to implement a few basic procedures in your business that will help keep you out of disputes and out of court. In fact, your goal I’m sure it to avoid getting into any legal disputes at all — large or small. There are many different approaches to home building and remodeling. Many different contingencies can arise. Murphy’s Law can visit the project in ways you’ve never imagined. The variations are endless, and I never cease to be amazed by this fact.
The technical complexities of construction coupled with the uncertainties of the personal and business relationships between the owner, building department, design professionals, and builder throughout a lengthy project provide fertile ground for many kinds of disputes.
It’s no secret that disputes drain valuable time and money from your company and even from your personal life. Disputes keep you from enjoying your work. Disputes take away from the time you spend with your family or on your favorite pastime. In fact, a large dispute may temporarily make you question your sanity for having ever picked up a hammer and a circular saw in the first place. Without a doubt, the smart money is spent on implementing reasonable and practical procedures to prevent disputes.
With residential construction, the basis for many disputes lies in the unknown. The contractor doesn’t know how the owner will react to certain events should they arise on the job, and the same is often even more true for the owner. As the owners see their house torn apart —particularly on a large remodel — they experience inconvenience and stress. At the point when their “castle” seems to be in a state of complete chaos, they are apt to have questions, concerns, and expectations about your performance that they could never have anticipated at the outset.
Both the contractor and the owner typically have such unexpressed expectations, most of which they aren’t even aware of until a particular situation or contingency arises. Then, once such a situation arises, the owner and contractor may suddenly find they have completely opposing ideas about the “correct” way to settle the matter. Right at this point, you have what I think is the basis for at least 75% of the disputes in this business — disagreements based on unexpressed expectations due to a lack of written communication. Fault can be argued about endlessly and at tremendous expense. But, right now, ask yourself, who’s in a better position to inform the other about what to expect? The contractor or the owner? Obviously, it’s the contractor.
What can you do to keep these unexpressed expectations from turning a good job into one you’ll regret ever having taken? The key is to do a better job of telling the owner what to expect! Prior to signing a contract, draw from your experiences, both good and bad, and let your expectations be known about how to handle the basic aspects of the business relationship and foreseeable contingencies that may arise. Develop routine systems for tracking and managing the basics of the business (e.g., contracts, change orders, insurance, etc.) so you don’t have to constantly reinvent solutions to the same old recurring problems.
An owner once called me with complaints about a contractor who misled her about the cost of work that was performed on a verbal T&M basis. The contractor couldn’t seem to complete any one part of the project and promised completion dates that were consistently not met. Later on in the conversation she told me that the contractor was being sued by four other owners in the same area. I asked her why. She said it had to do with complaints and misunderstandings over verbal T&M contracts. Apparently, this contractor had a hard time figuring out the source of his problems. I’m sure he blamed everyone else for disputes that he could have easily avoided by simply taking the time to obtain a signed contract before starting a job.
When taken as a whole, good written agreements and contract administration procedures become more than just a few separate techniques. Together, they form a systematic approach to running a more successful company that allows you to spend more time enjoying your work while making a reasonable profit, and less time fighting with your customers. It’s tempting to say that two or three of the items below are the most important, but the fact is that many of them may critical to your long-term survival and success in this business.
Much of the focus of this site is on the importance of using written agreements and communications simply because these are the first and most effective ways to define and document your expectations (many of which are contractually binding) with all the parties involved in the construction process.
Implementing certain routine business procedures to reduce small disputes is similar to providing basic safety training to your employees to reduce job-site injuries. You won’t eliminate all disputes any more than you will eliminate all job-site injuries, but fortunately you will prevent many of them from ever occurring. Regarding exposure to large lawsuits, implementing good fundamental business and legal practices is like putting fire sprinklers in a building. You can’t guarantee a fire or major dispute will never start, but the likelihood of losing the whole structure or business is greatly reduced.
What routine business practices can you put in place to help avoid small disputes and reduce the potentially crippling exposure to large lawsuits? A summary of these routine business practices may include the following:
(1) Careful Bidding and Pre-Contract Work: Organize your preconstruction bidding process. Carefully review the plans and bidding documents prior to estimating every project. Don’t guess at numbers because you’ve run out of time and the bid deadline is on top of you. Price the job high enough to make a fair profit — don’t “buy” the job hoping you’ll be able to make money on the extras or figure out ways to reduce your costs once you’re into the job. Don’t bid on jobs you aren’t qualified and staffed to perform and don’t bid on jobs if the completion date required by the owner is unrealistic. You’ll make more money in any given year by passing up certain jobs that aren’t right for you. Learn to recognize the type of job that won’t be profitable for your company and then let that type go.
(2) Good Contracts: First, never work off verbal contracts! Provide a contract that is fair, but detailed and complete — one that takes into account the risks and contingencies unique to the project you are bidding. On every job, think about, address, and in your contract assign who is responsible for the unique risks of the job and typical contingencies that may arise. For example, if you suspect that hidden structural damage may increase the scope of a remodeling job, specify in the contract that the owner will pay for any such extra work. On a remodel, if you will put a new roof part and new windows on the new addition and the roof and windows on the existing structure are not being replaced, exclude any new roof and windows on the existing structure in the project specific exclusions section of your contract.
