What Is A Construction Dispute?
Construction disputes are disagreements over a contracted construction project between involved parties. Involved parties in a construction dispute can be but are not limited to; home owners, stratas, developers, contractors, subcontractors, engineers, architects, local municipalities, and even warranty providers.
How Do Construction Disputes Happen?
Construction disputes happen when there is a disagreement between the different parties involved in a contracted construction project. This is generally due to one or more of the parties either failing to understand contractual obligations, or knowingly failing to comply with these obligations.
What Are Some Examples Of A Construction Dispute?
While there is a large variety of issues that can lead to construction disputes, there are a few examples that are far more common than others. Some of the most common examples of issues that create construction disputes are:
Time Delays
Delays in project deadlines are one of the most common issues causing construction disputes, both in residential and commercial projects. Delays often occur in construction projects and can sometimes be impossible to avoid. Unavoidable delays can be due to errors in design and or even supply issues caused by the pandemic. When a delay occurs, the party experiencing the delay should clearly notify the other parties that there is a delay and notify them of the estimated consequences of the delay (additional time and cost).
The parties receiving notice of the delay should act to either affirm the delay and consequences or notify the party of their non-acceptance of the delay and their expectations for the timing of completion of the contract.
Design
Design issues or mistakes in a design in of itself can set back a construction project. Design errors often lead to not only wasted time by having to go back and correct or alter the project to accommodate a solution, but also wasted money spent on the labour and materials needed to do so.
Where there is a design issue or mistake, it is most often the responsibility of the owner or developer. This is because the owner or developer of a construction project bears the responsibility of providing complete and correct instructions to contractors for the completion of the work. A contractor has a claim against an owner or developer for design mistakes that result in additional costs or additional time to complete the work.
But all is not lost for the owner in this case – If a design mistake causes a contractor to make a claim against the owner, the owner can often make a corresponding claim against the designer to recover the additional costs or losses incurred.
However, owners should be aware that contracts with designers often contain terms which limit the designer’s liability to a maximum dollar value equal to the fees charged by the designer. Designer fees are often a small fraction of the overall construction costs, and this type of limitation clause in a design contract can severely limit the owner’s ability to recover for design mistakes.
Materials
The quality of materials used in many construction projects can often lead to disputes. It’s not uncommon for parties involved to source materials that have the aesthetic of something of higher quality at a price point that won’t reduce overall profits on a project. Parties involved might have opposing ideas of what materials are considered quality and which are considered cheap. Changes to materials after sourcing the original materials can often increase the overall cost of a project, or result in the owner being unhappy with the contractor’s selection of materials.
Too often, a dispute over materials arises because the contract does not clearly set out which materials will be used for a particular part of the scope of work. We often seen contracts where the extent of material specifications in a contract is limited to the phrase “high quality”. But what does “high quality” mean? Reasonable people can disagree on the meaning of the phrase, which can cause great difficulty in the parties reaching an agreement on what materials to use.
The best way to avoid a dispute over materials is for the parties to specify in the contract documents every material that will be used for every part of the project. This specification is often done by the architect in a materials list, where everything from the type of counter tops of a kitchen, to mouldings on a wall are specified.
How Do You Resolve A Construction Dispute?
Construction disputes happen when there is a disagreement between the different parties involved in a contracted construction project. This is generally due to one or more of the parties either failing to understand contractual obligations, or knowingly failing to comply with these obligations.
Negotiation
Negotiation is the least formal of the four methods of construction dispute resolution. Negotiation is often considered a fast and more simple way of resolving a dispute and is often much less expensive than the more formal methods. Additionally parties can choose to have a lawyer represent them and negotiate for them on their behalf and both parties will have a lot more control in the outcome of the dispute when choosing to keep it out of court.
Negotiation is advantageous in construction disputes because it requires both parties to share with each other in an honest, frank and candid manner their respective positions or stories. This sharing process often results in one or more of the parties revealing some piece of information which was unknown up to that point and key to resolving the dispute.
Modern formal contracts usually place a requirement on the parties to negotiate before moving on to a more formal dispute resolution process.
