I’ve been sued. Now what?
Hopefully you can keep construction dispute from moving into the legal arena. But if you are sued or inclined to initiate legal proceedings, here are key things to keep in mind.
Don’t panic – anyone can sue anyone
First, remember that anyone can sue anyone for almost anything. Understanding this means understanding the critical need to document all issues to protect yourself. In a court setting, documentation carries great weight. Make sure your contracts are in writing, ideally reviewed by a lawyer, and include exact terms, conditions, and exclusions. Email the participants in your project frequently. Also take plenty of pictures of your work and of the project, the happenings on the job and the surrounding area.
Once a lawsuit is filed, the next step is serving it. This usually happens by way of a process server or sheriff coming to your door. A company’s registered agent – often the lawyer, accountant, or company officer that formed the business – is typically the first to be notified of the suit.
If you’ve been sued, you likely received a subpoena for deposition during the litigation process. A deposition gives the lawyer and the client their best opportunity to examine witnesses and gain a better understanding of the claims and defenses in a matter. They can do so while gauging both the level of the witness’s knowledge as well as his or her demeanor and effectiveness as a witness. If the subpoena is directed to a particular individual, it is that person that will need to appear. However, if the subpoena is directed to a company, the question of who needs to appear may not be so clear.
The rules of procedure in most states governing such depositions generally provide that when a party names a public or private corporation as a deponent, it must then describe with reasonable particularity the matters on which examination is requested. The company so named then has an opportunity to designate one or more persons with knowledge on such matters and have them testify on its behalf.
This rule was designed to avoid what had been the all too common situation of taking a seemingly endless stream of corporate representative depositions where each witness disclaimed any knowledge of the facts sought. By describing exactly what the examiner wanted to know, the company being deposed could identify and produce its most knowledgeable representative.
Some companies have attempted to interpret this as a shield to protect potential witnesses from examination, understanding that the choice of who within the entity may be deposed is the company’s alone to make through this internal designation procedure. They would argue that the examiner can only notice the entity generally, after which it is the company’s sole decision as to whom to produce for the deposition. But this interpretation has generally been rejected, particularly where discovery has otherwise indicated that an identifiable witness within the company may have the specific information the examiner is seeking.
The rule does provide protection to a company from fishing expeditions by overzealous or harassing opponents. While an examiner is not mandated to follow the designation procedure and may name specific individuals within a company for deposition, if it is shown that such depositions create a needless burden on the company, a court can require that the company designate that representative it concludes is the most knowledgeable in the areas of inquiry specifically described by the examiner.
Clearly, being aware of the current state of the law in this area can yield significant advantages.
20 days to file a response
After being served, you have 20 days to file a response. Generally, that response will either be filing a motion to dismiss or answering the suit. A motion to dismiss is generally filed because some procedural element is being questioned. The other side has the right to address that reason and amend the suit, and you have the right to file another motion to dismiss. This can happen several times; winning one motion to dismiss might not be enough to keep the case from proceeding.
Some legal filings, such as a 20-day summons to show cause, don’t allow you to file a motion to dismiss. In most instances, however, filing a motion to dismiss or responding to the suit are the two options after being served.
Next is the discovery phase. This is when written questions are sent to both parties by the lawyers. Those questions should be answered within 30 days. Requests for production of records related to the case must be responded to in 30 days.
From there, the case moves to the deposition phase. This is when subpoenas are issued which require third-party witnesses for either side to provide answers to questions under oath. When a witness is deposed, those answers, known as testimony, are transcribed by a court reporter and can be used later in the case.
Sometimes a motion for summary judgement can be filed. This asks the judge, based on all facts and discovery so far in the case, to rule for one party or another on a particular issue. Sometimes the judge can rule on certain counts, or a limited component of the case. But summary judgements for an entire case can be difficult to obtain. If there are disputes as to the factual issues, the judge will deny that motion and the case will continue to trial.
When a trial is set, it can be before a jury or just a judge, and can last from a few hours to multiple weeks, depending on the number of parties and complexities involved in the case. The legal system is very slow. Most cases average 12 to 18 months. If you leave resolution up to the legal system, be aware it will not come quickly. That’s just one factor in why the majority of construction cases settle before trial.
Because of the substantial time and financial commitment involved in going to court, hiring the right lawyer is important.
What does my insurance cover?
When being sued, a prime question arises: What does my insurance cover? In most instances, your general liability insurance covers damages to other property, but not your work product itself. For example, if you are a window contractor and you install windows that the building owner claims are improperly installed and leaking, your insurance will not cover defective windows or bad installation. You may, however, have coverage for the ensuing water damage. The complaint filed should include “damage to other property” to specifically trigger such protection.
Particular kinds of insurance may come into play, such as workers’ compensation, which covers injuries to employees in course of work, or auto insurance, which could cover damaged vehicles. If someone claims breach of contract, such as installing a different material than agreed upon, or not delivering work or materials on time, that would fall outside a general liability policy.