This is one of the unique and powerful advantages some contractors overlook. By having the opportunity to draft and furnish the contract, you also have the opportunity to establish many of the rules that will legally govern your business and legal relationship with the owner. Don’t miss out on this opportunity — it’s worth a lot, more than you might think. If the owner insists on furnishing the contract, carefully review it. If you are uncertain about the meaning of clauses, have your attorney review it. Don’t be afraid to draft alternate clauses, strike clauses you can’t live with, and generally negotiate the owner’s agreement. Become proficient at drafting your own agreements developed for your business so that you can customize them for each job.
(3) Payment Schedule (and Retention, if required): Include a payment schedule in your contract that keeps frequent, smaller payments coming in. More frequent, smaller payments are better than lumping them into two or three very large payments. Try to keep your final payment at an amount that is near or below the dollar limit of the local small claims court. Because many disputes seem to mysteriously appear around the time of the final payment, you want the amount owing to you at that time to be as small as possible. By structuring the payment schedule so less money is owing to you at any one time, you reduce your financial exposure and you reduce the chances of having larger monetary disputes turn into full-scale lawsuits.
Retention: If at all possible, avoid a payment retention altogether. If you must agree to one, try to have it not exceed 5%, and try to have 50% of the total amount withheld paid to you upon the “weathering in” of the structure. In general, never agree to a retention that exceeds 10%.
(4) Good Subcontracts: Most projects are the result of coordinated teamwork between the general and the subcontractors. Work off adequately detailed subcontracts when you subcontract work. Work with good subs who carry the proper insurance. Allow only experienced subcontractors who do quality work to bid on your projects.
(5) Proper Insurance: Carry the proper insurances to protect against both common and catastrophic risks (e.g., worker’s compensation and comprehensive general liability insurance in occurrence form). Require the owner to carry builders risk or course-of-construction insurance on most larger projects.
(6) Communicate and Document: Communicate well and often with the owner and all others involved in the construction process. Return phone calls promptly. Document all important communications in writing in a brief, but professional, manner. If you later have to go to court or arbitration, your written documentation can be very important to the success of your case.
(7) Good Workmanship, Timely Performance, and Customer Service: Provide high quality construction and a high level of customer service. Complete the job on time. Complete punch list work right away. Don’t work like crazy to reach substantial completion in six weeks only to take another six weeks (and ten phone calls from the owner) to reach final completion. If part of your work clearly falls below an acceptable standard, replace it.
(8) Change Orders: Obtain written change orders prior to performing extra work. This is one of the most frequent areas of dispute, but the one most easily avoided. If you absolutely can’t get it signed prior to starting the work, get the owner’s verbal approval and email conformation of the scope of additional work and price you are charging for it. Build a written record like this and most potential disputes over extra work will never appear.
(9) Depersonalize Minor Disputes: Having laid a good business foundation through a detailed agreement and written change orders, you’ll find it much easier to depersonalize disputes. This is important because some owners will take personal offense at differences of opinion over, for example, what is a legitimate change order, whether the work is of adequate quality, or what is the correct interpretation of the contract documents. Referring back to the contract and reminding the owner that a particular area was already addressed in the contract will often help quickly resolve such disputes. People usually go along with what’s in writing as long as the dispute is not a large one and you’re not working with a scammer.
(10) Preserve Your Right to Make Claims: Become familiar with mechanic’s lien laws in your state and be sure to preserve your lien rights and not miss your filing deadlines. If disputes flare up, be sure you understand and adhere to the notice procedure and dispute resolution procedure in your contract. Also, it’s a good idea to contact your attorney early on before committing to a legal course of action on your own, such as stopping the work or terminating the contract.
(11) Compromise and Settlement: As much as I like to see contractors get what they are due, some degree of compromise is appropriate to many disputes. An inflexible, “all or nothing” approach on larger disputes is a good way to provide lots of extra income to the lawyers at the expense of the contractor. No textbook answer can tell you when to fight and when to compromise in every situation. What’s critical is the ability to analyze the factual and legal elements of the dispute and, as objectively as possible, determine the correctness of your legal position, the cost of pursuing it and your odds of success. You will typically benefit from some good legal help in this area. Fill in your attorney who is familiar with construction disputes honestly on all the good and bad aspects of the job. Don’t be embarrassed to tell your attorney about work that wasn’t performed perfectly or problems you had on the job. He or she is bound by law to maintain attorney/client confidentiality. The more facts your attorney has, regardless of whether you think them favorable or unfavorable to your side, the better you may be advised.
No matter how wrapped up you are in the correctness of your position or your commitment to justice being done (which probably means full payment to you or not having to perform corrective work), don’t forget that there is a real and significant cost to settling disputes. Forget about getting even. Now’s the time to be practical and to evaluate the cost of pursuing what you think you’re entitled to and your odds of success. You must weigh the potential benefits against the costs. Remember, every lawsuit is a costly gamble. That’s why as many as 95% of them settle without a trial. While not always possible, the cheapest way to settle disputes is to never have them arise in the first place. The second cheapest way to settle them is to deal with them quickly and fairly without the involvement of attorneys. Some degree of compromise generally plays a positive role in ending a dispute. However, when you are convinced that no quick and easy settlement is possible, you can often get good results from an attorney experienced with construction disputes who is more interested in your long-term interests and an honest evaluation of your case than in merely obtaining a litigation retainer. Find a reputable attorney experienced with construction disputes so he or she is available if and when you need one.
(12) Check Your Insurance When a Claim Arises: If you are sued in court, have an arbitration action brought against you, or are brought into any kind of legal action, the first question you should ask yourself is, do I have insurance that may cover some of the costs and potential losses? Ask yourself the following questions:
• Will my insurance carrier pay out for a covered loss or claim in the event of a judgment against me?
