Understanding the most common legal disputes that arise between the owner, general contractor, and electrical contractor on typical construction projects, which often end in lawsuits
During times like these, when the world is experiencing economic troubles and money is tight, disputes often arise because construction project participants are not as willing/able to compromise and use cash to smooth over the rough spots. As a result, many of these disputes ultimately must be resolved in the legal system.
Keeping in mind that the inherent nature of the construction process often fosters disagreement, electrical contractors (as subcontractors) are often caught in the middle. They also have the difficulty of being able to communicate only with the general contractor, notwithstanding that the dispute may arise with the owner. Unfortunately, this is the bane of a subcontractor's existence. To help electrical contractors meet the most common construction challenges head on, following is a primer of some situations to be aware of during the course of a project that often create disputes between the various players.
Disputes over… Following is a sampling of the types of conflicts that frequently arise as the subject of either litigation or arbitration on a construction project.
Plans and specifications/scope of work — Disputes over the contract scope of work, represented by the plans and specifications (as modified or amended), are some of the most significant areas of dispute on a construction project. Typically occurring between the owner and the general contractor/subcontractor, contractors and design professionals often interpret the documents differently, particularly if the description of the work in the plans/specifications is unclear or ambiguous — or when the plans are contradictory to the specifications. Typically, there is an implied warranty on the part of the owner that the plans/specifications are correct, adequate, accurate, and buildable. Of course, there are always exculpatory clauses in the contract by which the owner attempts to shift that responsibility to the contractor. The battle is often between the implied warranty and the enforcement of the exculpatory clause.
Presumably, the purpose of the request for information (RFI) process is to handle problems related to the interpretation of the plans/specifications. However, that process often fails for a number of reasons, among them being the delay in responding to RFIs, the failure or refusal of the design professional to acknowledge or recognize problems, the crossover between project design and construction means/methods, and the contractor's abuse or misuse of the RFI process.
Another common dispute is over the scope of work between the contractor and subcontractor. Often, the contractor will ask the subcontractor to bid a particular scope of work by identifying a specific subtrade of work without specifying in detail the plans and specifications applicable to that scope of work. Thus, the subcontractor is determining what that scope means. When the subcontractor bids only a portion of work — but the contractor had the expectation that the subcontractor bid a different and larger scope — a dispute arises.
Many disputes materialize over conflicting utilities and other building structures — the structural units interfere with the mechanical, electrical, life safety, and communications systems (among others). Often surrounding complex building structures, such as hospitals, this type of dispute typically focuses on delay, impact, and efficiency issues. However, Building Information Modeling (BIM) or 3D modeling has significantly minimized these kinds of disputes (see “Barriers to BIM” on page 22 or “Making the Transition from CAD to BIM” on page C26).
Shop drawings and submittals — A corollary to disputes arising from the plans/specifications are disputes arising over shop drawings and other submittals. Primary among these are delays, either in the timeliness of the contractor/subcontractor submitting shop drawings and submittals or in the design professionals responding back in a timely fashion. The other common problem is the interplay between the design professional and the contractor/subcontractor, with the design professional rejecting submittals without adequate explanation and the contractor/subcontractor providing inadequate submittals.
Change orders/extra or out-of-scope work — Typically, disputes over change orders and extra work or out-of-scope work boil down to the change order price and whether or not the contractor/subcontractor is entitled to extra time. Frequently, the owner requests pricing for the changed work but then disagrees with that price and time extension request — ordering the work to proceed as scheduled. This situation leaves the parties to fight over the amount and time at project's end.
Disputes also arise when there are many change orders that have a cumulative effect or impact on the contractor/subcontractor that each individual change order alone may not reflect. Unfortunately, such an impact claim typically must await project completion and the preparation of a critical path method analysis to demonstrate the cumulative impact of the changes.
Differing site conditions — There are two different approaches regarding the owner's responsibility for existing site conditions. The majority approach is that the owner has the duty to disclose all information in its possession. Even if there are no studies, the owner warrants that the construction is feasible and cannot contract away that implied warranty. Therefore, general exculpatory clauses arguably do not relieve the owner of its warranty.
The other minority approach — only applicable to public owners — is to enforce exculpatory clauses that put the responsibility for site conditions on the contractor. This is only if the owner has engaged in fraud or intentional failure to disclose known information.
It is the contractor's responsibility to discover those conditions (apparent or discoverable) through a reasonable investigation. Therefore, if a contractor encounters conditions that are subsurface or otherwise concealed, differ materially from those indicated in the contract documents, and are unusual in nature, the contractor/subcontractor will typically be entitled to more money and time to deal with the differing site conditions.
Construction sequencing/project access — The owner typically warrants that the contractor/subcontractor will have access to the project site. Disputes arise, for example, when the owner fails to provide access particularly in remodels of occupied buildings, to obtain required permits or easements, to coordinate multiple prime contractors, or to timely provide owner-supplied equipment.
Subcontractor substitution — In the public setting, disputes over subcontractor substitution occur relatively often in those states that have legislation to protect subcontractors from bid shopping and bid peddling. Private owners often provide a requirement in their contracts that they must approve subcontractors. However, the likelihood of a major dispute arising when a contractor wants to substitute a subcontractor is substantially less because the private owner is not: (1) charged with enforcing the anti-bid shopping laws, and (2) as concerned about the makeup of the subcontractors working on its projects, including disadvantaged, women-owned, or minority-owned business.