It’s always important to report claims to your insurance company in a timely manner. Sometimes an insurance company will respond with a Reservation of Rights (ROR). This is a statement saying the insurance company has received the claim and will offer a defense while continuing to investigate. Be aware that based on what they find, coverage may then be declined and the defense withdrawn.
A few more helpful points on lawsuits and insurance, based on our experience:
- If you have insurance, try to obtain a lawyer you trust appointed to your case. The insurance company will procure a lawyer they have a relationship with. But because a relationship with an attorney is very personal, you should be selective. The attorney you choose must be qualified and be experienced in the area of the law in question. He or she must also agree to the insurance company’s billing rates, which are typically much lower than the free market, and must also agree to the insurance company’s billing guidelines, such as electronic format. If the lawyer you prefer can satisfy those requirements, there’s a chance your insurance company will engage that lawyer on your behalf.
- Even if you have insurance, monitoring the cost of your defense is still important. Your case could impact the cost of your premium at renewal time. You want the most efficient outcome possible.
In working with your attorney to steer your case, be a co-pilot, not just a passenger. A lawyer may move on to the next case placing yours on hold. Keep the attorney focused on your case and stay involved in making decisions.
- A bad settlement is better than a good lawsuit. Settling a case is the best and most efficient way to resolve a dispute. The outcome of a case played out in court may be different than you expect. And no lawyer can guarantee an outcome. If you can settle, do so rather than move forward just because you believe you have a good or even great case.
In defending a lawsuit, you will accumulate legal fees. Can you recover those fees if successful? In Florida, there are three ways to do just that. First, have a written contract that says the prevailing party in a legal dispute is entitled to recover legal fees. Secondly, utilize the bond statute and lien/foreclosure statute, which have provisions for recovering legal fees. Finally, either party can make a formal proposal for settlement. To the extent that this settlement offer isn’t beaten by 25 percent at trial, the court will award the prevailing party legal fees. This encourages settlement and aggressive offers to transfer the risk of attorney fees. Facing a lawsuit can be unsettling. Retaining records and retaining a lawyer you trust will help you through the process – and hopefully to a good settlement.
Choosing A Lawyer and Understanding Attorney Billing
Where do you start in choosing a lawyer? The guidelines in “The Basics: Choosing A Lawyer and Understanding Attorney Billing” can help you feel more secure in selecting someone to take your case. Knowing what to look for and what to ask gives you the best chance at a successful, financially sound outcome.
How do I find the best lawyer?
Ask people you trust for recommendations. Get a few names, and then Google those names to make sure you are aware of everything publicly available about those lawyers. Also, use the Avvo.com rating resource to find attorneys by location or by their areas of experience. (Avvo is short for “avvocato,” the Italian word for lawyer.) A lawyer’s experience, reviews, publications, discipline and more go into the rating, so this is a tool worth considering. Also explore Martindale.com, the country’s oldest and perhaps deepest attorney database, which takes into account reviews by clients and peer attorneys in rating lawyers.
Always check a lawyer’s standing with the state bar, which regulates the profession. Make sure he or she is licensed and in good standing. Knowing an attorney was previously suspended for three years is something you want to know before you hire, not after you’ve had an issue yourself.
Explore whether the attorney you are considering has any board certifications, such as immigration or construction. Knowing an attorney has been vetted, has relatable experience and has passed tests on the issues pertinent to your case is worth consideration.
What questions should I ask a prospective lawyer?
Do you specialize in this area of law?
If so, that means you won’t have to pay a lawyer to learn things that are important in your case. For example, a board-certified lawyer focused on construction cases understands the issues relevant to your construction case. It takes time, which translates to your money, for a lawyer to get up to speed on an issue.
How much of your practice is devoted to this area of law?
How many cases like mine have you handled? The result in your case might not be the same, of course. But you should know whether your attorney or law firm is recently familiar with the area of law your case involves.
Who will I be working with?
You should be comfortable and acquainted with those who have a role in your case. Finding out you have been handed off to an associate isn’t always a bad thing, but you need to know what to expect. Know who would be working on your case and meet them in person.
How do you communicate with your clients?
Many lawyers communicate via email. However, many very good lawyers are old school, and dictate letters to be typed and sent. Is a strict 9-to-5 in play or is your attorney available for a 6 pm call? You need to know what to expect and whether that meets your needs.
How and how often will I be billed?
Ask for estimated fees and a frame of reference for costs. Yes, these will be rough estimates based on assumptions, but it certainly helps to know whether to expect $5,000 or $105,000 in fees.
What are the strengths and weaknesses of my case?
This will give you from a lawyer’s perspective the things that will help your case, as well as the issues that may sink it. Be concerned about any lawyer that definitively promises you a win. Asking “How many cases have you won?” isn’t helpful. This number could be high based on settling cases before they go to court. Or the percentage could be low due to a purposely low caseload. A win-loss record by itself is a dangerous litmus test to use in evaluating a civil lawyer.