• Will my insurance carrier pay out toward a settlement offer in order to have the action against me dismissed?
• Will my insurance carrier pay the legal expenses for my legal defense, i.e. provide me with defense coverage by hiring legal defense counsel to defend me?
If faced with a large dispute, legal defense costs and settlement money can be critical to the survival of your business. Don’t overlook the possibility that you may have already paid for all or part of these costs above through your liability insurance premiums. Some attorneys not familiar with the construction business may forget to fully explore this area with you. Don’t let that happen.
Strategizing a Dispute
Having implemented good basic business procedures, some disputes are still inevitable. Disputes come in all different sizes, shapes, and levels of complexity. They may be with the owner, the architect, the subcontractor, the supplier, your insurance company, a bonding company, the owner’s bank, the successor of the owner, the building department, or even the Contractor’s State License Board. When a dispute arises, I recommend an early consultation or phone call with your attorney so that you can get a fresh perspective on options for resolving the dispute. This consultation might take only a few minutes for a small dispute. With a good attorney, two heads are almost always better than one at this crucial turning point prior to the time you’ve committed to a definite course of action.
Suspending the Work or Terminating the Contract
Normally, when a contractor considers shutting down a job or terminating a contract, it’s because the owner has failed to perform according to the terms of the contract. This normally means the owner has missed a payment or stated he is refusing to make further payments until the contractor does certain things. But, it can also mean he has blocked access to the site, withheld information the contractor needs to advance the work or numerous other possible things that seem unfair to the contractor that impede or seriously hinder the contractor’s ability to perform. Most significantly, the ongoing cash flow of the expected payments to the contractor in accordance with the payment schedule is critical to the success of most projects and the contractor can’t be expected to “finance” the job for any extended period of time.
However, a contractor should consult his attorney and consider a number of factors very carefully before suspending the work or terminating the contract. You will need a valid legal justification to do either — or you risk exposing yourself to greater liability. Without a valid legal right or “excuse” for suspending the work, you will likely be considered under the law to be in breach of contract, have abandoned the work and therefore subject to a lawsuit from the owner and possible damages for any increased costs to complete the remaining work under your agreement. You also need to quickly and honestly assess if the owner’s refusal to pay is based on an alleged defect in your own performance.
In other words, does the owner have reasonable legal grounds for withholding payment or failing to do something you think the owner should have done? If so, consider with your attorney the likely consequences of stopping work at this point. It is also critical that you follow the procedures for work stoppage set forth in the dispute-resolution clause of your contract. Do not terminate a contract without following those notice procedures in your construction agreement. Whatever the particulars, it’s important that you give the owner written notice of the relevant facts related to the owner’s alleged breach of contract, your legal basis for stopping work, and what you expect the owner to do to “cure” his alleged breach of contract. The dispute resolution clause in the agreements on this site are written to include a notice period and opportunity to cure the alleged breach prior to either side being able to terminate the contract. This is only fair.
Owner breaches (and contractor’s as well) can be put into at least two basic categories, minor and material breaches. How the law defines minor and material will be endlessly argued by the lawyers and the parties. The key difference is that a material breach would or could give one party the right to suspend the work or eventually perhaps terminate the contract. A minor breach would not typically give rise to suspending or terminating performance under the contract. Determining whether a breach is material, however, is not easy. The same action could be a material breach on one job and a minor breach on another job.
For example, is a late progress payment grounds to stop work? It all depends. If the owner is three days late with a 15% draw payment on a job that is 60% complete, this is probably not a material breach of contract at this time and you would perhaps not have clear legal justification to stop the work. If the owner is ten days late, however, you may be more justified in stopping the work — as long as your contract gives you that authority and you provide proper notice of default to the owner. You almost certainly need to return to finish the work if the owner makes his payment in a reasonable amount of time.
However, after a month or more goes by without payment, without a valid legal justification, the owner’s minor breach may rapidly turn into a material breach of contract which may justify your terminating the contract for cause due to the lack of payment by the owner.
The scenario above illustrates how both the contractor and the courts may view certain acts or omissions of the owner differently depending upon how long the act or omission continues, whether the owner presents a reasonable legal justification, the severity of the hardship caused by the owner’s act or omission, the way your termination clause is written and other pertinent factors. All factors to review with your local attorney. The termination or breach of contract and payment clauses in the contracts on this site all attempt to give a framework for handling scenarios like the ones above.
One factor the courts have considered is how much of the contract has been performed by the parties at the time of the breach. If the breach occurs very early on, it may be viewed as more of a material breach than if it occurs after the parties have performed most of their obligations under the contract and little work remains to be done.
Approach very carefully the area of suspension of work or termination of the contract due to the owner’s perceived default. Act on the side of reasonableness and typically give the owner the opportunity to cure a default. Always give the owner written notice of his default and make sure you follow the notice and dispute resolution procedures set forth in your contract.
If you are threatened with or served with notice by the owner that you have breached the contract and should not return to the job, the same factors discussed above will need to be considered i.e., Did your act or omission constitute a material or minor breach of contract? Did you have an opportunity to correct the alleged breach? Has the owner followed any notice provisions in the contract, etc…? You are strongly advised to consult your local attorney to discuss these factors if you need to suspend the work or the owner kicks you off the job (or threatens to). Your response at this point in time is critical to your future success in resolving the dispute. Creating a paper trail at that critical point in time is also more important than ever should the matter not resolve quickly. Stopping the work may keep you from easily financing the job, but it may also wind up bringing on a lawsuit.
