Negotiating an In-Project Construction Dispute

Negotiating an In-Project Construction Dispute

Many thorny and competing interests are implicated when an ongoing major construction project experiences an unanticipated event that impacts the project schedule or costs, and the parties are unable to resolve quickly growing disputes. The owner generally wants progress to continue while the contractor seeks cost or schedule relief.  Both parties want to minimize risk, expense, and uncertainty, and they likely desire to maintain the relationship for future business.  Yet the blame game often takes over, with each side becoming entrenched and taking strident positions through change order documents and lawyer-driven correspondence.  With compromise often meaning that both parties end up unhappy, how are owners and contractors to proceed in a manner that prepares them for litigation yet also attempts to preserve the relationship and serve the ongoing project?  Each project faces different challenges and will require independent evaluation.  This article offers practical tips for the art of negotiating in-project disputes on major construction projects, and details how certain actions can meet all of these seemingly disparate needs.

Engage Sooner Rather Than Later

Impact events should be expected on all major construction projects, and efforts should be taken both to prepare for this scenario and to mitigate the effect. Quite simply, the smaller the impact, the less cost or schedule there is to fight about.  Thus, it generally is in everyone’s best interest to act consistently with the purpose of a notification letter: to engage and begin to problem-solve.  While it may be tempting to “wait and see,” timely and substantive communications generally will benefit the project and mitigate the dispute.  Yet self-interest is often served by such a strategy as well, as uncertainty regarding the project’s path—or how the parties will bear the impact—creates risk.  Each party must consider their own risk tolerance for the possibility that claims will not be resolved until after the additional work is done, or even after the project is complete.  When both parties voice their views and respective positions, each party is better able to assess the dispute and weigh its own risks at an earlier stage.

Additionally, the relationship between owner and contractor is best promoted (or salvaged) by meaningful dialogue. Not only can early engagement help prevent future slow-downs or subsequent claims that the project is not being managed or administered properly, maintaining a healthy relationship with your contract partner has other benefits as well.  Mutual discussion often can go a long way toward taking the emotion out of the equation and framing the issues as business disputes with potential commercial solutions.

On the other hand, a failure to engage can engender hard feelings and escalate the situation. When this occurs, contractors may “front” costs with a fear of getting stuck with large, unforeseen costs, and may question if they need to accelerate the work.  Owners may feel the contractor is focused more on drafting claims than progressing the project, or that the impact primarily was caused by the contractor’s poor management.  Silence can lead to mistrust, and a delayed response to an impact event can further delay the project.  In such cases, the dispute grows while the resolution process becomes more difficult.  Unless termination is a real option, owners and contractors should recognize they are in it together.

Project, Claims, and Management Teams

Defining distinct roles can be of great assistance as parties navigate in-project disputes, and it can be beneficial for owners and contractors alike to create three different teams. The “Project” team consists of those on site or who maintain close relationships regarding the work.  Their focus is on progressing the project, and they are the ones who interface with the “other side” in order to implement changes to the work plan or schedule.  While this team may possess a great deal of relevant facts regarding the impact event, and most certainly will be involved in change management and any internal assessment, their role in the growing dispute can be minimized.  In this way, they can concentrate on the work, maintain a good relationship “on the ground,” and move forward with progressing the project.

Next, the “Claims” team is responsible for administering the contract and serves as point of contact for claims management and disputes. This team is responsible for internal coordination, as well as notification letters, formal correspondence, and claims evaluation and determination.  It is important for this team to document, both internally and externally, all cost, schedule, and performance issues.  Although the parties want to avoid litigation, it will be important to have a well papered file in the event litigation cannot be avoided.

Designating persons other than the contractor’s project manager and owner’s representative for the “Claims” team allows them to focus on common interests and can reduce the potential for dual or conflicting roles. Owners and contractors alike can better act as objective recorders of facts, rights, and positions, helping a dispute remain defined as a business issue.  Depending on the size of the project and dispute, legal and claims consultants may be a part of this team.  It is of critical importance that each side has a thorough understanding of the contract, and appreciates that it likely will have to live with the positions that it takes on both fact and contract issues early in the project for the life of the project.

Finally, the “Management” team should involve persons with authority from the home office or parent company who will get involved in negotiations. Involvement of such persons sends a strong message that the dispute is being monitored and taken seriously, yet also presents the opportunity for a commercial solution.  Being yet one more step removed from the impact event, this team should harbor little emotional investment, but more importantly should ensure that the disputes are evaluated both at a project level and from the more global, company-wide perspective. Issues considered will include the company relationship with the contract partner, reputation, profit margins, the timeline in which the project really must be complete, and the company’s long-term strategic goals (for which the individual project may be merely a part).