What are the different ways to pay a lawyer?
Most attorneys charge clients an hourly rate. The more time they spend on your case, the more they stand to make. Hourly rates can vary widely, and there’s a perception that the higher the rate, the better the lawyer. However, many good lawyers charge lower rates, so this alone is not a barometer of quality.
Some attorneys charge on contingency, which means they take a percentage of what is recovered in your case. Still others charge through a hybrid system: a lower hourly rate with a bonus that is based recovery.
Not many lawyers charge a blanket flat fee, because litigation and expenses are unpredictable. But certain tasks, such as drawing up or negotiating a contract, can indeed be charged as a flat fee. Certain segments of your case – writing a demand letter, filing a complaint, serving discovery – could be negotiated for a flat fee. This eliminates you having to wonder how much time is going to be spent and how much you will get billed.
A retainer is money paid in advance of a lawyer’s services. Most retainers are a month or two of work. If you approach a lawyer with a substantial case that requires extensive work be done, the retainer will be higher than for a smaller case. Be aware of the policy on any unused portion of a retainer; you don’t want to lose money but can if the retainer is non-refundable.
How do I reduce my fees and costs?
It’s your right to ask for a case cost estimate or budget, but preparing one can be difficult and unwieldy, and it will be based on many assumptions and uncertainties.
A better idea as you communicate with your lawyer is to get mini-estimates for certain tasks. For example, if a deposition of a defendant is needed, ask for an estimate of what it will cost. (That involves time to prepare, gather records, and actually take the deposition.) This gives you an expectation of an upcoming cost. It also tells your lawyer that you are watching the cost in the case. He or she is more likely not to exceed the budget, having given you specific numbers. Your case strategy is intertwined with your fees. If the strategy is to settle the case early, that requires different steps than going to a trial and a judge for a determination. You should have an understanding of the strategy you want to employ early on, since that dictates the work that needs to be done. Switching strategies is expensive, so try to stick with one if possible.
Organization on your end can cut costs. If you give your lawyer five boxes of documents that don’t make sense, they will have to be sorted and processed and that will cost you. Put information in an orderly fashion to save time and money.
Respond quickly to your lawyer. When you are asked about setting up depositions, hearing dates, responding to discovery, or a trial date, reply promptly with an answer. When your lawyer must call or email you repeatedly, that follow-up costs time and money – and stalls your case.
As you proceed, it’s understandable to want an update on the case. But if you ask your lawyer for one, you’ll likely be billed for it. Instead, asked to be copied on everything, including correspondence with the court or opposing counsel. This way you see things progress as they happen, you know what work is getting done, and you are far less likely to need official updates.
What should be on the legal bills?
Assuming you are being billed hourly, every entry should include a date, the person who rendered the work, a description of that work, and the time it took to the tenth of the hour. It’s recommended to ask for tenths, versus quarter hours or half hours. If an attorney responds to a four-line email, depending on your agreement you could be billed a quarter-hour for what took only five minutes. In addition, you can request your bills contain running totals for the life of the case and attorneys performing work.
How do I change lawyers midstream?
If you want to discontinue working with an attorney, make sure you have everything you need to move the case. This is easiest if you have copies of everything. Give your attorney only copies of original documents or have them make copies when you begin the case and return the originals. This is important because if an attorney is not paid, he or she can file a retaining lien. This means the lawyer can retain or hold on to the client’s property he legally possesses – those documents you need – because of that failure to pay. A charging lien can also be asserted. This means that a lawyer can claim a portion of any money the client eventually gets due to the judgement. They can use that to pay their fee.
Spending time upfront finding, vetting and selecting a lawyer will pay dividends in the long run. The stakes are too important to make a hasty decision. Communicate regularly with your lawyer and remain involved. There’s a professional ready to go to work for you and work as a team toward your goal.
Ways to Reduce Legal Fees
Organize Your Files.
The more organized you are in how you organize your records and hand them to your construction lawyer, the less time your construction lawyer’s gonna need to spend in organizing the documents and learning from the documents, which means you’re gonna spend less money in legal fees.
However, if you organize your documents, using labels for folders, creating a timeline of events, both good and bad, so that your attorney can get a head start in the case because you’ve done some of the digestion of the information for him or her by putting the information together in organized ways. So, number one, organize your files.
Ask to be Copied on Everything.
If you’re attorney is corresponding via email with the other attorney, the opposing attorney or attorneys, ask that you be blind copied on all of those emails or, if your attorney is uncomfortable blind copying you, forward a copy to you after the fact.
If they file documents with the court, ask for copies of all of those documents so that you can see what’s going on. What arguments are being made by your attorney in the case, by the other attorney against you.
You need to stay informed and when you’re informed, then that does two things. One, it allows you to be at ease with the case ’cause now you know what’s going on, and two, you don’t have to keep calling your attorney and getting an update because you’ll be updated constantly as the case is progressing because you’re being copied on everything, and that should reduce your legal spend.