At times stopping work or terminating the contract may be the necessary course of action. At other times it should be delayed or the contractor should simply finish the work under written protest and then perhaps seek damages later from the owner all depending upon the circumstances.
Consider Keeping Your Lawyer Backstage
If you are still on the job, I recommend keeping letters from lawyers out of the process for as long as possible. Most lawyers love to write letters. It gives them a good feeling for the dispute and runs up the billable hours. However, with an ongoing job, once both sides marshal their attorneys and begin the letter writing process, the tension between the contractor and owner escalate and the stakes get raised. It’s often helpful to keep your lawyer behind the scenes until your personal negotiation efforts with the owner appear to be entirely unsuccessful. This may happen very quickly, or it may not. It just depends on your relationship with the owner and your negotiating skills.
While a strongly worded, but reasonable, letter from an attorney may be just what you need to move some smaller disputes toward settlement, with other cases this may just be the spark that incites the owner to get his lawyer and construction expert involved to see just how many real or imagined construction defects they can find in your work. With a large dispute involving the collection of a larger payment from the owner, you’ll need to not only evaluate the potential costs of collection, but also the likelihood that the defendant will file for bankruptcy or have so little equity in the property that even if you foreclose on the property, you may not get enough money to justify the cost of an expensive legal action.
Often A Test of Endurance — Not Always Justice
About 95% of the lawsuits filed never go to trial. And many, many arbitration “demands” never reach the final arbitration hearing either. However, due to the more informal nature of arbitration hearings, a little larger percentage of them may get to the hearing phase. Many lawsuits are primarily a test of endurance. The party who can hang in there the longest and continue to pay their attorneys may win almost by default. This, of course, has nothing to do with concepts of justice, right and wrong, or any other notion that should ideally govern the outcome of a dispute.
It’s just the practical reality of the legal system. The legal system is imperfect and anything can happen! It usually takes a lot of money and endurance to achieve a favorable judgment, and even then, the result is not always a fair one — and it is never guaranteed. Obviously, the longer that the attorneys are involved, the more expensive things become for both sides. Since you really can’t absolutely count on getting attorney’s fees and costs reimbursed in most lawsuits, before you start a legal battle, it’s wise to consider whether you’ll be able to afford to finish it. Some legal actions will even wind up costing more than the amount being fought over.
Look Carefully Before You Leap
Making the decision to have your attorney write a letter to a customer about a dispute represents a milestone in the breakdown of the owner/contractor relationship.
The decision to file a lawsuit or a formal demand for arbitration is a much more serious milestone than having your lawyer write a letter and should not be approached without a serious exploration of the potential costs involved and the likelihood of recovery or possible loss, including an inquiry into the defendant’s ability to pay the judgment you’d like to get. In short, you need to approach and evaluate every legal dispute as if it was a potential business investment. While this may involve some crystal ball gazing, so do most investments. Consider whether the investment of time and money is worth the likely return. If not, don’t “buy” the lawsuit. Carefully explore this area with your attorney. Make sure you are working with an attorney familiar with construction matters. Failing to do so could be like having an orthopedist perform heart surgery — it could work, but it’s certainly not efficient or typically recommended.
Don’t be afraid to negotiate, settle, and cut your losses! Most people agree with this philosophy after they’ve spent $50,000 in attorney’s fees on a legal dispute, received a judgment, and failed to collect a penny. Next time they might do things differently and might place a much lower value on trying to collect every single penny owed. No matter how much you’re told by your attorney that you have a good case, something can always go wrong and cases can get wildly complicated and expensive. New facts can come to light that you were unaware of, the owner’s expert witness can shed a very bad light on work you consider to be fine and the judge, jury, or arbitrator can just fail to see it your way. An arbitrator can fail to apply the law that you consider applicable to the best parts of your case. A $5,500 small claims court case may be removed to superior court by the owner insome areas and combined with the owner’s $25,000 lawsuit against you. Once you commit to this path of litigation, the outcome is unpredictable and it can be very expensive.
Collateral Damage to the Contractor
Sometimes the collateral damage of a lawsuit can in hindsight outweigh the benefits of whatever you eventually collect. The case may drain so much of your time, attention, and capital that your business suffers while you fuel the litigation machine with hard earned dollars. With large disputes, you may at times find it difficult to concentrate on anything besides the litigation and the possible outcomes. In other cases, the owner may file a complaint with the license board that you may have made some technical violation of the Contractor’s State License law which costs you civil penalty fines with the state or provides a possible technical defense to your otherwise rock solid claim in court. Suffice it to say that no matter what approach you take, the waters of dispute resolution can be unpredictable, sometimes treacherous and the night can be very long. Take all the preventative steps that you can to avoid these troubled waters.
Increase your company’s resistance to disputes and lawsuits by following dispute avoidance strategies — the costs will be insignificant compared to the alternative.
Places To Settle a Dispute
Every once in a while I see attorneys and clients on both sides make a huge, drawn-out, and costly federal case out of a relatively minor dispute which either side can easily afford to absorb financially. The whole mess is nothing more than an expensive spitting contest.