Assigning personnel to clearly-defined roles in this fashion can help ensure the project’s short-term interests are working in tandem with the company’s long-term interests. Whether the endgame is settlement or litigation, involving all teams ensures that the proper perspectives and likely risks are being considered.

Workshops and Summit Meetings

Often there is no substitute for getting people together in a room for a face-to-face meeting. While carefully drafted letters and change documents are important both to frame issues and preserve rights, such efforts may not resolve a growing dispute, and the parties may find themselves at an impasse.  Consistent with the different roles assigned to different teams, two different kinds of meetings may be conducted get past the stalemate.

First, a “workshop” meeting including the Project and/or Claims teams can be effective in establishing the parties’ positions and clarifying the key evidence. In such meetings, the parties seek a technical understanding of what happened and can identify agreed and disputed facts, analyze how costs or schedule were impacted, and discuss why additional funds or time are (or are not) the fair result.  If undertaken early enough, the meeting can even include discussion on mitigating the impact and how the project can best move forward.  Regardless, a workshop meeting can offer a forum for meaningful dialogue regarding the event and its associated claim, and sharpen focus on the dispute if it cannot be resolved.  Power point presentations can be useful, as each party can show the impact (or lack thereof) through schedule fragments, photographs, changed plot plans or engineering specs, and other visual evidence.  Through such dialogue, each party has the opportunity to be heard, which serves the project and the relationship.

If the dispute lingers, or if a technical discussion of the issues would not be helpful, a “summit” meeting between Management teams may be a prudent next step. As mentioned above, any discussion of the underlying claims should be framed as a business dispute, and thereby the Management teams can engage in tough negotiation and an unflinching discussion of the perceived merits of the claim without necessarily creating a toxic atmosphere.  Indeed, owners and contractors should be able to press their claims but simultaneously attempt to maintain the business relationship.  Sometimes in this manner a dispute can be resolved, or compromise may be reached, based upon an objective assessment of the claim. Moreover, a summit meeting can provide the parties with an opportunity to discuss a commercial solution, which may not even address the merits of any specific claim.  Rather than choosing litigation, owners and contractor may jointly find it beneficial to settle or implement new incentive or penalty provisions (or both).  This is especially true when multiple complex claims arise, as the cost of proceeding with the dispute may be daunting.  Yet even when litigation follows, it is more likely to be an informed economic decision.

What role should lawyers have in such meetings? The answer will depend largely on the companies, the personalities involved, and the nature of the dispute.  The presence of lawyers can send a strong message that you are prepared and believe in the strength of your position, yet can escalate the situation, especially if only one side has counsel present.  Recommended practice is to mutually decide in advance whether lawyers will be present and prevent unwelcome surprises.  Legal counsel may be of great help before the meeting, both framing the discussion through written correspondence and helping to prepare the participants.  Unless legal issues are discussed, however, it may be best for lawyers to be “seen but not heard” at the meeting, allowing the technical or commercial discussions to take precedence.

If the legal team is involved, the lawyers should evaluate if and when a litigation hold needs to be issued. Simply involving lawyers to resolve a project dispute does not trigger a duty to preserve documents, but at the point where litigation is anticipated, the company needs to issue an appropriate document hold.

Keep It Secret, Keep It Safe

One vital role of counsel is to help ensure that you do not waive any rights or privileges. The best scenario is for owner and contractor to agree before a meeting that discussions will not be admissible should litigation ensue, and that no rights are waived if the dispute is not resolved amicably.  Such a proposition can be tactfully raised as also serving the parties’ joint desire to speak freely and frankly without concern for legal repercussion.  That said, the parties should understand that it will be difficult—although not impossible—to walk-back any resolutions they offer at these meetings.  For example, if an owner offers to extent the schedule by 30 days at one meeting, it will look like bad faith if the owner offers only 10 days at the next meeting simply to gain a negotiating advantage.

Regardless, all written correspondence should be properly vetted before they are sent. Disclaimers and warnings should be affixed, clearly stating the information exchanges are made for the purpose of negotiation and settlement and are not admissible.  Reservation of rights clauses similarly should be inserted, expressly denying any intent to waive or relinquish any rights.  Like in all things related to negotiation, the goal should be to act in good faith to resolve the dispute while at the same time ensuring your position remains protected.

Conclusion

Impact events can create tension between owners and contractors, as they must navigate negotiating a solution and advancing the project, while at the same time preparing for litigation . . . just in case.  But the idea that a party should act one way if it desires to settle, and another if it wishes to litigate, is a myth.  Both parties are best served when they engage with their contract partner, while defining clear and distinct roles for their own personnel in order to manage the project and the dispute simultaneously.  Clearly articulating a position and finding opportunities to hold meaningful dialogue—so long as you are protecting your rights—often provides the best chance for a successful negotiation AND prepares you for litigation if needed.