To Sue, or Not to Sue? That Is the Question

Ulf Wolf / February 2016

In his play, Henry VI, Shakespeare offers this immortal advice: “The first thing we do, let’s kill all the lawyers.”
    
Some say Shakespeare meant this as a compliment; others have different takes on this. Either way, there is symbolic wisdom in his sentiment, for these days we live in a highly litigious society, where it seems most will file a lawsuit at the drop of a hat (or insult).
    
But is this really the way to resolve disputes, especially those that might develop on the job site?

Project Disputes
The perfectly planned and executed project—completing on time and without friction or disputes—is a rare (though beautiful) thing.
    
Most projects, however, will hit a bump or two. Given this, what are the main areas of potential disputes on a busy project?
    
Kim Lorch, vice president at George M. Raymond Company in Nevada, observes that “disputes normally arise from scope misunderstandings or the failure of one or more parties to maintain an agreed-upon schedule.”
    
Pat Arrington at Commercial Enterprises, Inc. in New Mexico shares that, in his experience, disputes tend to arise when “the GC does not ensure that the mechanical trades have completed their work prior to requesting the gypsum board application, or when the GC allows mechanical trades to cut into finished walls and then does not see the drywall contractor compensated for the subsequent repair work.”
    
Michael Mazzone, president of Statewide General Contracting & Construction, Inc. in Hawaii, finds that “most disputes with owners involve change orders; and with subs, it’s damage to work after it has been finished.”
    
Robert Aird, president of Robert A. Aird, Inc. in Maryland, sees two main areas of dispute: “When an apartment building goes condo, we often see claims against contractors. Far too often, the condo association and their attorneys look for free money by claiming design and/or construction defects and so proceed to sue the architect, engineers, general contractor, suppliers and subcontractors. Good documentation of work done—with photos for backup—typically saves the day.
    
“The other area of potential conflict is non-payment by the general contractor. In this case, we’ve only filed suit once as a letter from our attorney indicating our intent to file a lien usually does the trick.”
    
Charles Antone, consultant with Building Enclosure Science in Rhode Island, has also run into the condo problem: “Condos have many legal owners who seem all too happy to file construction defect cases, aided by the fact that the statute of limitation for construction defects is rather long, usually a decade or more.”
    
Kevin Biddle, president of Mader Construction Co., Inc. in New York, suggests, “Most disputes spring from a lack of proper scheduling on the GC’s part. That and change orders.”
    
In the experience of Greg Smith, vice president of estimating at Superior Wall Systems in California, “most disputes seem to arise from poor GC planning and out-of-sequence work. This results in having to over-man a project and a lot of ineffective jumping around. Shortened schedules almost always lead to trade stacking and inefficiencies that are very costly financially.
    
“Another area of potential dispute is scope. It is imperative that a complete scope be fully vetted during contract administration to avoid on-site scope-gap issues to ensure the GC understands exactly what they are or are not buying.”
    
David Smith, division manager of special projects at Marek Brothers Systems–Dallas, concurs. He also has the opinion that there are two main areas of potential dispute on a busy project.
    
“Meeting a schedule laid out by the GC is by far the biggest area of potential dispute for drywall subcontractors, as many pieces need to fall into place for a schedule to be met,” Smith says. “It must be realistic and based on input from all of the subs, all of whom must then meet the milestones committed to. The other area is discrepancies between the contract scope and the work actually required to complete a project.”
    
The experience of Dave DeHorn, chief estimator at Brady Company in Los Angeles, corroborates Smith’s: “Disputes with GCs are typically over scope. If the documents are not clear and if the contract is not clear, then a potential scope-gap problem arises. Disputes with other subs are typically over the schedule or over them installing their work ahead of yours, which complicates the task.”
    
Many other contractors confirm that schedule and scope are indeed the two major areas of potential conflict.
    
What’s the best way to steer clear of these pitfalls?

Dispute Prevention
The best way to handle conflicts and disputes is, of course, to avoid them in the first place—more easily said than done, though not impossible.
    
