Tips on How to Avoid Major Litigation Land Mines
Understand the Relationship Between the Parties InvolvedA successful construction project requires coordination between all of the parties involved. If the parties do not have a clear understanding of their roles and duties, disputes will occur. It is the responsibility of the general contractor to ensure that all involved-from the client to the general contractor to the subcontractors and their employees-not only have a firm understanding of their requirements, but also how they interrelate with one another. Problems can arise simply because one of the parties exceeds or fails to meet his obligations which can, in turn, cause a domino effect on the others.
Clarity with job duties begins with a careful review of all of the pertinent contracts on the job. The general contractor must review the prime contract with the client and all of its subcontracts. Additionally, the GC must interact with the subcontractors and their employees in a consistent manner in order to avoid later confusion. Without careful attention to this issue, the project can face delays, cost overruns, workmanship issues and other problems.
Avoid Undocumented Alterations to the ProjectOne of the most common oversights that lead to disputes and litigation is lack of documentation for changes to the scope of the project or for additional work performed. While the basic contracts and agreements between the contractors on a project set forth the scope of the project and many of the guidelines towards its completion, changes to the original specifications undoubtedly occur. Changes arise for several reasons: feasibility issues on site, financial constraints, and client intent are just a few. All of these changes-and their approval-should be memorialized in some form of writing.
It is important to document changes for two reasons. First, because construction projects are usually governed by contracts in writing, almost all changes to that contract must also be in writing to be enforceable in court. Second, changes in the project will invariably change the cost of the project. If the project becomes more limited or expansive, the cost will rise or fall. Variance in costs affects margins both upstream and downstream in the contractor chain and, without appropriate documentation, will lead to disputes regarding who is responsible for the change in cost.
Provide Notice of All Delays and Their CauseSimilar to undocumented changes, disputes arising out of delays on a project are some of the most frequent areas of litigation. Because of the specialized nature of work that goes into a large project, construction progress can frequently rely on dozens of different subcontracting companies providing a wide variety of expertise. Often, one company cannot begin its work until another has completed its duties. Additionally, most contracts will contain a deadline of some form by which work must be completed. For these reason, delays by one company can cause issues and problems.
The major problem that arises from delays is cost. Costs in materials and labor change. Furthermore, subcontractors plan and accept or reject their projects and manpower allocations in reliance upon deadlines that are set by either the general contractor, client or another subcontracting company. Failure to start on time can cause disruption, especially to smaller companies, which can lead to higher costs and potentially high losses in revenue. Therefore, when delays do occur, it is imperative that they be carefully documented. Correspondence and memoranda upstream seeking additional time as well as downstream providing reasons for the delay will help to prevent others from suffering damages as a result of the delay, while protecting the delayed company from liability.
Prepare for Employee DisputesAlthough most employees are considered "at-will" (and can, therefore, be terminated without cause), issues with employees frequently occur. Allegations of breach of employment agreements and/or wrongful discharge will be brought and contractors should be prepared to defend themselves. There are some preventative steps that the contractor can take to avoid liability.
First, it is important that the status of all workers as either independent contractors or employees is clearly understood and complied with. This distinction is important for a variety of reasons including liability for damages, payment of taxes and control. The parties' roles should be defined in the contract documents and in the manner in which control is exerted upon them. Courts have held that even though an employee is labeled an "independent contractor," if enough control is exerted by the employer, he will be treated as "employees" under the law. Second, if the worker is an "employee," it should be clear who his "employer" is. Employers can be liable for the acts or omissions committed by their employees.
Pay Attention to Bond Filing RequirementsFor a variety of reasons, a situation will arise where either a contractor cannot pay a subcontractor or a subcontractor cannot complete its duties. For this reason, payment and performance bonds-insurance policies protecting construction companies from failures to perform and pay-are becoming increasingly common. In order for a proper claim to be made on these policies, however, very strict contractual and statutory requirements and deadlines must be met. These include potential claimants' timely provisions of notices of furnishing and last furnishing, and the bond holder ensuring that it is secured, its premiums are paid, and that all notices submitted by claimants are timely addressed.
Warranties and WorkmanshipIn addition to the many procedural and administrative issues contractors face, one obvious source of dispute is with regard to the quality of workmanship. Warrantees are frequently used to ensure that the work performed meets the standards that the client or the general contractor want met. If warranties are going to be included in the contract documents, however, they must be explicit and specify the work that is going to be warrantied.
As with many of the issues discussed, to avoid dispute, the warranty should be carefully drafted. The purpose of a well-written warranty is to limit the exposure of the general contractor for work that is performed by the subcontractors. Similarly, subcontractors must draft their warrantees in such a way that they are not found liable for defective work that was performed by other subcontractors. These goals can be accomplished by clearly stating the scope of the work warrantied and the parties whose work is being warrantied.
Being Smart in the RelationshipFinally, one of the most important guides to avoid litigation is one of the simplest: Be smart in the business relationship. Most of the time, disputes will arise on a construction project between parties that have worked together in the past, have more work together on the project, and will likely work together in the future. Sometimes, the best resolution to a dispute will be to bite the bullet, take the loss, and expect that a good long-term business association will be made or preserved. Also, taking the loss will often prove less costly than a protracted dispute or litigation would be.
There are occasions where arguments between parties cannot be avoided. There are preventative measures that can be taken, however, which will reduce the number of disputes or, in the alternative, lead to victory if litigation begins. The key is well-written, signed documentation (frequently projects begin before the documents are signed; a practice that can lead to disputes and complicated, expensive resolutions), and continuous, consistent communication.