The Dotted Line: How to craft contracts to avoid disputes and keep legal fees down

This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.

There’s an old saying in construction about there being only two types of contractors: those who have been sued, and those who will be.

While that maxim may be tongue-in-cheek, it received validation recently in a report from business credit scoring agency Creditsafe. The firm found that the construction industry had the third-highest number and cost of legal filings among all US business sectors.

Indeed, construction businesses had 212,582 legal filings entered against them last year, resulting in cumulative losses exceeding $3.36 billion, according to Creditsafe’s State of Credit Risk 2022 report released in February.

For construction attorneys who deal with these disputes, the findings were hardly surprising. They said the numbers merely reflect the fragmented nature of the business.

“On some of these projects, you’ll have 30 or 40 parties involved,” said Elizabeth Coppolecchia, a partner with Miami-based Weiss Serota Helfman Cole + Bierman, who specializes in construction claims. “Anytime you have that many players, when there are disputes, it’s inevitable that you will have a large number of claims.”

A headshot shows Elizabeth Coppolecchia, a partner with Miami-based law firm Weiss Serota Helfman Cole + Bierman.

Elizabeth Coppolecchia

Courtesy of Weiss Serota Helfman Cole + Bierman

That multifaceted structure sets itself apart from business arrangements in other industries, lawyers say, where deals often get done one on one.

“A construction project is not your typically two-party transaction with one contract and one set of rules,” said Philip Mannelly, an attorney in the construction practices group at McDonald’s Carano in Reno, Nevada. “With so many different interests, there’s just a lot of opportunities for things to go sideways.”

Banking jitters

In the current economic environment, those opportunities have multiplied, attorneys said, as access to capital has tightened and banking jitters have spurred lenders to apply more scrutiny to projects.

“Sometimes, there are provisions that things like change order approvals have to go through the lender itself,” Mannelly said. “So even if the owner and the general contractor agree, if the lender says no, that creates a dispute.”

Andrew Richards

Courtesy of Kaufman Dolowich & Voluck

The cascading provisions that are embedded in many contracts, where the rules that apply to a relationship higher up in the project chain must be adopted by those lower down, can also lead to more disputes when one party doesn’t fulfill its obligations.

“If one person sues at the ownership level, then every trade contractor has to sue their subs and suppliers to protect themselves, so it becomes a mess,” said Andrew Richards, a co-managing partner and co-chair of the construction practice at Kaufman Dolowich Voluck in Woodbury, New York. “It’s the domino effect, and it all runs downhill.”

Richards points to the gargantuan litigation that’s playing out currently in New York City surrounding 432 Park Avenue, the supertall condominium tower on Billionaire’s Row that has been beset with lawsuits. Owners have sued the developerclaiming more than 1,500 building defects.

“That litigation is a monster,” Richards said. “You’ve got all these wealthy people suing the sponsor who built it, and then the sponsor is suing Lendlease, who was the construction manager. We’ve had to keep a running counsel list just to keep all the parties straight.”

Why does it cost so much?

The same multipliers that lead to a high number of claims also contribute to outsized monetary damages, lawyers said. Larger and more complex projects, paired with increased costs for materials and labor, have upped the dollar amounts that are at stake.

“The price of land has risen, too,” said Richards. “And as construction gets more complicated through the engineering process, buildings are getting bigger. That’s why you have bigger claims. It’s just that simple.”

Another factor has been the spiraling amount of electronic discovery that claims to generate as more and more of the construction process is captured digitally.

“One of the biggest reasons, I think, is the advent of technology,” Coppolecchia said. “Even a project that’s not huge could generate multiple terabytes of data in discovery. You’re talking about the cost of collection, and the cost of paying attorneys to find the needle in the haystack.”

How to avoid claims

With both the numbers and dollar amounts of construction claims at dizzying heights, lawyers say the best thing to do is to try to avoid claims in the first place, while writing language into contracts to keep their costs down when they do happen.

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