Lorch suggests that when it comes to scope, “the best thing is a complete and thorough contract that clearly outlines the responsibilities of each party. But when it comes to schedule, “the GC needs to involve the trades continually in the development and updating of the project schedule. For their part, the subs need to meet their commitments,” Lorch says.
    
In Arrington’s experience, the best way is to “stay in close communication with the GC and other subs at all times.”
    
Biddle agrees: “Up-front communication is the key to nip potential problems in the bud.”
    
In Mazzone’s experience, “Even though it is hard to make the field staff understand, they must document, document, document everything.”
    
Says Aird, “We go out of our way to provide our customers with such good-quality work, job safety and service that they will want us for their next project(s), and as a result they treat us well.”
    
“We compare the proposed schedule to our historical production rates to determine the best crew-size for a project,” says Greg Smith. “Also, we want to make sure that we are sequenced properly with the other trades. To do this, we try to meet the GC as early as possible to discuss both scheduling and sequencing. Failure to do so will result in scheduling issues later when it is much more difficult, if not impossible, to resolve them amicably.”
    
Suggests Antone, “Don’t do condos. Or, if you do, be ready for potential claims by including potential legal costs in the bid.”
    
David Smith says, “Contract verbiage must be very clear and mutually understood as it pertains to scope, schedule, terms and exactly which set of plans/specs you are committing to.”
    
Timothy Rogan, CEP, vice president at Houston Lath & Plaster in Texas, concurs. “We are very specific in our scope,” he says, “and we only execute extra work without a change order for one GC whom we know and trust.”
    
Lee Zaretzky, president of Ronsco, Inc. in New York City, suggests that you “always document progress and delays. Use RFIs as needed and proactively manage projects. Never be a victim.”
    
DeHorn stresses, “When bidding a project that does not have a clear scope, clarify in your proposal what you do and do not see as your scope.
    
“Then you need to follow up and ensure that all these clarifications wind up in your contract with the GC. It does no good to clarify a bid and then not included the clarification in the contract.
    
“Another excellent way to avoid conflict is to deploy a Lean Integrated Project Delivery (LIPD) type bid, where the owner, GC, architect, structural engineer, as well as all subcontract trade partners share in both the risk and reward of the project. In this way, the subs will participate in the design early on and can help work through details and issues before they arise on-site.
    
“In this scenario, everyone wants to work as a team because at the end of the project, the whole team shares in the profit.”
    
Failing that, however …

Dispute Resolution
If your best efforts to avoid conflict still sees you in dispute with either the GC or another sub, how best to resolve this?
    
Craig Daley, president of Daley’s Drywall & Taping in California, has been there. “We’ve been down the claims route using consultants and lawyers,” he says, “and it’s amazing how much time and money is wasted on so-called experts. Always way more than their initial quotes. So these days we steer clear of this process and much prefer to kick any dispute up to the president of the company involved and, if at all possible, bring the owner to the table as well. This is where the claim process ends anyway, so why not start there?”
    
Offers Lorch: “All parties need to work toward a resolution and be creative in finding alternate solutions and compromises that all parties can live with.”
    
Mazzone concurs. “It really is a matter of give and take,” he says. “If it is a GC I like working with, then I’m willing to give.”
    
In Aird’s experience, “A good relationship with the customer (general contractor, owner, property manager) is important—always. Also, face-to-face discussion is preferable and cheaper than involving lawyers and court. Basically, everything in life is a negotiation. All too often, that includes landing a job, performing it and being paid for it.”
    
Shares Greg Smith, “The first thing we do is sit down with the GC management team and explain what our concerns are and try to eliminate the issues causing us heartburn. If we cannot reach an agreement on how to move forward as a team, we then request a meeting with the general contractor’s principals to try and work out a reasonable solution with them. Then there are times when both sides feel very strongly about their respective positions and a resolution cannot be reached. At this point we formally file a claim against the project.”
    
Howard Bernstein, president of Penn installations, Inc. in Pennsylvania, suggests (tongue partially in cheek), “Hopefully we can resolve disputes by thorough documentation and clever butt-covering long before things reach critical mass. Failing that, we point fingers at everyone else and try to fix blame elsewhere.”
    