In the public sector, in order to substitute a subcontractor, contractors often must participate in an administrative hearing process to demonstrate good cause to substitute a subcontractor. Sometimes, the owner refuses to authorize the substitution and a dispute arises.
Construction defects — During the course of construction, the owner may identify work that is not in conformance with the plans/specifications. If the contractor/subcontractor does not agree with the owner's assertion of that defective construction, a dispute arises. Typically, both the general contract and subcontracts allow the owner and general contractor, respectively, to order the removal and replacement or repair of the allegedly defective work. Assuming the contractor/subcontractor complies, it will have a claim against the owner at the conclusion of the project if the contractor/subcontractor had conformed to the plans and specifications.
Most defective construction disputes arise after project completion when some aspect of construction fails. Furthermore, because there are allegations of negligence (not just breach of contract), liability insurance comes into play. A great deal of construction litigation involves construction defect disputes.
Remedies for failure to pay
The contractor or subcontractor who remains unpaid can record a mechanic's lien and then file an action to foreclose on the property. Mechanic's liens are only available on private projects. Mechanic's liens are available to general contractors, subcontractors, and suppliers. Subcontractors and suppliers can also pursue payment bonds and recover against the surety. Of course, anyone in the chain can file a lawsuit or demand arbitration (depending upon which applies) against the entity who has failed to pay them and recover a judgment against them.
If it is a public works project, there could be a requirement that before the general contractor sues the public entity, it must first make a government claim. An additional remedy is what is called a stop notice or notice of withhold. It may be available in both public and private projects to subcontractors and suppliers. It requires the owner to withhold payment to the contractor. Thereafter, to the extent there are funds remaining with the owner, the claimant can file an action directly against the owner for release of those funds directly to the claimant, not to the general contractor. Most of the remedies discussed previously are not mutually exclusive, although the claimant obviously cannot recover more than it is entitled.
Termination, whether by the owner or the contractor, is the ultimate “dispute.” Typically, contract provisions allow the owner to terminate the contractor for cause (i.e., a default termination) if the contractor: (1) fails to supply properly skilled workers or proper materials; (2) fails to make payments to subcontractors; (3) disregards laws, statutes, ordinances, codes, rules, and regulations; or (4) substantially breaches the contract documents. The contractor, whether provided in the contract or not, can terminate if the owner is in material breach of any of its contractual obligations, the most prevalent of which is failure to pay.
Dispute resolution methods
No discussion of construction disputes from the legal perspective would be complete without a discussion of the various types of dispute resolution methods, some of which are outlined below.
Architect/initial decision maker — Some contracts provide that the design professional is the initial decision maker. Others even provide that the design professional's decision is binding on all parties. Over the years, the contractor side of the equation has felt that such a procedure is unfair in that the design professional works for the owner. Therefore, newer contracts have the parties deciding in advance whether or not the design professional or a neutral initial decision maker will resolve ongoing disputes.
Dispute resolution boards (DRBs) — Many contracts now provide for DRBs, which are often comprised of senior and/or retired individuals who were actively involved in the construction industry, such as project engineers, managers, and executives. These individuals conduct truncated hearings and provide their decisions with respect to disputes that the parties bring before them during the course of a project. Although the DRB's decision is admissible in a court of law or an arbitration setting, they often are not binding on the parties.
Mediation — Whether it's during the course of construction (less frequent) or after the project is complete, mediation is arguably the most satisfying of dispute resolution methods. It can occur as early in the process as the parties are able to organize a mediation and identify/schedule a mutually agreeable mediator. However, a mediation is typically most successful after the parties, their attorneys, and the consultants have had an opportunity to review the other side's project files and prepare whatever impact/delay analysis may be necessary. Because mediations are nonbinding, they involve a neutral mediator understanding each side's position/settlement appetite and then bringing the parties together in settlement.
Arbitration — Beginning in the '80s and through the '90s, arbitration was the favored form of dispute resolution in the construction industry, at least when the owner was able to dictate the form of dispute resolution. The theory was that arbitration was both speedy and economical because the parties and arbitrators scheduled it at their convenience. Unless the parties otherwise agreed, there was no discovery or jury as there is in litigation, and no appeal. Finally, the arbitration panel was comprised of individuals knowledgeable in the construction industry.
In recent years, arbitrations have fallen into some disfavor. This is because many parties complained that arbitrators often just “split the baby.” They also objected to the common practice that arbitrators were not bound to follow the law but rather “did equity,” essentially ignoring contractual provisions and statutory and judicial law that otherwise governed the parties' rights and obligations.
Litigation — Litigation is dispute resolution in the courts, where all parties are subject to all of the forms of discovery, such as interrogatories, requests for admission, document production demands, and depositions. The parties then have a trial, either by a court alone or by jury. If the parties are dissatisfied with the results, they have an appeal as a matter of right. Historically, litigation has a reputation for being a long, expensive process. That's one key reason why arbitrations came into vogue on construction disputes. However, at about the same time that arbitration lost a bit of its luster, some state and federal courts made the process significantly faster and less expensive.
Government claims procedures — In the public sector, there are often requirements that contractors must first file a government claim and even go through an administrative hearing procedure before they can proceed to arbitrate or litigate their claims.
Klinger is co-chair of Sedgwick Deter Moran & Arnold LLP's National Construction Practices Group in Los Angeles. You can reach her at email@example.com.