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Executive Insights from Leaders in Construction Law

Four experts offer advice on what contractors need to know about construction disputes.

When should a contractor refuse to sign a contract if the owner will not modify the language?

EI Brian WolfBrian A. Wolf
Partner
Smith, Currie & Hancock LLP
If general contracting is legalized gambling, when does the contract unfairly favor the house? Contractors can follow a simple rule of thumb to know when to walk away from an unfair gamble: Never assume a risk that you cannot control.

Start by carefully identifying the performance and scheduling risks inherent in the project. Determine whether your company has the people and the experience to manage the scope and whether the schedule of performance is achievable. Most performance and schedule risks can be controlled using best practices. Avoid proprietary and performance specifications that you cannot control.

Determine what risks can be controlled with insurance and weigh the costs. Remember that insurance primarily covers resulting damages and liability to third parties. Payment, performance and indemnity risks can be controlled by shifting or sharing them with subcontractors. For example, payment risks can be shifted to subcontractors using a pay-if-paid clause in many states. Take care to ensure that subcontractors and their insurers have the financial strength to accept all transferred risks.

Why should contractors consider incorporating language regarding arbitration in contract documents?

EI MichaelMichael Powell
Vice President, Construction Division
American Arbitration Association
Predictability is the strongest factor to consider when deciding whether to embed an arbitration clause in contract documents. When there is predictability in the process, time and cost savings are inevitable.

A contractor can decide the number of arbitrators to be appointed to the dispute and how they will be selected. Industry expertise can be required too. Roughly 20 percent of the AAA’s Construction Panel is comprised of industry professionals (architects, contractors, engineers) serving as arbitrators.

When it comes to large-scale, highly complex matters, drafters can include specialty panels, such as the recently created Mega Construction Projects Panel. Undoubtedly, a critical component for contract drafters is the ability to pre-select the background and expertise of their arbitrator.

Another key consideration is locale. Contractors with projects in different regions/states, or other countries, will surely want to pre-determine the locale of the arbitration to avoid costly forum selection issues and uncertainty when a dispute arises.

EI Kenneth SortebergKenneth Sorteberg
Construction Attorney
Huddles Jones Sorteberg & Dachille, PC

For several reasons, contractors should consider incorporating arbitration language in their construction contracts. First, arbitration is a private alternative to litigation. Thus, an arbitration proceeding and its outcome are not a matter of public record.

Second, unlike a judge or jury, the construction arbitrators will have experience with the construction contracting process and will have the ability to understand the often technical construction disputes. Accordingly, arbitrators can issue high-quality, well-reasoned awards.

Third, the arbitration process will typically be faster, more streamlined and more cost effective than the court-controlled litigation process. Arbitration awards are virtually unappealable, bringing finality and closure to the dispute resolution process.

Fourth, the arbitration proceeding itself will be much less formal than a court proceeding, with the arbitration typically set in a private conference room using relaxed evidentiary rules.

What are some of the most common causes of construction disputes? How can contractors minimize the potential for disputes?

EI Kenneth CobleighKenneth W. Cobleigh
Managing Director & Counsel, Contract Documents Content
AIA Contract Documents

Poorly drafted contracts often lead to construction disputes. Some disputes arise from ambiguous contract terms, while others arise when the parties discover that the terms of a custom contract differ from industry standards and expectations. Disputes also can arise because there is a conflict or lack of coordination between the owner-contractor and owner-architect agreements. Finally, some disputes arise because the contract fails to address key performance or payment issues.

The potential for disputes is greatly minimized if the parties start by using a comprehensive, clearly written, coordinated set of agreements that reflect current industry standards and practices. Rarely is this best accomplished by using a manuscript agreement prepared by one of the parties. Standard form agreements published by the American Institute of Architects are written to avoid these sources of dispute, and provide an excellent and cost-effective alternative to manuscript documents.

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