Ask for Rough Cost Estimates.
If your attorney says, “well, we need to file a Motion for Summary Judgment in the case”, you should ask the attorney, “well, how much do you think it’s gonna cost, when you think it’ll be ready, and when do you think we’ll get an answer on it”. Those types of questions are more than reasonable to ask. You should be asking them regularly, and your attorney should be comfortable in giving you a rough estimate.
It may not be perfect, but at least it creates a guideline for the attorney to follow, number one, and number two, it allows you to understand what your bill may be before you get it at the end of the month so you’re not surprised. Ask for estimates and you should be able to drive some of your legal costs down just by asking for estimates.
Pick a Strategy and Stick With it.
Sometimes clients pick a strategy, we move on that strategy for a few months, then they pick another strategy because they’ve had a change of heart, we move on that for a few months, and they decide that they wanna take a different approach. All of that back and forth, that herky-jerky approach to the litigation, costs money because the things you would do under one strategy may be unnecessary on another.
Decide with your attorney in a collaborative way what is the best strategy based on where you’re at, employ that strategy and give it time to work. Avoid back and forth approaches to the strategy in your case and you will reduce your legal fees.
Keep these four things in mind as you litigate a case. If you have questions about construction litigation, send me an email, firstname.lastname@example.org. See you next time.
Do You Mediate, Arbitrate or Litigate?
Contractors and their lawyers are very familiar with arbitration being the preferred method for the resolution of any dispute. It is called for in most construction contracts. But what happens if an agreement is not very clear and the parties are uncertain if their misunderstanding is to be presented to an arbitration panel or to a court.
Who gets to make that decision?
The supplier of impact resistant doors and the general contractor on a hi-rise project had a difference of opinion over whether delivery of ordered product was timely but it wasn’t clear if they had agreed to arbitrate or litigate their dispute. So they presented that question to the court. In short order a judge decided that by incorporating a reference to the Construction Industry Rules of the American Arbitration Association within their contract, the parties had sufficiently evidenced their intent to have arbitrators, not a court, hear and decide that it the matter – an important warning for everyone dealing with construction contracts. If you want to be clear how a dispute is to be resolved in any agreement, be it litigation or arbitration, better specify your preference in your contract.
Often misunderstood as just another form of arbitration, mediation is quite different. It is a private and confidential process where the parties voluntarily agree to meet and, with the assistance of a neutral third-party mediator (jointly selected by the parties), try to work through their disagreement. The process does not involve the evidentiary and testimonial aspects associated with a trial or arbitration, but is rather a mediator’s shuttle diplomacy to seek an acceptable middle ground that both parties might accept. If a settlement is reached, it may be enforceable by law. Many states now require that mediation take place after suit is filed and before trial. It is a very worthwhile step in any dispute resolution procedure and is highly recommended.
Arbitration has historically been the preferred method for contractors and their lawyers to resolve a dispute. It is often noted in their contracts as the way an unresolved claim or controversy is to be addressed. Believed to be a simpler, faster and cheaper option than litigation, this has not always proven to be the case. Depending on the dollars involved in the misunderstanding, an arbitration would be before one, or a panel of three, disinterested and jointly selected arbitrators (generally experts in the field). The process is much like a trial, with discovery being taken and evidence presented. While both may be more limited in arbitration, the fact that construction issues these days may be difficult or intricate could result in any arbitration actually taking more time. The coordination of multiple parties, witnesses, lawyers and arbitrators could easily cause any presentation to be spread out over a number of months versus one continuous hearing. But most importantly, and not often understood by contractors, arbitration decisions are rarely appealable, even if based on an incorrect interpretation of the law. You would need to show fraud or bias to have a good chance of winning at overturning an arbitration.
Is Arbitration Right For You?
How does your contract address dispute resolution? It probably says arbitration is the preferred method. And why not? It’s been favored by construction professionals for years. But that popularity may be fading. In fact, the American Institute of Architects contract forms now state that if the parties don’t specifically select arbitration as the way to deal with a dispute, then the choice automatically defaults to litigation.
Problems with Arbitration
Most people don’t realize that arbitration can actually be just as time-consuming and expensive as litigation. Discovery may be limited, but it isn’t eliminated. Document production and depositions remain integral in moving a construction case forward. And arbitrators’ fees—which aren’t cheap—are paid by the parties, whereas judges and juries are paid by the taxpayers.
But what may be the most important distinction between arbitration and litigation is the little-known fact that arbitration decisions are rarely able to be appealed. Short of a showing of bias or fraud perpetrated by the arbitrator, it is unlikely you can have a bad outcome overturned, even a decision based on an incorrect interpretation of the law. That is not true in litigation. You have the absolute right to appeal a judge’s ruling or jury’s verdict if you don’t agree.