Mediation
Should parties not be able to come to a resolution through negotiating, they can opt to use a third party to help mediate the dispute. Mediators are impartial to the dispute and hold no decision making power. Rather, they are simply there to help navigate both parties to an agreement or settlement that is acceptable to all of the parties in the dispute. Because mediation occurs in private, the results of the dispute resolution are confidential and not made public. Mediation is also advantageous in that it can be commenced quickly and a result can be obtained just as quickly. This is important in a construction project where the time delays of the court process may completely derail a project.
ATAC LAW’s mediators are trained as lawyers and mediators and have skill in using the latest alternative dispute resolution techniques, if you are in need of mediation for a construction dispute, contact us today.
Arbitration
Arbitration is a much more formal approach to construction dispute resolution. When choosing arbitration as a method for dispute resolution, an impartial third party is appointed by contract or statute, or is agreed upon and chosen by the parties involved. Unlike the third party used for mediation, the third party involved with arbitration is given decision making power. Once both sides make their case, the arbitrator will make a final decision. This decision is not only final but can be legally enforced.
The advantage of arbitration in a construction dispute over litigation is that the parties can choose an arbitrator who has knowledge of construction, engineering, and construction law. As a specialized area of law, it is often the case that judges in the BC Supreme Court do not have experience in dealing with construction disputes, and that can lead to uncertainty for parties in disputes, and the risk that an unfavorable decision which may need to be appealed may be made against them.
Arbitration is also advantageous because the process can be started and completed in less time than if the dispute was litigated in court.
A disadvantage of arbitration is that it involves significant up-front costs. Arbitrator’s fees for construction disputes are usually in the range of $500/hr and above, and the fees are usually split between the parties. A construction dispute over $1,000,000.00, for example, might cost $75,000.00 in arbitrator’s fees. This figure is for the arbitrator only, and does not include each party’s lawyer fees.
However unlike litigation, the successful party to an arbitration is often entitled to recover all of their costs. This is called full indemnity. This would mean a successful party would be repaid not only the fees it paid for the arbitrator but also its legal fees and expert fees.
This idea of full indemnity can be the driving force for a party to choose between litigation and arbitration. Our advice to clients is to utilize arbitration if they know they are on the right side of the dispute (so that they can recover their costs). If you know you have a potential to lose the dispute, litigation is the route to take, we usually say.
Like mediation, arbitration is also private and confidential.
ATAC LAW’s arbitrators are trained as lawyers and arbitrators and have skill in using the latest alternative dispute resolution techniques in construction law. If you are in need of arbitration for a construction dispute, contact us today.
Litigation
The final option for construction dispute resolution is litigation. Litigation is the most formal of the methods and often the most costly due to it being performed in the court of law. Due to the fact that the proceedings take place in a courtroom, it results in a final decision that is legally enforced. These cases often take place in public and as such the results are not confidential and there is often full disclosure of any relevant information.
Construction dispute litigation can take years to resolve. Entire construction projects have been held up for years while they work their way through the litigation process. With the pandemic, and the lack of funding and attention paid to the judicial system in British Columbia, the courts are more backed up and slower than ever.
We have found that in numerous cases, after years of litigation, when we finally arrive prepared to argue our clients’ cases before the courts, we are told on the first day of the trial that there is no judge available to hear the case, and the case is adjourned to another date six months into the future.
In our view, the courts are not well suited for construction dispute litigation. Apart from the risks of extensive delays in having the dispute heard by a judge, courts have difficulty in dealing with the evidence in construction disputes. Particularly with larger projects, a construction dispute often involves thousands or even hundreds of thousands of documents.In a court room, each document that a party wishes to rely on must be formally proven, which requires an eyewitness to the document to given evidence about it. Even for a relatively small dispute over a few hundred thousand dollars, this strict requirement may result in needing to call a dozen or more witnesses into the court room to testify about the project and the documents involved. This takes time. And as with everything in the legal world that takes time, it also costs money.
A construction dispute involving a claim for a few hundred thousand dollars might take four or five weeks’ of trial time. Not counting the cost for expert’s fees, each party’s legal fees for such a dispute will be on the order of $200,000.00 or more.
In litigation, the successful party is usually entitled to “costs”. Costs are not the same as legal fees or the indemnity obtained in an arbitration. Costs are a specific set of rates for certain steps in litigation that are set out in the rules of court. As a quick rule of thumb, we suggest clients can estimate the “costs” they will receive if successful in litigation as being 25% of the legal fees they incurred. So if they were successful in the example case above where they spent $200,000.00 in legal fees to collect on several hundred thousand dollars in a dispute, they would also be entitled to collect $50,000.00 in “costs”.
