Once a construction dispute arises, the parties to the contract may find themselves wondering what the best course of action is. Disputes can be time-consuming, harmful to a contractor’s reputation or damaging to the relationship between them and the client.
Claims can cost both parties and end up disrupting the whole project. There are things a contractor can do to avoid a dispute. Should a dispute arise, however, contractors should be aware of six resolution methods.
Why do construction disputes arise?
Construction disputes arise because of disagreements between the parties on a contract. They are due to a perceived or real violation of a construction contract and the obligations set forth therein. Disputes may also arise due to:
- lack of understanding of the conditions of the contract;
- delays on a contract;
- failure to administer the contract; and
- unsubstantiated or incomplete claims being made by the parties involved.
While disputes in themselves do not constitute a breach of contract, they may become one, and even lead to a termination of the contract or a claim against the contractor’s surety bonds. In order to reduce the possibility of disputes arising, all parties on a contract may take proactive steps before the project itself begins.
Reduce the possibility of disputes arising
To reduce the likelihood of a dispute arising, seek to optimize each aspect of the construction process, at every stage. Construction dispute resolution begins with the construction contract and clarifying the dispute clauses. Other preventive measures to consider when planning and executing a project include:
- make significant upfront planning before beginning work;
- carefully read and understand the contract;
- negotiate clauses that are murky or potentially problematic;
- be diligent when it comes to pre-construction work, such as putting together estimates, schedules, contacting subcontractors, making important orders, etc.;
- make sure schedules are realistic and executable and plan for delays and disruptions;
- document any issues and challenges that arise during the execution – daily reports are irreplaceable;
- deal with problems as they arise, do not postpone them;
- identify risks in advance and consult specialists; and
- adopt systems that increase predictability of every process, and provide greater information transparency to all parties.
Construction dispute resolution methods
When drafting the contract, and in particular the dispute resolution clause, there are a number of resolution methods at hand. These are:
1. Negotiation. A negotiation clause basically includes the agreement that if a cause for a dispute should arise between a contractor and a project owner, these parties will attempt to reach a just and satisfactory resolution between themselves before moving on to other means.
2. Mediation. A mediation clause suggests the inclusion of a neutral third party in the dispute situation to help mediate the process of resolving the dispute. Mediation is not legally binding in any way, but can be an effective way out of a situation which could otherwise deteriorate.
3. Expert determination. An alternative to mediation is expert determination which is used to resolve disputes of a specialist nature or in cases where there is a valuation dispute requiring a specialist’s opinion. Though the determination cannot be legally enforced either, if the parties agree to this type of resolution it may save them from more time-consuming procedures.
4. Adjudication. The adjudication method also includes a neutral third party but unlike with the mediation method, the adjudicator will give a decision, whereas the mediator will assist parties in finding the resolution. Adjudication clauses typically also include the possibility of applying to a court to enforce the adjudicator’s decision, if the dispute is not resolved by the decision itself. It is a cost-efficient method which helps operations proceed while the dispute is resolved.
5. Arbitration. If parties decide to go for arbitration, they will again have a neutral third party enter the situation to help resolve it. In arbitration parties agree to the arbitrator who has the relevant experience to engage in the matter. The arbitrator considers documents and facts that concern the situation, and can make a decision that favors one side if the parties fail to achieve consensus. Arbitrations can be legally binding, depending on the jurisdiction. The costs of arbitration can be significantly higher than that of other methods, sometimes even as high as legal proceedings.
6. Litigation. Finally, litigation is usually also included in the dispute clause, in case the parties do not find any other way to resolve the issues that have come up. Litigation involves a trial and is legally binding and enforceable, though it can also be appealed. Litigation can be by far the most thorough, complex as well as slow and costly way of resolving a dispute. This is why parties will typically attempt a number of other resolution methods before opting for litigation.
The role of surety bonds in construction disputes
Surety bonds serve to grant compensation to claimants if there is cause for a claim. At the same time, since a bond claim is a costly outcome to contractors and is not desirable, surety companies can also help resolve disputes or minimize damages that have arisen.
Surety companies can be invoked when there are difficulties during the project and the contractor and project owner or subcontractor cannot settle these themselves. Sureties can then provide assistance or suggest possible ways of resolving the problem and minimizing damages for all sides. For this reason, contractors must also always work with their sureties if a disagreement arises.