Then, there is the tried and true method of litigation – suing in state or federal court before either a judge or a jury. This approach has one clear advantage – any decision, judge or jury, can be presented for further appellate review. While costly, it remains an effective way to move a controversy to a resolution. The complexity of the issues can dictate whether a judge or jury would be the appropriate forum. But frankly, more and more cases reach a settled resolution before ever going to trial.
So, What Should You Do?
For starters, put a requirement for mediation into your contracts. Many mistake mediation for arbitration. That would be wrong. In an arbitration, an arbitrator hears evidence and renders a decision that is enforceable in a court of law. In mediation, a neutral third party negotiates with the people involved and looks to find a middle ground which might settle the dispute. The mediator makes no decisions and his or her recommendation does not have to be accepted. An arbitration continues to a decision while a mediation can reach an impasse when the sides simply do not agree.
Set a time frame for a mediation to occur before any next steps take place. Courts in most jurisdictions now require mediation before a trial can proceed. If mediation is futile, then litigation, preferably before a judge, should be pursued.
To be clear, none of these options is pleasant. But having no stated path to resolving a dispute is worse.
Finally, make sure to have a prevailing party attorney’s fee provision. You wouldn’t want to go through all this, win your case, and then have no way of recovering some of the legal expenses you have incurred.
Recovering legal fees and costs
The matter of legal fees and costs. Are they recoverable? Absent a statutory provision and a corresponding claim, the attorney’s fees and costs you incur will not be recoverable, even if you win, unless you have a contractual provision which calls for the prevailing party to recoup his/her incurred legal expenses. Be sure to add such a provision along with your choice of dispute resolution alternatives when finalizing your contract. You’ll be glad you did.
Alternative Dispute Resolution Option
Many of you in the construction industry may already be familiar with dispute resolution models, such as mediation and arbitration, in resolving construction disputes. However, a number of reports and studies show an increasing trend toward one model of dispute resolution in particular– the Dispute Review Board (DRB). In fact, Florida recently used a DRB to reach a settlement in a dispute related to the ongoing PortMiami tunnel project. The disagreement arose when it was discovered, after digging began, that limestone needed to be grouted for the project to continue. This unanticipated work carried a heavy cost, which the Florida Department of Transportation (FDOT) has agreed to pay as part of the settlement.
Use of DRBs is not unique to Florida. A DRB was first used in Colorado in 1975 during construction of the Eisenhower Tunnel, and the construction industry has since reported using them with great success. In 1996, the Dispute Resolution Board Foundation (DRBF) was created and has developed a best practices and procedures manual to encourage the use of DRBs in construction disputes.
THE DISPUTE REVIEW BOARD (DRB)
Typically, DRBs are made up of a panel of three impartial individuals with industry experience. According to the DRBF’s website, a DRB is a “board of impartial professionals formed at the beginning of the project to follow construction progress, encourage dispute avoidance, and assist in the resolution of disputes for the duration of the project.” The Board members are usually selected and then approved by the owners and contractor before construction begins. Members remain current with the project by periodically visiting the jobsite and reviewing project documents.
When there’s a conflict, the DRB writes a recommendation that the parties can choose to adopt. This recommendation is based on review of the contract, meeting notes, correspondence, and any statements made by the parties. The recommendation explains how the Board evaluated the facts and the reasoning behind their advice. Importantly, the Board’s recommendation is not binding on the parties, although in many cases the parties choose to follow the recommendation.
The DRB model differs significantly from other forms of dispute resolution, particularly mediation and arbitration, both of which are commonly used in construction disputes. Mediation often takes place when parties to a lawsuit are ordered to try to settle before going to trial. A mediator is a neutral party who helps the parties reach a compromise agreement on their own terms but does not render a decision. Unlike a mediator, an arbitrator (could be one or three depending on the size of the dispute) makes a binding decision based on his or her interpretation of the law. Arbitration is common in construction disputes because many construction contracts have clauses requiring the parties to arbitrate.
Proponents of mediation and arbitration emphasize that these models save time and money by avoiding lengthy and expensive litigation. However, mediation and arbitration are not without their own risks, so you should understand the pros and cons of all your options, including litigation, before deciding on the best choice. As the case of the PortMiami tunnel demonstrates, Florida construction cases can be quite complex. Arbitrators may incorrectly interpret the law. If that happens to you, you may find it difficult to overturn the arbitration award. Unlike court decisions which can be appealed, an arbitration award is unlikely to be vacated unless there is evidence of fraud, corruption, misconduct, or similar ground. That means you may be stuck with an arbitration award that incorrectly evaluated the facts or law of the case. Finally, while arbitration and mediation offer the neutral advice of an impartial decision-maker, the costs of these procedures can sometimes match that of complex litigation.
Why You Should Litigate Rather Than Arbitrate
Arbitration has been a popular dispute resolution option in the construction industry. It is, in fact, a standard provision within many construction contracts. Generally believed to be a simpler, faster and better option to resolve a difference of opinion, this has proven to not always be the case. These are 4 reasons why.
