When Contractors Clash: Rights and Responsibilities in Disputes

Tavella adds that payment is hardly surprising as a common dispute issue. Although payment disputes between owners and general contractors happen, it is more common to see payment disputes between general contractors, subcontractors, and suppliers due to federal and state laws that provide protection to certain lower-tier contractors.

Doug Oles, a partner at Smith Currie Oles, clarifies that most construction contract disputes are based on written agreements and rarely on verbal agreements. He says that long, complex contracts have replaced handshakes when parties decide to exchange services for payment.

“Verbal and handshake agreements or even one-page contracts have faded into the past,” says Oles. “Now contracts include so many pages with industry-specific language that they’ve become less user-friendly. It’s unfortunate, but it’s reality.”

p>He says construction contract disputes rarely involve just two companies. Many disputes include multiple parties, and resolving the dispute means sorting the issues by the parties involved in the construction project. This includes the owner, designer, architect, prime contractor, subcontractor, suppliers, and more. With so many people involved in a contractual relationship, Oles says that any dispute resolution can require interpretation of multiple agreements, and those agreements may not all be consistent.

Time and Money

Tavella says resolving construction cases can be very expensive, in part due to the large volume of documents involved. Construction projects that span several years can generate tens of thousands, or more, documents. Costs for document review and production are substantial, in addition to the cost of legal services. Relatedly, many construction cases require expert witnesses—often more than one expert—which also increases the cost.

Most contracts put the responsibility on the contractor to take all actions in pursuing a claim or dispute. This includes timely notice, preparing documents and information for the owner’s consideration, timely submitting such information, and ensuring the documents meet contract requirements. For example, many contracts require a time impact analysis to prove delay. This creates an administrative burden for the contractor, even in situations where the owner is entirely responsible for the cost and impacts of the issue.

“Know your contract and ensure your field team is properly documenting any potential issues on the project,” Tavella says. “It’s impossible to know when an issue arises if it will be a dispute. However, failing to take proper action at the time, notifying the owner, or documenting the issue could result in a loss of the dispute as it gives the owner an easy excuse to deny responsibility.”

Proper documentation includes daily reports, accurate schedules, and meeting minutes. A contractor with significant documentation establishing its entitlement to a dispute can also avoid litigation, and the costs associated with it, entirely. If litigation cannot be avoided, having adequate documentation greatly improves a contractor’s chances of recovery. Without proper documentation, collecting all the facts and information is difficult due to the number of platforms on which people communicate. Discussions between parties may take place in person and via email, text messages, phone calls, and more.

Construction contracts mostly determine a contractor’s rights and responsibilities, but public contracts can be more complicated. Most public contracts cite regulations or laws that need to be cross-referenced to confirm rights and responsibilities. Even with private construction contracts, which are usually more straightforward, court cases addressing contract interpretation can affect how those contracts are administered.

Contractors generally have the right to enforce contract terms, including seeking additional time and costs for changes and delays. There is also the responsibility to provide timely notification to the owner of any issues on the project, to await direction before performing work outside of the original scope, and to mitigate damages or increased costs. Contractors rarely, if ever, have the right to refuse to perform work—even changed work—due to a pending dispute. A contractor who is debating whether to refuse a change order or to walk off a project due to a dispute should contact an attorney.

“Refusing to perform or choosing to abandon the project can lead to termination for default,” says Tavella, “even if the contractor is justified. Fighting over a termination is much more difficult for the contractor than fighting over a change order.”

Contractors who continue to work through a dispute should take caution when signing documents, particularly change orders, as they can cause a contractor to waive or release unrelated issues. Tavella says signing any document with a release should be carefully considered with legal counsel while a dispute is pending. Many times, she’s encountered contractors who signed releases based on verbal agreements for future change orders or other resolutions only to have the owner reverse course after the fact.

Tavella adds that parties in dispute commonly wait until a project is finished or nearing completion before addressing the issue. Although this allows the parties to focus on the construction work, waiting may force the contractor to finance the cost of the issue in dispute. This can also create a difficult situation if there is turnover on the project and the individuals who were initially involved no longer work for the company. Without sufficient documentation or the ability to obtain testimony from former employees, the contractor may not be able to prove its case later in the project.

Lastly, it’s important to be thoughtful about how the dispute is discussed internally, particularly when no lawyer is involved. Tavella says emails and text messages can create problematic evidence that may need to be disclosed during litigation. Involving a lawyer in internal communications may protect documents by attorney-client privilege.

When to Seek Help

Asking a lawyer when to seek legal assistance is like asking a doctor when to get a health checkup, says Oles. He says some wait until they’re sick (there is an actual dispute), and some seek preventive care (before there is a problem). In today’s environment, with multiple complex agreements, he suggests getting advice before a dispute arises.

Tavella agrees. “My advice is to seek legal guidance early and often,” says Tavella. “The cost for thirty minutes of advice early in a dispute or before an issue becomes a dispute is significantly smaller than the cost to litigate a case or even prepare an initial complaint.”

Seeking legal counsel early and often also allows a contractor to have strategic guidance while continuing the project. Tavella says this can help avoid other disputes or minimize an ongoing dispute. For contractors who prefer to involve an attorney later in the process, she says it’s best to consult an attorney as soon as a disagreement looks like it will be a dispute. Many contracts, particularly with public owners, have detailed dispute-resolution processes with associated time requirements. Contractors who fail to follow the requirements can waive their claims, so working with a legal advisor before the dispute resolution process applies is important.

“It depends on the contract and the timing of when I’m contacted,” says Tavella. “If it is early in the dispute, my main goal is to determine the options that lead to the client’s desired result without the need for litigation. If it is later, the process is usually dictated by the contract.”

Either way, Tavella says the goal is to reach a resolution without a lawsuit, as they are time-consuming and expensive as employees are pulled away from their normal work to testify as witnesses.

One of the fundamental challenges to dispute resolution, according to Oles, is overcoming hostility. By the time a dispute comes to a lawyer, he says the parties are sometimes no longer listening to each other. Finding a resolution means encouraging everyone to return to rational discussions based on objective documentation. Most importantly, he says it’s important not to exaggerate claims. Some parties come to the negotiation table asking for double the amount they believe they’re entitled to, anticipating the need to bargain that down by half. Oles says this tactic degrades the credibility of the industry.

“Lawyers should never get carried away by the emotional hostility of the parties involved in a dispute,” says Oles. “It’s important to remain objective and talk their clients down from an extreme position to a reasonable one.”

In general, Oles says people shouldn’t take adversarial positions. A contract is a path for two or more parties to achieve a goal. In that light, he says, people who hire contractors shouldn’t put unnecessary obstacles in the way of efficiently completing a project, and contractors should show the same respect for project owners. Likewise, the lawyer who assists them should focus on the relevant information to get optimal results.