How To Prevent Construction Disputes
While it’s clear that construction disputes are quite common and there is no shortage of ways to resolve them, they are best avoided whenever possible. You can save valuable time and money for all parties involved by taking some simple steps to help prevent construction disputes from arising in the first place.
Define Clear Terms
Money is often the biggest root cause for disputes. Nobody wants to feel like they are not getting their fair share or have to worry about whether they are going to be compensated on time or at all. Setting clear terms for payment in your construction contract is imperative. Defining predetermined payment dates for the parties involved will help prevent construction disputes over money from appearing. Terms to think about include:
- Will payments be made at pre-determined milestones? (for example, 50% at lock-up?)
- Or will payments be made monthly as the work progresses?
- If payments are made monthly as the work progresses, what information will be provided or checks done to determine the appropriate amount of payment?
- How will additions to the contract, or extras, be handled? Will there be a formal change order process? How will the extras be valued?
- What happens if the project is delayed? If it is the owner’s fault, what will the contractor receive for the delay? If it’s the contractor’s fault, what will the owner receive?
In our experience, many disputes could have been avoided if parties had thought about these issues before entering into their construction contracts.
Use Communication
Communication is key, this is very much the case when there are large complicated projects that involve many parties that are all involved with different aspects of a project. Maintaining proper and constant communication from all parties involved during the entire process is the best way to stay on top of the project and to help deal with any issues that may arise during the process.
And like with contracts, the best form of communication is communication in writing. We cannot emphasize this enough: every communication to the other party in a construction project should either be made in writing alone, or recorded in a note or meeting minute and shared with the other party. Too many times have parties fallen into disputes over terms, agreements, specifications or other communications which are alleged to have been made orally. When the parties go to resolve the dispute afterwards, the time and cost involved in resolving the dispute increases on account of not having a clear record of what was discussed. Instead of reading the record from a document, witnesses need to be interviewed and experts need to be retained to infer the truth of what really happened.
We recommend keeping records of any letters, emails, text messages, or any written communication that happens throughout the span of the project. It is also helpful for parties involved to keep a log/journal and or photos that might be relevant to the project for their own records. Having a solid written and visual record of the project as a whole will help reduce any doubts about the project and the work done by the involved parties.
Read And Understand The Contract
It is crucial for all parties involved to ensure they fully read and understand the agreed upon contract from clauses to amendments to drawings and everything in between. Due to the complexity of construction work and the number of parties involved, contracts can often undergo changes over the span of the project. Any changes to the contract need to be negotiated with all parties involved. Once everyone is informed of the changes and understands what is expected of them, they should follow the contract and adhere to their expected obligations.
There are a number of great standard form contracts available for owners and contractors alike, such as the suite of CCDC contracts, the MMCD contract, the CCA contracts, the CHBABC contracts and more. Enormous legal resources were deployed in developing these “standard form” contracts, and they are powerful tools for parties wishing to contract for construction projects. However, the documents are only useful if the parties using them understand their rights and obligations thereunder.
We often see parties use the readily available CCDC contracts. These contracts set out robust procedures for approving of changes with a change order process. However the parties seemingly ignore the written process in the contract and approve of change orders on the fly without any written record. Inevitably this lack of attention to the contract results in a dispute and we then have to try to resolve.
Similarly, the standard form contracts often contain provisions on termination. Some of the provisions are quite severe: in the case of the CCDC 5A construction management contract, we litigated a case where the owner decided to terminate the construction manager close to the beginning of the work for convenience. The CCDC 5A contract contained a clause which said the owner could do that, but would have to pay the construction manager his lost profit. Since the project had barely gotten underway when the owner terminated, the owner became liable to pay the construction manager an amount almost equal to the manager’s fee for the whole project, as if the manager had completed the project!
These standard form contracts are not necessarily complicated, but unless you have read and understood them, or had someone read and understand them for you, by using them you are potentially creating risks and liabilities for you and your project.
ATAC LAW specializes in construction project dispute resolution and commercial dispute resolution and its lawyers have extensive experience resolving a wide range of construction disputes. Call us or contact us for more information on retaining our services for construction dispute resolution including mediation and arbitration.