No Longer So Simple.
It was often thought that discovery had no place in arbitration. That is not true. Discovery in an arbitration proceeding can be as long and as expensive as it is in litigation. While the parties can indeed limit the amount and type of discovery conducted in arbitration, that doesn’t always occur, especially in these days of complicated issues.
Just As Time Consuming.
It is not unusual for a significant arbitration to take as long as a lawsuit from initial filing to final ruling. Scheduling all the parties and then coordinating their availability with that of their lawyers and the arbitrators is a challenge. It is therefore not unusual for arbitration hearings to be spread out over several months. As cases have become more complex, so has the ability to argue any particular position in one continuous presentation.
Not So Cheap.
Parties are often surprised when they learn the amount of filing fees and administrative costs associated with arbitration, not to mention the professional fees charged by the arbitrators – costs that are absent in a state court or federal litigation where filing fees are in the hundreds of dollars and judges are paid by the taxpayers.
Something not always understood by non-lawyers, an arbitration decision is rarely appealable – even if it is based on an incorrect interpretation of the law. Absent a showing of fraud, bias or a corrupt arbitrator, it is near impossible to overturn a bad decision by an arbitration panel.
Arbitration may have its place in certain construction disputes, but parties need to make such a decision fully aware of the pros and cons of proceeding down this road.
3 Do’s & 3 Don’ts to Stay Out of Court
Smart business practices can go a long way toward reducing, even eliminating, the chance of legal trouble. With that in mind, here are three Do’s and three Don’ts that should keep you from being sued by unhappy customers or vendors.
DO get it in writing – always.
Even a small job needs a formal written agreement. It should include scope, price, payment terms, and schedule. It should reference a complete set of plans and specs. It should include language on insurance, indemnification, warranty, termination, dispute resolution, and recovery of legal fees and costs. After you have a signed contract, continue to get everything in writing, especially changes. Have customers and vendors acknowledge each agreement, promise, or direction in an email, text, or a written document of some sort. Memories fade in time.
DO review the plans, the specifications and the site.
Plans and specs are the road map for getting the job done with as few hiccups as possible. But plans and specs can be incomplete or unclear, leaving out key details – ingress or egress problems, for example – that you need in order to properly price and build the project, and which you may only discover by visiting the site.
DO manage expectations.
Projects start off with the best of intentions but with different expectations. Review the scope of work and payment terms with your customers and vendors so they know what you plan to do, when you plan to do it, and how you expect to be paid. Surprises on construction projects are seldom pleasant. This will help minimize them.
DON’T start work without a deposit or assurance of adequate funding.
In most cases you will want some money upfront, even if it’s just 5% or 10% of the project sum. If it’s not customary to obtain such a deposit, you should get documentation verifying the customer’s ability to fund the entire project. An example would be a letter from the lender on the project showing the value of the unused portion of any construction loan.
DON’T work without insurance.
Things can go wrong fast on any sort of construction project, and a $50,000 job can easily turn into a million-dollar liability. Proceeding without insurance coverage – be it for personal injuries, damage or loss to property, or just mistakes – is simply not worth the risk. You also need to make sure subcontractors are insured. Deal with valid certificates of insurance, and endorsements that name the contract parties as additional insureds. And don’t forget to obtain new certificates and endorsements when policies renew.
DON’T walk off a job.
Relationships with customers and vendors can sour. When that happens, it may be tempting to abandon the work, especially if the customer isn’t paying you or a vendor isn’t fulfilling its orders. But don’t, at least not before you review your contract in detail, ideally with your legal counsel. Courts have historically not looked kindly at contractors who walk off jobs, especially without adequate written notice. Once you finish your work, you can put in the necessary effort to collect the money you earned.
Steering clear of legal trouble is both dollar-wise and business savvy. Underscoring each of these do’s and don’ts in your communications and documentation will keep all parties well informed, and should keep you out of court.
Settling construction disputes
There is no running away from the fact that we live in a highly litigious society, and there is no question that having to file a construction lawsuit to enforce your rights or being brought into a lawsuit to defend yourself is at best an expensive proposition and at worst a gut wrenching experience. Even if you are able to adequately recover your litigation costs, the process of dealing with construction disputes is both long and emotionally draining, sure to challenge your patience and test your will. It is believed that you have a 1 in 4 chance of having a potentially devastating lawsuit filed against you sometime in your future.
Accepting the threat of litigation in your future is the first step; understanding how to best resolve any dispute which arises is the more difficult next step. Always know that somewhere, likely buried in the positions put forth by the opposing parties, lies a resolution, where each party compromises its demand just enough to eliminate the necessity of a costly judicial action. Finding that place where a settlement can be reached and where the respective parties can agree to accept something less than what they hoped to achieve isn’t always easy, but it is possible.