When faced with a dispute, contractors have the following sorts of venues to select from for dispute resolution. Any alternative dispute resolution process you select should be clearly specified in your contract in the dispute resolution clause. Discuss this area with your attorney to decide which of the following venues you think will be most advantageous for your business:
• Settle informally prior to filing a civil complaint or a demand for arbitration.
• Have the dispute heard either in small claims court, a higher level civil court, or federal court in some cases.
• By contractual agreement in your contract or by stipulation of the parties, submit the dispute to alternative dispute resolution (ADR). The most popular forms of ADR for residential construction are non-binding mediation and binding arbitration.
Small Claims Court If you don’t agree to binding arbitration in your contract, and any efforts to negotiate or mediate the dispute fail, you’ll probably wind up in the civil court system. Small claims court is the lowest court in the civil court system and is typically a fast and easy place to settle disputes. Even if you have an arbitration clause in your contract, if the dollar amount of the dispute is within the limit of the small claims court, filing the small claims suit is likely faster and less costly than filing an arbitration demand and the parties may waive the arbitration clause.
Lawyers generally can’t represent parties in small claims court. The policy underlying small claims court is that people should have a fast and economical place to resolve minor disputes. Some states require the parties to make an effort at mediation prior to showing up in court for the small claims hearing.
The small claims court generally has no jurisdiction over mechanic’s liens. Don’t plan on bringing a mechanic’s lien foreclosure action in small claims court unless this is specifically permitted in your state — see your local attorney or small claims court adviser for confirmation. Filing the paperwork to initiate the small claims court case is very simple. The court may be able to serve the lawsuit by certified mail. The filing fee is usually very reasonable. It’s a cheap way to get your “day in court.” One problem with small claims court is that you don’t always get your day in court with a real “judge.” In some areas you don’t get a judge at all, but a lawyer who is sitting temporarily to hear cases. Often you can ask to wait to have your dispute heard by a real judge if that is your preference and not a lawyer who is sitting in “pro tem”.
In some areas, the court calendar is booked solid and you’ll literally have only a few minutes to present your case, even though you may want a full hour to present your evidence, testimony, and perhaps even a witness. Sometimes the judge doesn’t even appear to spend any time reading your case statement or reviewing the evidence you submit. The results in small claims court, as with other dispute resolution venues are unpredictable. You can usually get a case heard within a couple of months and there is generally no appeal for the plaintiff who loses the case. The defendant may have an appeal if defendant loses the case. Check with your attorney or small claims court adviser for the rules in your local area.
Small claims court may be attractive for small disputes simply because it is fast and economical. However, two words of caution — be prepared! I recommend you consult with an attorney experienced in the area of the dispute to get some advice on preparing a short statement of claim and perhaps a brief oral outline. You don’t want to go into the courtroom talking about issues that may seem important to you, but may be totally irrelevant to the judge. This is a common mistake people make all the time and it often decreases their odds of receiving a favorable judgment.
The basic approach to presenting a case in small claims court is to take evidence and an argument to court that supports your case and also presents a defense against the other side’s claims. You may want to prepare a brief written statement summarizing your claim and a defense which incorporates any relevant documents. You hand this material to the judge and a copy to the opposing side when the hearing commences (or otherwise in accordance with your local rules).
Arbitration Vs. the Civil Court System
If the amount in controversy is above the maximum dollar limit of the local small claims court, you may be headed for a higher state court. Your attorney will help you with the question of which court to file in. If you are served with a summons and complaint, immediately contact your attorney. There is limited time to file an answer or general denial to the complaint before the plaintiff or claimant has the right to file a Request for Default Judgment and you don’t want the plaintiff to win by default just because you sat on the summons and complaint after being served.
If your contract calls for arbitration, you may be headed toward some form of binding arbitration. The American Arbitration Association has become perhaps the most widely known administrator of arbitration services for many participants in the construction industry. Jams is also another alternative large dispute resolution organization. Both may have fast track programs available for construction disputes depending upon the amount in controversy.
Because negotiating your way through the arbitration process and the civil court system are similar in many ways, they are treated together in this section with some important differences noted. Arbitration is a process of dispute resolution in which a neutral third party (or panel) renders a decision after a private hearing at which both parties have an opportunity to be heard and present evidence. Agreements to arbitrate have been declared valid by nearly all courts, and in most cases the decision is binding and enforceable. Arbitration cases keep cases out of the court system which is already typically overloaded in many areas. Arbitration clauses must be carefully worded and they may not cover all types of disputes that can arise out of a contract.
In some cases and in some areas, to enforce a mechanics lien, the complaint to enforce the mechanics lien must be first filed in court, a motion in court to stay the court action is made pending the outcome of the arbitration and if the contractor wins the arbitration and it is determined in arbitration that the owner owes the contractor money that is not paid by the owner after the arbitration, the contractor goes back to court to enforce the arbitration award and foreclose on the mechanic’s lien. In this scenario with a mechanic’s lien, the parties are in both the court system and the arbitration system.
Many contractors favor arbitration because in theory it should be faster and may be cheaper and more informal than the civil court system. The arbitration process can usually be fully completed in several months for most residential construction disputes, compared to one to two years or more for a case to wind its way through the civil court system (more if the decision is appealed). The rules of evidence are far more relaxed with arbitration and a party’s right to appeal is practically non-existent which you may find to be a good or bad thing depending on the outcome of the arbitration.
