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5 Rules for Making Construction Litigation Less Painful or How to Avoid Being Turned into Sausage
by Joseph Allen Kelly
For most clients, litigation is a last resort and with good reason. As Ambrose Bierce said: "Litigation: A machine which you go into as a pig and come out as a sausage." Thus, a client's fear and loathing of litigation is understandable. But, sometimes an issue cannot be worked out before litigation is necessary. By then, it is often too late to advise clients about what they could have done to make the litigation less painful and to increase the chance that clients will not be turned into legal sausage. There are five basic recommendations you can make to construction clients to put them in the best position possible should they be forced to litigate.
Rule Number One - Think About the Contract Before You Sign It.
Often in construction, contracts are signed quickly so that work can begin and little thought is given to the ramifications of the document. You need to understand the terms, conditions and consequences of the contract.
For example, The American Institute of Architects ("AIA"), The Engineers Joint Contract Documents Committee ("EJCDC") and The Association of General Contractors of America ("AGC") all have form contracts with differing language on such issues as whether owners can withhold payments. It is important to know who drafted the contract and to read each provision to be sure you understand how it may differ from contracts you have worked under previously. Additionally, the AIA form has "Standard Terms" that are not attached that affect everything from how to submit change orders to how to get paid. These standard terms often are incorporated into AIA contracts by reference and parties may be bound by these even if they never read them. You should get copies of any other documents to be incorporated by reference or attached as exhibits and read these additional terms that may become part of your contract.
Not only should contracts be searched for terms that are incorporated or to be attached as exhibits, but you should fully understand the terms appearing on the face of the contract. The contract should be given a thorough review to identify risks, such as specific provisions that conflict with more general provisions, clauses that may be given more than one meaning, and guarantees that the project will be completed at a certain time. Particularly if the contract is an industry form, be sure that the written contract is consistent with the conversations you have had with the other party about the terms.
Rule Number Two - Once You Understand the Contract, Follow the Terms.
It does little good to know what the contract requires if you fail to then abide by its terms. Pay special attention to notice and timing provisions. The relationship will run much more smoothly if you follow the contract's procedures by submitting change orders or completion extensions in writing. Also, you should make payments when the other party expects them to be made under the terms in the contract. If the contract governs an action, you should not vary from the contract unless it is amended in writing.
Know the scope of work and require written change orders or directions before you agree to act outside of it. If a dispute arises, you want to put yourself in the best posture possible by having always followed the terms of the contract. If a conflict rises to the level of litigation about an ambiguous term in the contract, the interpretation the parties gave the term through their course of dealing will often be found to evidence the parties' intention.
Rule Number Three - Keep Records.
As time passes, memories often differ. If litigation should occur, having written verification of your actions will give you an edge. Keep written record of contracts, change orders, invoices and payments. Also, confirm your conversations with the other party in writing. Follow up telephone conversations with an email or letter to make sure both parties are in agreement about what was discussed. Be sure to give the other party written notice of issues that may impact cost or the timeline for completion.
Rule Number Four - Understand the Process for Draw.
Having an understanding of the role of the lender in coordinating construction draws will help streamline the project and avoid construction delays. Each lender has different requirements, but they often determine in advance when draws can be paid during the project. Several major disbursements throughout a project are typical. Lenders may prepare draw schedules which explain how the funds drawn are to be used and may require proof that all the money on one draw was spent as specified in the schedule before authorizing a subsequent draw. You should know how the lender can stop payments to ensure the money can be drawn when you need it.
Although knowing the arrangements for draws is obviously important for general contractors, the subcontractors need to have a basic understanding of the draw process on the project as well so that they will know when to expect payment and can plan accordingly.
Rule Number Five - Remember Deadlines for Lien Rights.
You should know the deadlines for asserting lien rights and the steps necessary to preserve them. Documenting when subcontractors are paid will make it easier to determine if the time to perfect lien rights has passed. It is also important to understand how the lien rights are perfected so you can determine whether the appropriate steps have been taken and within the time provided by statute. Such steps may include serving a notice of nonpayment and serving and recording a notice of lien to evidence a lien on the property. Notice given by the owner that the project is complete may cut short the contractors' timeframe to comply with the lien procedure. States often require strict adherence to statutory requirements for the content of these notices.
Payment bonds also contain notice and timing requirements for submitting claims under them. These timelines are unrelated to the timelines under the lien statutes. Therefore, the bond itself should be reviewed to determine the applicable notices and deadlines. The subcontractor can and should pursue remedies under the lien statutes and payment bonds, if applicable. For more information on lien rights click here.
In today's economy, focusing on the inherent risks of the construction industry is an absolute necessity. By following these five guidelines during a construction project, your client can strengthen its case should litigation be necessary and increase its leverage in negotiations. |
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