However, resolving a controversy without entering into a proper settlement agreement is tantamount to leading a horse to water and not letting it drink. Settlement agreements are interpreted and governed by the law of contracts. It is therefore critical that the parties not only reach an agreement conceptually but also sign a document which is clear, concise and lists the actual terms of the settlement. This will demonstrate that the parties have mutually agreed upon the essential elements of their resolution. While uncertainty as to nonessential terms or small items will not preclude a settlement agreement from being enforced, an inability to show that the parties had a meeting of the minds on resolving their construction disputes could be fatal to actually making a compromise stick.
Settlement agreements are highly favored by judges as a means of conserving judicial resources, and therefore courts will enforce them when possible. Parties will do themselves a favor in making sure that any settlement they reach is one which is reduced to a written document and signed. Case after case has been unnecessarily litigated because the parties never got around to formalizing their settlement. Courts are reluctant to enforce what one party only thought the other party agreed to. It is bad enough to find yourself in the middle of a dispute; it is ever so much worse to think you have settled a controversy and then be hauled into court because the deal was never actually formalized or signed. Remember to always ink the deal.
Proposals for Settlement
If you get involved in litigation, especially litigation with significant dollar exposure, you’ll likely come across a proposal for settlement. Either your opposition does one or you or your legal advisor suggest you consider filing one yourself.
Here’s how proposals for settlement works.
The party being sued (the defendant) makes an offer to settle a particular dispute for a specified and reasonable amount. If the offer is rejected by the party who brought the suit (the plaintiff), and the plaintiff is unable to obtain a verdict equivalent to 75% or more of the amount proposed, then the defendant will be entitled to his/her incurred legal fees from the plaintiff. Vice versa, if the plaintiff files a proposal for settlement under the statute and obtains a verdict which exceeds the offer by 25% or more, then the defendant must pay the plaintiff his/her incurred legal fees and costs.
These proposals have to be in writing and must follow the statute’s specific requirements. The party receiving the offer has 30 days from receipt of the proposal to accept or reject it.
Notice that I said the offer has to be reasonable. Many a proposal has been thrown out by a judge because it was either not made in good faith or was for an unreasonable amount. $100 is not generally going to work. Likewise, including a general release as part of the offer can be problematic. That release has to exactly outline who and what will be released, especially complicated if the underlying suit involves multiple parties and issues.
What’s the benefit of using a proposal for settlement?
It is one way to recover incurred legal fees, something which can be an important part of any resolution of a pending dispute. A proposal for settlement allows a party to recover its reasonable costs and attorney’s fees incurred from the date of the filing of the offer. And the rejection of an offer does not preclude the making of a new and subsequent offer. An offer can also be withdrawn in writing before it is accepted in writing.
Proposals for settlement can be excellent tools for fee shifting, but they must be prepared accurately and taken seriously.
Are You Using Daily Job Reports?
In a court of law, a contractor’s daily reports are critical. In many instances, they are considered key evidence showing what actually occurred at specific times on the job. And since people’s memories fade, a court will likely rely heavily on what the daily reports say happened (especially when presented with a corroborating witness).
The problem is that many contractors fail to create these reports. And those that do create them, do it only at the beginning of the project or sporadically throughout the progress of the job, generally only when they are reminded to do so. Daily reports (hence the name) only become truly effective when they are, in fact, done daily.
The importance of timely documentation
The reason that daily reports are admissible in court (again, with corroborating testimony) is that they are interpreted as being recorded at or about the time the events in question occurred. Field managers should, therefore, write up these reports daily while the work is occurring or very soon thereafter to capture as accurate an account as possible. Not created until the end of the week or month, the information will surely not be as accurate and may not be as helpful in supporting a case if suit is filed.
What to include in daily construction reports
To reduce a company’s legal risk, daily reports should clearly describe the entire project’s status as it applies to a contractor’s scope and the schedule. At a minimum, the report should include:
- The date of the report;
- Who is writing the report;
- The time work starts and finishes on that day;
- A description of the weather;
- On smaller jobs, the employees, and subcontractors, by name, title, and company, who are on the job site. On medium to large jobs, the total number of employees and subcontractors by title and company will suffice;
- Any material deliveries of significance, such as large dollar items, for example, fixtures or pallets of tile;
- The current state of the schedule as compared to planned scope of work and what is causing any delay; and
- Anything else that is out of the ordinary that may be occurring, or not occurring, that is impacting or may impact the project or the contractor’s schedule and work.
- Daily reports serve many purposes. Make sure those who complete them understand how they will be used and how they can positively impact a project summary. A contractor’s good name and financial success on a given project can depend on it.
Sound Contract Practices to Better Protect Your Company
You might be surprised to learn how many business people with a dispute don’t have any written agreement to back up their claim. Sound contract practices protect your company. It’s well worth sticking to these principles any time you agree to a job.
Write it down.
Any contract you have should be in writing. Thorough is better than brief, but something is far better than nothing. An agreement can be handwritten or electronic. It could be an email exchange that shows agreement to outlined terms and conditions. A recent legal ruling found a text message created a valid agreement between two parties. A contract doesn’t have to be notarized or be an original copy to be valid. The more complete the better, but just make sure you have your agreement in writing.