You can have a lawyer represent you in an arbitration hearing just as in a civil court hearing. Arbitration seeks to avoid the formality and some of the expenses associated with the civil court system. The greater informality of arbitration is generally more conducive to examining residential construction disputes. Another advantage of arbitration is that you may be able select an arbitrator with some experience in the construction business — compared to a judge or jury who may not know the difference between a joist and a jamb, or a flashing and a footing.
If you want to arbitrate future disputes rather than litigate them, you should make sure your contracts contain an arbitration clause. This is the standard way to be assured of the right to arbitrate. However, this right may be waived if you file a claim in court — even small claims court — or if you fail to raise the arbitration clause in your contract as a defense immediately upon being served with a civil complaint. This is a technical area of the law that must be carefully handled to make sure you don’t lose your right to have a dispute arbitrated unless that is what you want. Discuss this process in detail with your attorney before you are in the midst of a dispute that needs to be resolved. While arbitration has some distinct benefits for construction disputes, it, like the court system, can be far from perfect.
One criticism of the arbitration process sometimes expressed is that the law is not necessarily strictly applied by the arbitrator in arriving at a “fair” decision. In addition to considering the law, the arbitrator may also take into account the testimony of experts, the credibility of the parties, and other factors. The arbitrator also may bring with him to the hearing his own biases regarding certain issues which can’t possibly be fully disclosed or known about prior to selecting the arbitrator. Of course, a judge or jury may also have similar hidden biases. So, pros and cons are found in both systems.
Initiating the Lawsuit or Arbitration
If you work near the state or county line, check with your attorney to determine the rules regarding where suits can be brought. As a matter of convenience, you’ll
ordinarily want to be able to have a case brought before a court that is near to your place of business. The civil lawsuit officially begins with the filing of a complaint. The complaint can be fairly brief and ordinarily lists which court has jurisdiction, the basic facts of the dispute, and the causes of action against the opposing side. The complaint must be properly served on the defendant. This is ordinarily done by personal service using a process server.
The arbitration process, on the other hand, is initiated by the filing of an arbitration demand with the agency administering arbitration and also directly with the opposing party. Once you are served, immediately contact your attorney and give him a copy of the complaint or demand for arbitration. The legal response to the complaint is called the “answer” or “response.” Every allegation in the civil complaint must be responded to, at least briefly, in the answer to the complaint that is filed. You may well want to file a counterclaim (claim against the party bringing the action against you) or a cross-claim (claim asserting someone else is responsible for the claim being brought against you) in conjunction with your answer or response. In many states the time allowed to file the answer to the complaint or arbitration demand is very short, i.e. 30 days, and if you fail to file a timely answer, you may suffer a judgment against you by default. This is why talking to your attorney immediately upon receiving a complaint is so important.
Your Insurance Company’s Potential Duty To Defend You
If you are served a civil complaint or arbitration demand unexpectedly, you should immediately contact your attorney to discuss all the issues around dispute and
settlement strategies covered earlier in this chapter. In addition, you should immediately attempt to determine whether you have, or had in effect at the time of the alleged damages, an insurance policy that will pay for the defense of this lawsuit. If you don’t ask for this defense coverage from your comprehensive general liability carrier through your insurance agent, you won’t get it. Calling your insurance agent to discuss the complaint or arbitration demand is often a good thing to do.
Under most comprehensive general liability policies, the insurance carrier may have clear legal duty to defend the contractor, depending on the allegations in the complaint or arbitration demand you are served with. This duty to defend may even be triggered by small events such as very minor property damage at the job site, which may account for only a small portion of the entire claim. Generally, the contractor has to prove merely the possibility for coverage under his policy.
When there is an ambiguity in this area, the ambiguity may be construed in favor of providing a defense to the contractor, with a “reservation of rights” by the insurance company. If you are entitled to a defense by your insurance company, they will defend you against covered claims, but they will not go to court on behalf of your affirmative claims against the owner. For example, they will not help you try to get money from the owner for a breach of contract claim. You’ll need to hire your own attorney to pursue your affirmative monetary claim against the owner.
If your insurance carrier agrees to defend you in a suit, expect a reservation-of-rights letter from the insurer. This letter will reserve the carrier’s right to tell you at a future date (depending upon new facts that emerge in discovery) that they have reconsidered and decided that no coverage, or limited coverage is afforded you under the policy. In that case, the insurer might still pay for your legal defense, but it might encourage the contractor to contribute money for the settlement or refuse to pay certain damages that the carrier sees as not being covered by the policy.
The insurance company’s duty to defend in a lawsuit or arbitration may often be easily triggered, while its duty to provide coverage for all claims that may be brought against the contractor is harder to trigger and may be hotly debated. As a practical matter, with smaller disputes, the carriers often want to get in and out quickly, settle the case, and avoid the potential exposure and legal costs of a trial. With larger cases, however, the carrier may look very closely at ways (such as legal technicalities) they can find to deny policy coverage.
Due to the high costs of attorneys and construction experts, don’t wait to notify your insurance carrier about a lawsuit or arbitration or you may be waiving your rights under the policy. There is typically a clause in comprehensive general liability policies that require the contractor to promptly notify the carrier of all claims. Once again, the potential duty of your insurance company to provide your legal defense discussed above applies not only to situations where you are sued in civil court, it also normally applies when someone brings an arbitration action against you either directly or by way of cross or counterclaim.
