June 23, 2008

Many years back, a lawyer I knew made an observation that goes something like this:

“All construction disputes have one thing in common – they are ultimately resolved either by surrender, compromise, or litigation.  Anyone familiar with litigation will tell you that litigation is generally the second least preferable way.”

Disputes and claims are something that we all must live with despite our best efforts to avoid them. How we choose to resolve our differences, however, is often something that is within our control. Because this decision can have a significant effect on what your project will ultimately cost, it requires careful deliberation. Before making the final decision to jump to litigation, pause for a moment and consider what that option holds for your future.

Why? I am reminded of this other often-quoted definition of litigation attributed to Ambrose Bierce and others:

“Litigation is a machine which you go into as a pig and come out as a sausage.”

Imagine this: A contractor suffers significant cost overruns on a long, difficult and delayed project. There is a finger pointing from the start to finish and by the end of construction there is much resentment and distrust between the owner and contractor.  Each of them has been severely wounded by the job and both blame each other for their respective pain. The contractor quantifies its pain and submits a global impact claim at the end of the job.

The owner is outraged. From the owner’s perspective, the contractor’s claim grossly mischaracterizes the facts of the job and ignores the contractor’s problems and fails to comply with the contract provisions or establish a cause and effect relationship between the contractor’s allegations and cost claims. The owner summarily rejects the contractor’s claim. 

Believing the only way to get his concerns heard by someone other than the biased owner that he dealt with throughout construction, the contractor decides to commence litigation. When the litigation starts, communication between the two stops and everything is filtered through their attorneys. As a result, both sides start forgetting vulnerabilities and begin to fall in love with their positions. In addition, the checks they write to their attorneys get larger and more frequent and they begin to add up to significant amounts of money with no end in sight. 

The owner and contractor finally start realizing that litigation is very expensive and slow. Worse yet, they learn that they cannot control it nor guarantee the outcome. It is then, only after a requisite amount of blood-letting has taken place that the owner and the contractor cut a deal that is driven more by the desire to stop the bleeding than by the merits of their position. Or after years of more legal expenses, the claim ultimately settles on the court house steps or in the courtroom itself by people that had nothing to do with the project and for an amount that leaves both sides unsatisfied. 

What is wrong with this picture? Just about everything. Unfortunately, in our business, we see it happen all too often. Here are three suggestions that we have found help contractors and owners to avoid this ugly scenario. 

Contractors – Spend the Time to Make Your Claim Convincing the First Time

Avoid, if possible, the strategy of presenting a general global impact claim which is not founded on the contract or a detailed analysis of the project events, and that blames others for all of your cost overruns without considering your self-inflicted problems. 

Yes, perhaps you can create a fog of war situation that camouflages your losses as owner problems and you may avoid getting into the trenches and fighting out every issue. Maybe, using this approach, you may even be able to get your claim resolved quickly without additional cost by luring an unwary owner into mediation unprepared, and having the mediator browbeat the owner convincing him to pay you most of the claim. 

Contractors – do not get your hopes up that this will work. This strategy frequently backfires, and as a result, you can end up in the quagmire of litigation. As budgets become tighter, many owners are less and less willing to jump into an early meditation and cut a deal. Be aware that owners and their attorneys are increasingly more skilled in dispute resolution, less easily intimidated by contractor claims and they are well-aware that they have a distinct advantage when it comes to time and money. 

Owners – If the Claim Has Merit, Recognize It Will Probably be Proven Someday

Despite what many owners believe, most contractors are not claims-conscious nor are they skilled at it. Fortunately, they are usually much better at building things than constructing claims. Moreover, it is often easier for them to compromise when issues are unclear. As a result, they often do not understand the owner’s need for substantiation and prepare their claim accordingly. As owners, it is easy to summarily reject contractor claims that are unclear, confusing and unconvincing even when the owner knows there may be some merit; the contractor just hasn’t proven it to the owner’s satisfaction. I call this the prove-it trap. 

Be aware that the prove-it trap can significantly increase the owner’s cost of resolving the contractor’s claim. Why? If the claim has merit and involves a significant amount of money, the contractor and its attorneys will usually be able to someday show it will sufficient certainty to convince a judge, juror or arbitrator. Moreover, many owners do not realize that a court may require a lower standard of proof by the contractor than they do. Often, by the time owners come to these realizations, the ability to negotiate a settlement may not be possible due to the amount of time that has elapsed and the money the contractor has spent on their attorneys and consultants. 

Owners – if possible, avoid the prove-it trap. As contrary as it seems, your best strategy is usually to be clear with the contractor regarding the substantiation needed for you to consider the claim. Consider helping the contractor get it right the first time. Generally, owners put themselves in the best position when they do their own independent analysis, either internally or using outside consultants, to determine the time and cost impact of their actions or inaction for which the contractor may have legitimate claims. 

If Possible, Agree to Structured Negotiations – or if Necessary, Mediate

We have found on a number of occasions that if properly structured, negotiations can settle even the most difficult disputes for amounts that all parties can accept and for amounts far less than what the parties would have spent in litigation. 

This starts when the principals within the organizations of the owner and contractor understand that each have the resources and intent to aggressively pursue and vigorously defend their relative positions in court if necessary. Only then will they agree on the benefit of seeking an alternative to litigation, even though it will take time and a dedicated good faith effort by both parties to make it work. 

For the negotiations to work, the contractor must be convinced that its claims will receive a fair evaluation. The owner can generally accomplish this by putting into place a senior negotiation team composed of individuals that were not involved in the project either from within their organization or an outside consultant. 

Similarly, the contractor must demonstrate that it has considered the contract and will bear the costs of its mistakes. The best way for the contractor to do this is come to meetings prepared, take consistent positions that make contract and fact-based arguments, and recognize legitimate owner arguments by reducing the claim when appropriate. 

A reasonable and fairly negotiated settlement is only possible if the contractor senses that the owner’s negotiation team is on top of the details and understands the issue, and at the same time has enough flexibility to reach settlement. Thus, it is also very important that they have the authority to compromise with confidence they will not be second-guessed later on. We do not live in a perfect world, and if the negotiation team cannot compromise and is forced to take too strong of positions, negotiations will not be successful. 

In closing, do not forget the alternatives to a negotiated settlement are either surrender or litigation. Neither contractor nor owner will have to surrender if their positions are based on the contract and they have properly documented the project.  The only other way to resolve the claim is to litigate it. The consequences of that are what?

“Pigs usually become sausage.”

Lee Schumacher, P.E., is one of the leaders of PinnacleOne’s Dispute Avoidance and Resolution practice in the eastern United States. In his 25-year career, Mr. Schumacher has worked as a consultant to design professionals, owners, contractors, insurance companies and sureties on a wide variety of projects types throughout the United States and Canada. Mr. Schumacher graduated with honors with a Bachelor of Science degree in civil engineering from the University of Kansas in 1975 and he is a registered professional engineer in Connecticut and Colorado. Mr. Schumacher is an arbitrator for the American Arbitration Association and the Alternative Dispute Resolution Center. He has provided expert testimony in court and arbitration, lectured extensively and is widely published. 

Authors’ Note – This series of articles is adapted from a paper presented by Ernest Holmes, AIA, NCARB, NRCA and Lee Schumacher, P.E., at the Design Professional Risk Control Group (DPRCG)s 2001 Annual Convocation in Palm Springs, California. The authors express thanks to Bob Camilleri, Camilleri & Clarke (Wethersfield, CT) for promoting PinnacleOne’s participation in the program and his enthusiasm for the themes of this paper.