Don’t automatically sign a contract.
Someone else’s contract is likely designed to protect them, not you. It’s better to review and amend someone else’s contract rather than just signing off. Don’t be intimidated by formal language or assume it offers you protection.
Be cautious about “standard” contracts.
If someone tells you, “This is what we use for all our jobs,” that doesn’t mean it’s fair. Do not sign without reviewing and amending if necessary. Some favor contracts produced by trade organizations such as the American Institute of Architects. Those are relatively fair to all the parties involved, but could still be made better. Don’t sign blindly.
Clearly define the scope of work.
Whether it’s materials, materials and labor, or just labor, be very clear in defining your work. When someone hires you, he wants a broad definition of the work that you are going to perform. He wants to have all the opportunities that may exist in the contract to say, “This is within the scope of your work,” even if it’s somewhat vague. In contracts prepared by AIA or others, there may be a statement making you responsible for all work that is shown in the plans and specifications, as well as all work that is “reasonably inferable.” Under those terms, if a “reasonable person” believes that something should be part of your work, a judge could determine that to be the case. This can expand the scope of your work beyond what you intend.
When sophisticated owners define scope of work, sometimes they include all the pages of the entire plan and specifications – plumbing, architectural, structural, mechanical, etc. Be wary. If you are an electrician, you want just the plan’s electrical pages defining your scope. But they may want to hold you responsible for all electrical issues in the entire plan. If something is left off the electrical plan, but it is included in the mechanical plan as an electrical item, unless you have limited your scope you could likely be deemed responsible and have to include it for the same price.
List all exclusions.
There are things you don’t do in the scope of your work. Have a list of exclusions prepared and be able to itemize what is not included in your price or scope. Include that list of exclusions and limitations as an exhibit in your contract.
Understand the change order process.
Ideally, you’ll do extra work on a contract only after there’s an agreement on a change order – scope, price, and timeline changes fully defined – and the agreement is memorialized and signed. When you review a contract or generate one yourself, make sure you understand the change order process and, most importantly, follow it.
Most general contractors with their own contract specify that you can’t do any work without getting a signed and approved change order in advance. However, in such a contract it also likely states that if you are asked to do further work, you agree to keep separate, detailed records of that work and submit the bill. It will be determined later whether it was extra work and whether there was an impact on the schedule and cost, based on your records.
Therefore, if you don’t segregate your own records for the change order work and process, it will be difficult to submit pricing. The contract should state that if you are asked to make a change, the contractor or owner need to verify that change. Generate and submit a change order before you do the work. If it’s rejected, ask for a change directive from the contractor. Either way, you need a paper trail associated with the change.
Verify the schedule.
Closely review any schedule in the contract to make sure it’s achievable. Does the contract include a penalty for failing to perform the work in a timely manner? A provision for “liquidated damages” means a per-day penalty for not performing your scope of work on time. Consider adding some sort of buffer to your agreement, a 30-day window before those damages would kick in. If the contract doesn’t call for liquidated damages, you might still be liable for actual damages. That could mean any employees hired and kept on standby to cover your incomplete work, or profits that were lost because the project wasn’t completed on time.
Understand payment terms.
How will you be paid and when? You need to clarify these points in advance so you aren’t surprised later. Are you to be paid within 30 days of your payment application; are you agreeing to a pay-when-paid or pay-if-paid clauses – they’re not the same and both are problematic. Is there a retainage and when will that be released?
Refine the dispute resolution procedures.
Disputes can happen during a job, not just over its end result. Four steps should be included your contract. First, those associated with the dispute should have an in-person meeting to attempt to resolve it. If that initial meeting doesn’t work, the second step is mediation. Both parties would meet, splitting the cost of a neutral, mutually agreed-upon third party mediator who will try to mediate, or facilitate, an agreement.
The third and fourth possibilities are mutually exclusive. You can take a case to a judge or jury to be decided, which can take anywhere from eight to 24 months and be expensive, or you can choose arbitration. Arbitration means the disputing parties hire one to three arbitrators (perhaps a former judge, contractor, engineer, and/or lawyer) who get paid as professionals to decide the matter. Arbitration may be faster than a trial, but there are additional costs associated with this method of resolution, and an arbitration decision is not generally appealable.
Make sure the winner gets legal fees.
There are two ways in most states to recover legal fees. First, when someone is sued for violating a statute, typically the winner is awarded their legal fees. The lien and payment bond statutes are among those providing for this. Secondly, if you have a written contract, that contract can include the necessary language to ensure that the prevailing party is entitled to recover legal fees. Because litigation is so expensive, make certain your contract includes this provision, should you need to go down this road.
Contracts are no place to cut corners. It doesn’t have to be complicated, but your contract must be in writing, thoughtful and thorough to give your work and your company the proper protection.