Once the complaint is filed and answered, or the arbitration demand has been filed and responded to, the discovery process begins. The discovery process allows the two parties in a dispute to learn about more of the facts supporting each other’s case. In the court system, discovery rules are established by the court or by a special master who oversees the pretrial matters of the case and attempts to help the parties to disclose relevant information prior to a trial. With arbitration, discovery may be done on a more limited basis with the opposing attorneys agreeing to the terms of the process under the watchful eye of the arbitrator. The discovery process may be less thorough in arbitration than in the civil court system. The arbitrator may have less authority to compel discovery than does a judge in the civil court system.
The purpose of discovery is to give the opposing parties the opportunity to confirm suspected facts or learn new facts that will help them predict the likely outcome of the case. Based on facts that come out through discovery, many disputes are settled.
Discovery can be very short and simple with cases that are factually very clear. Or, discovery can be long and costly if the facts of the case are very complicated and many different parties and witnesses are involved. With large construction cases, hundreds or thousands of pages of documents, and numerous parties or witnesses can make the discovery process complicated and costly. Often lawyers don’t want to disclose certain documents the lawyers will file motions to compel discovery of certain information in the possession of the other side.
Several common discovery devices are sometimes used in both civil litigation and arbitration. They are site inspections, interrogatories, depositions, requests for admissions, and requests to produce. Site inspections are where one party, his attorney, and a construction expert meet at the site to review current site conditions. The other side typically has the right to also be present and bring his attorney. Interrogatories are a set or series of written questions about the facts of the case, normally prepared by an attorney, and answered in writing, normally under oath by an opposing party, a witness, or some other person having information about the case.
If you are given written interrogatories to answer, you will have time to review the questions and answer them with the assistance of your attorney prior to sending them back to the opposing side. You will normally have a couple of weeks or longer to do this so the response is not given under a time pressure, as it is with a live deposition. A deposition is an oral interview where the testimony of a witness, party, or other person having information about the case is taken by an attorney and often transcribed by a court reporter or sometimes videotaped.
Questions relating to the case are asked of the witness by the attorney. The witness may also have an attorney present who sometimes objects to the question by opposing counsel. All parties in the case often have their attorneys present at the deposition. A court reporter normally transcribes every word spoken at the official deposition into a record which is then referred to by the attorneys in their preparation of the case and in their future examination of witnesses at trial or at an arbitration hearing.
You might be asked to give your testimony at a deposition and be asked all kinds of questions ranging from your educational experience and work history to a full probing of the facts of the case. You need to spend some time with your attorney preparing for the deposition if you will be the deponent, or the one answering the questions. Then after the deposition has been taken and the transcript produced by the court reporter, your attorney will spend more time (and more of your money) reviewing the transcript of the deposition.
Requests for admission are essentially questions that a party is asked to simply admit or deny certain facts.
1) “The contractor never prepared or gave the owner any written change orders for the project — admit or deny.”
2) “The contract states on page 4, paragraph 7 that the owner will only pay for additional work if he has signed a change order for that work — admit or deny.” You get the idea.
Requests to produce are normally prepared by an attorney, and request the other side to produce certain documents related to the case. If you are given a request to produce documents, you will normally have a couple of weeks or longer to review your files and either send copies of the documents, photographs, etc., or send the originals for the other side to review and copy.
The basic discovery devices described above are used both in the civil court system and, to a lesser degree, in the arbitration system. Interrogatories and requests to produce are ordinarily less expensive than depositions due to the fact that depositions can go on for hours and someone will be paying not only your lawyer, but often the court reporter and transcript fee as well.
A critical part of preparing for most construction disputes where construction defects are alleged by the owner is retaining an expert witness with a strong background in the area of the alleged damages. The expert witness will inspect and evaluate the construction, prepare a report that summarizes his findings, and be available to back up that report with credible testimony and a construction estimate at the trial or arbitration hearing if required.
An expert’s testimony may be used to aid in negotiating a settlement. Often an expert witness will testify about whether the contractor’s work complied with building code and met the applicable standard of care. An expert may be anyone with a good reputation who possesses the requisite education, experience, and training to make him a credible witness regarding the specific technical issues contested in your dispute. Your attorney should have a list of qualified experts who can testify in the construction area. Some construction experts are retired contractors or engineers; others are actively working and combine expert testimony work with their regular career in the construction or engineering business. With very technical construction/engineering issues, an engineer may be a more effective expert witness than a general contractor.
If you are sued by the owner over alleged defective work, you will want an expert to review the owner’s claims and hopefully demonstrate and conclude that the owner’s allegations are unfounded. If you are being represented by an attorney through your comprehensive general liability insurance carrier, the insurance carrier should pay the cost of your expert witnesses. Be sure that your expert has experience testifying at hearings. An experienced attorney can sometimes confuse or discredit an expert witness who is not accustomed to testifying at hearings. While the parties always color the facts in their favor, detailed testimony from a credible expert witness can often tip the balance and help convince a judge or arbitrator to rule in your favor.
The Trial or the Arbitration Hearing
The vast majority of disputes settle out before reaching the trial or arbitration hearing. This occurs for many different reasons. Discovery or an expert witness report can change a party’s perception of their odds of success at trial and encourage settlement. The pretrial expense of attorneys, motions, experts, and discovery can drain the parties of the money they need to advance to a trial or arbitration hearing. An insurance carrier can agree to pay a settlement amount that is accepted by the other side in order to end the dispute and stop for paying the contractor’s legal defense, especially with an expensive trial looming. And, often, the anticipated high costs of a trial or arbitration hearing (typically one day to a week with many residential disputes) places both parties in a position where they are finally more willing to compromise and reach a final settlement. Finally, lawyers don’t like to lose cases, and some don’t always have the necessary time to prepare well enough for a trial or hearing and will push for a settlement. These are other reasons many cases settle before the hearing or trial.