Gerald Roach, owner of Forks Lath & Plaster, Inc. in North Dakota, puts it succinctly: “You just have to work with them.”
    
Antone takes a very pragmatic approach, “When it comes to condos, whether you wind up in arbitration or in court, make sure you hire a very good expert. Also, during construction, document what you’re responsible for as well as you can. And be aware that 80 percent of such claims are about performance failures of the building envelope, so always adhere to your best practices to prevent such failures. However, should the owner or GC ask you to do something that does not meet best practice criteria, document like crazy, and if at all possible, make the GC, architect or owner put in writing precisely what they want you to do.”
    
The consensus seems to be that the least expensive and most efficient dispute resolution is communication at as high a level as needed.
    
Should this fail, what next?

Meditation and Arbitration
Before filing liens or heading for court, there are two less-drastic steps to try. The first is mediation.
    
The term mediation refers to any instance in which an impartial third party (the mediator) helps others reach an agreement. The process is private and confidential, and participation is typically voluntary, although it may be specified in the GC contract.
    
Mediation, as used in law, is a form of alternative dispute resolution, a way of resolving disputes between two or more parties. Typically, the mediator facilitates communication and, so, agreement.
    
AWCI’s general counsel, Don Gregory, who is also director and chairman of the construction law practice at Kegler Brown Hill & Ritter in Columbus, Ohio, elaborates: “Mediation is not arbitration. It is not binding. It consists of an impartial third party, in essence, facilitating communication between the parties and ensuring that both sides are actually heard.
    
“Due to the dynamic of mediation—that each side is heard and can freely speak their minds (something that may never happen in court)—people will feel less aggrieved, and this helps foster a resolution. There is, in fact, something quite therapeutic about getting these things off your chest. That is why mediation is a very effective tool these days.”
    
Antone agrees. “A good friend of mine, with a master’s degree in alternative dispute resolution, always suggests mediation if you want to preserve your relationship with the other party,” he says. “Arbitration or court might well destroy it.”
    
If mediation did not arrive at a resolution, the next to try step is arbitration.
    
Arbitration is a proceeding in which a dispute is resolved by an impartial adjudicator whose decision the parties to the dispute have agreed, or legislation has decreed, will be final and binding.
    
It is one step short of going to court, not too far removed from having a case determined by a knowledgeable judge.
    
Still, should meditation fail, arbitration might avoid a lengthy and costly legal battle.

Before You Sue
What should you do before going to court?
    
Says Lorch, “We never go to court. There is always a better solution than going to court.”
    
Biddle concurs: “We would try just about everything. Only the lawyers win if you go to court.”
    
Bernstein is of like mind. “We’ll do anything and everything,” he says. “Going to court rarely works out well. Even if you win, you lose.”
    
Dave Smith says, “In a word: We will try everything. We generally do not do business with GCs who make it a common practice to settle disputes in court. Obviously nobody wants to go through the legal process to solve a dispute. In my 30-plus years in this business (20 with Marek), I can count on one hand the times the word ‘court’ was mentioned on a project.”
    
Greg Smith elaborates: “We will do everything we can to stay out of court because this option is a very costly one. Not only when it comes to legal fees, but you must also factor in the intangible costs of taking an employee away from his normal tasks to document and administer the claim. This individual might be a project manager who now has a diminished capacity to manage work, meaning that we now have to overload someone else or, worst case, hire another project manager to fill the void.
    
“As you go through discovery, there are tons of files that need to be read or prepared, and someone has to take care of all that. Then there is putting the claim together, which requires a ton of research by our employee, and that literally involves recreating the project all over again on paper to trace and prove what went wrong and who is responsible.
    
“As a result, claims are very time consuming, which is expensive. Also, to file a claim effectively, you will need to hire a claims consultant who will assist the company in assembling the claim and tie it together with the attorney. Again, very expensive.
    
“Bottom line: We will do everything we can to avoid that process.”

GCs and Contracts
Another relevant issue is whether GCs live and breathe by the letter of a contract (a more litigious kind), or whether they are reasonably flexible if the situation calls for it.
    