If no settlement takes place, you’ll get to spend a day or sometimes much more time in court or at an arbitration hearing listening to your attorney make an opening statement, present witnesses in your favor (including your expert witness), introduce exhibits or documents you want admitted as evidence to support your case, cross examine the other side’s witnesses, and deliver a closing statement or brief. Often the entire job is dissected ad nauseum.
Some cases only take a few hours at the trial or hearing; others can take two weeks or more! You do the math: A two-week hearing with attorneys and experts will drain almost anyone’s savings account in a heartbeat. Lots of work for everyone involved. Lots of time you’ll not be able to go to work to earn money to pay for this dispute. Lots of money spent not knowing if you’ll have to pay or be paid. From a business standpoint, this is not always a reasonable course of action to take.
Post Judgment Concerns
When the judgment comes in the civil court system, you may be able to appeal if the finding is against you. With arbitration, in the absence of extreme misconduct
on the part of the arbitrator (which is very rare and usually has to do with improper conflicts of interest that weren’t disclosed by the arbitrator), you ordinarily
will have extremely limited or essentially no grounds to appeal a decision you don’t like. This can be good or bad depending upon the decision and depending upon how much of a litigation war chest you still have left.
If a large judgment is either awarded in your favor or against you, the issue of bankruptcy may be raised. If the judgment is against you and you can’t pay it, you will inevitably discuss bankruptcy with your attorney. If the decision is in your favor and the other side can’t pay it, they may be discussing bankruptcy with their attorney. Either way, filing bankruptcy (or threatening to) often prevents many large judgments from being paid. As hard as it may be to get a judgment in your favor, you can’t spend the piece of paper that has the word “JUDGMENT” on it. The really hard part of many lawsuits and arbitrations is collecting on the judgment. Sometimes the money is just not there.
If you wind up having to arbitrate or litigate a dispute, take an active role in reviewing the work of your attorney. He may know the law better than you, but you know the facts of the dispute and the construction business better than he does. The facts and how they are argued wins many cases. If your attorney doesn’t understand the facts or is incapable of understanding many of the technical aspects of the dispute, you’ve got a serious problem.
Disclose everything to your attorney. Keep no secrets about the case or you may be sabotaging your own case without even knowing it. Your attorney has a legal duty to keep privileged communications confidential and argue the merits of your case. However, your attorney also must be prepared to counter weaknesses in your case as the need arises.
When you are owed money and looking at hiring legal counsel to go after it, ask your attorney what it may cost, study the numbers and evaluate your options as a business decision. If it doesn’t make business sense, you may want to consider going home, licking your wounds, considering the experience grist for the mill and getting on with your business and your life.
Mediation has proven very successful in resolving construction disputes at a cost that is often far lower than arbitration or litigation. The American Arbitration Association reports that as many of 90% of the cases submitted to their mediation program are successfully resolved. There is no doubt in my mind that mediation
is the way to settle the vast majority of all construction disputes. Mediation is a non-binding, voluntary dispute-resolution process where a trained neutral third party reviews the dispute between the opposing parties and attempts to help them reach their own mutually agreeable resolution or settlement without the need for a
costly lawsuit or an arbitration hearing.
Compromise is usually encouraged as a means of resolving the dispute. The neutral mediator does not have the authority to make a decision or award that is legally binding on the parties. This is not the function of the mediator. The mediator’s role is to get the parties to craft their own legally binding resolution of the case before the matter turns into a costly and protracted legal dispute. A skilled mediator and willing participants are essential to the success of the mediation process.
Because mediation is voluntary and legally non-binding, if the parties aren’t sincere about resolving the dispute, the mediation can end up being an additional expense and seem like a waste of time. Statistics show, however, that mediation is often successful and greatly reduces the time and expense of resolving many disputes. If you want to mediate disputes, it’s a good idea to put a mediation clause (in addition to your other dispute resolution clauses) in your construction agreement. It might read something like this: “In the event of a dispute that arises out of this agreement, the parties agree that either side may submit the dispute to a private, non-binding mediation before a neutral, independent mediator and that the parties to the agreement agree to participate in the mediation and split the costs of the mediator.” The agreements on this site contain a mediation clause.
Honest people sometimes just disagree. And, then again, there are those few people out there you should never try to work for because they are always trying to get something for nothing. By implementing some good fundamental preventative legal procedures into your business, you’ll likely have fewer disagreements and retain more of your anticipated job profits. If and when disputes do arise, you’ll hopefully be better prepared to deal with them.
Important Notice to Contractor and Disclaimer:
Before using or relying on the template forms and information above, read the template forms with care, fill in, modify, delete, add language to, and revise portions of the template forms according to your specific needs and any state laws applicable to the type of job you are using the document for. Use of the form templates on this site does not constitute the formation of any kind of attorney/client relationship between you and us. You should seek and obtain independent legal advice from a licensed attorney in your local area familiar with construction law before using or relying on any of the forms or information on this site. The forms and information on this site are provided only as general information, not legal advice and may or may not reflect the most current legal developments, your specific needs or laws applicable to the state where you conduct business. Only the original purchaser of the forms has a limited license to modify, edit, print and use the forms.
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