Says Daley, “Our GCs can be two-faced when it comes to the letter of the contract. They like to deny change orders due to lack of timely notice or some such contract stipulation, but when we try to refuse work due to lack of formal change order as required by contract, they want to skirt it.”
    
Says Lorch, “We will typically not work for customers that we don’t know or that are extremely rigid in their use of their contracts. However, on certain issues, like ‘pay when paid,’ even these customers typically are not that flexible.”
    
Says Greg Smith, “For the most part, the contract is the rule book for the project, and most projects are administered to the letter of the contract. That being said, we have some regular clients who are a little more relaxed on the issue, reflecting the trust we have built in each other.
    
“With general contractors that are new to us, we do as much as we can to obtain a contract we can live with through the course of the project.
    
“Also, experience plays a large role in how well we can negotiate contract terms.”
    
Quips Bernstein, “They seem very rigid with respect to language that benefits them while being very flexible when it comes to such things as paying us per the contract-language terms.”
    
Says Roach, “Really, the contract does not mean much unless you, or the GC, plan to sue.”
    
Antone has been around this block a few times. He says, “Most contracts are quite horrendous. Everything is the sub’s fault. Here’s my advice: If in the pre-construction meeting, the PM is reading the contract line by line, then you’re in trouble. If the GC is planning to enforce every clause from day one, you’ll have a really tough time. Trust and performance will keep that agreement in the filing cabinet, but of course you must know precisely what you’ve signed.”
    
Steve Winn, corporate credit manager at Marek in Texas, says this: “On commercial and retail work, and even some local public work, the contract is a guide but pretty much stays in the file cabinet unless there’s a major dispute. Once you pull the contract out, you’re no longer in a working relationship and things will go south fast. We negotiate as best as we can for [probable bad] scenarios but work like hell to keep … the relationship good. I think it was John Maxwell who said, ‘Everything is relationship.’ Relationship is a bond far superior to contract language. At any level in the GC-sub relationship, if that relationship is good, one side will do whatever it can to make things right or to help their counterpart.”
    
“Public work, especially federal, is a different animal,” Winn continues. “Those GCs tend to stick to the book because they have to, which isn’t necessarily a bad thing because the prime contract and regulations lay everything out for you. If you follow the rules (and have a good bid), you should do fine.”

Leverage
It would stand to reason that with the construction economy back on track, the subs now have more leverage with the GCs during contract negotiations. But is it really a sellers’ market?
    
From Lorch’s standpoint, “In Las Vegas, although our revenue has increased since the downturn, there is still quite a bit of competition and our customers know that it is still a buyer’s market. We are not seeing a significant ability to negotiate terms.”
    
Arrington is in a better position. “Contractors that have insurance, bonding and can pay for materials, call the shots now,” he says.
    
Says Biddle, “Current manpower leverage is quite effective. We can tell them that if they don’t provide signed change orders, we will cut manpower and when we do, they may not have them back when they want them.”
    
Winn observes, “If the market is so hot that you’re turning away jobs, you’re certainly in the driver’s seat when it comes to the contract, though I think even in downturn cycles, subs today are more aware of the risks they buy into when they sign a contract.”
    
Zaretzky adds this: “Today we can afford to insist on fair contracts that don’t forfeit our rights. In lean times, in a buyers’ market, the GC has more leverage to demand that you accept all their terms and conditions.”

Wise Words
Some final bits of advice, this from DeHorn: “Having a good estimate up front is key to staying out of disputes, but you also have to have good people in the field who know what to look out for and who can spot where potential disputes might arise.”
    
“Having long-term relationships with GCs always help,” he adds. “That way, you know what they want, and they know what you can do.”
    
And finally, both Winn at Marek and John Kirk, owner of Kirk Builders in California, remind us of the old contractor adage, “I’d rather have a bad contract with a good contractor than a good contract with a bad contractor.”
    
And as Winn adds, you need to look for character when choosing customers.
    
That way, you probably won’t have to kill any lawyers.

California-based Ulf Wolf is the senior writer at Words & Images.