Managing In-Project Disputes in Major Construction Projects
What do you do when an unforeseen event threatens to increase the costs or time necessary to complete a major construction project? At first, it may seem easy to “wait and see” if the issue develops into something impactful, or reserve rights and decide the parties can sort it out after the project is complete. This response is especially common when valuable project resources and personnel will be called upon to address the issue, which can be seen as taking them away from their primary focus. However, unforeseen issues are quite normal and should be expected on any major project, as well as the disagreements that often accompany them. Investigating the causes and impacts of such incidents, as well as staking out your company’s position, should be considered an integral part of the project—for both owners and contractors alike.
Taking swift and pro-active steps during this “pre-dispute” phase is always prudent. Doing so while the still-potential dispute is brewing can have a significant impact upon its ultimate resolution, as an informed and reasoned approach from the beginning will strengthen your position or even defuse the situation. This article recommends practices for a pre-dispute environment in making an initial analysis, gathering relevant information and materials, and framing the event in a favorable manner. By doing so, it aims to serve as a reminder and checklist of important initial steps which, if followed, can have a positive impact on a potential dispute and thus your project’s overall success.
Understand the Contractual Landscape
Upon the initial report of an unforeseen event, it is important to place the issues in their proper context by examining each party’s rights and obligations. The first task should be to consult relevant contract provisions, including any attachments that may bear on the issue. Indeed, important technical specifications may be tucked away in a lengthy appendix but contain requirements that are not obvious in the primary document’s terms. Thus, it is important to ask about and look for all provisions that speak directly to the specific issue that has arisen. Before you can begin to form a response plan—and before you can meaningfully interpret the information coming from the project team—examine well what the controlling documents say.
A review of the contract’s delay and cost provisions, including change management mechanisms, will illuminate how an entitlement must be established. It is also wise to review the governing law and dispute resolution provisions, even at this preliminary stage. While you may be a long way from a formal dispute, it is important to familiarize yourself early with this structure, so as to better weigh your realistic options as the facts emerge. During this step, be sure to identify any notice obligations and the associated time periods, as this will help determine the time frame in which a preliminary analysis may need to be conducted. Make sure you do not waive any rights or create unneeded uncertainty by missing a contractual deadline. Finally, review any relevant contract amendments, RFIs, or change orders that may have altered or clarified the original contract provisions at issue.
Talk to the Right People
With an understanding of the framework in which this dispute will develop, identify and talk to the key persons involved. Generally the project manager is the best place to start for the contractor, and the site representative for the owner. Be sure to consult with someone who is informed about the project schedule, costs, and management concerns, and who can provide insight regarding the unforeseen event’s potential impact on project resources and activities. Ask about productivity, as well as if critical path activities are likely to be affected by the event or response. And ask about any informal discussions that have taken place to date concerning the event or its potential impact.
Even if contractual notice deadlines do not require urgency, it is wise to hear first-hand accounts early on. Memories should be fresh, and the emotional investment of deflecting blame or being “right” generally becomes stronger over time (and with increased awareness of the potential consequences). Talk directly to the people with relevant knowledge to hear their voice and evaluate not just what they say, but how they say it. Don’t settle for their impressions and opinions, but download a full report of how they perceived facts. Press them for details regarding what was actually said and done. And push them regarding what the contract and related materials say on the topics. Such an exercise may trigger the disclosure of additional relevant facts, promote a discussion of the path forward, and even help you manage the project team’s expectations as to the process or merits of their understanding.
In addition to discovering what the witnesses know, impress upon them the importance of identifying and organizing key written documents, and help them brainstorm regarding the type and location of such materials. Encourage them to finalize meeting minutes as needed, and even to create a written record concerning anything said in meetings or even casual conversation that may impact the dispute. In this way, you can begin to ensure that oral statements are not lost, but instead are recorded and preserved close to the time they were made. But it is also important to make certain such written documentation is accurate, and that the witness understands any non-privileged materials could be discoverable if a formal dispute is initiated. Thorough (and privileged) notes should also be taken by attorneys or paralegals during or immediately after any witness interviews.
Gather Key Documents
While the narratives that key witnesses can provide are important, the written record is often paramount in construction disputes. Gathering and organizing contemporaneous records concerning what happened—as well as what the parties were informed or when someone had awareness—is critical to a proper analysis of the issue. Assuming that change orders or claim documents have not yet been exchanged, start with key correspondence regarding the unforeseen event, and collect any relevant formal letters, informal emails, meeting minutes, or other reports that already exist. Emails in particular can be more difficult to locate as time passes, and often become elusive once the job is complete and project personnel scatter. Even if the document management systems already are robust for your project and include numbering and cataloguing, it is good practice to identify and organize the documents that bear on each dispute. Indeed, establishing an electronic folder to house all important documents specific to each unforeseen event is prudent, even before the issue bears a change order number.
Even at the preliminary stage, other significant documents should be gathered and organized. Because such materials at this early stage likely are limited in scope and readily available, the time and effort required should be minimal but worthwhile, especially if you consider the cost and difficulty of doing so later. In addition to the baseline and any updated schedules, secure the version of the project schedule in use at the time of the key events. These documents will provide immediate insight regarding the project’s status and work plan at the time, as well as potential impact to future progress and critical path activities. Collect the different versions of schematics that reflect key changes to engineering or the site plot plan, as necessary. Gather invoices, receipts, or estimates to demonstrate amounts paid or owed. Ask that photographs be taken of the site or any affected equipment. You may even search for local media reports of an incident, particularly concerning a community incident, government action, or force majeure event. As mentioned, be sure to ask each person interviewed what supporting documents they believe will shed light on the event or the resulting damages. In the end, the dispute may well turn on a small handful of documents that are both in existence and readily accessible from the very beginning.
Articulate a (Reasonable) Position to the Other Party
After examining the contract and gathering initial key evidence, you are well-situated to make a preliminary assessment of how to address the developing situation, something which you can formally provide to the other party. Whether you are a contractor or an owner, you will be well served by articulating a position and its bases in a formal project correspondence. While you may prefer to keep things simple, or provide a mere overview that reserves certain arguments or facts for strategic purposes, defining the event right from the beginning in clear and favorable terms is generally to your advantage.
Frame the event in terms favorable to your company, while being careful not to overdo it. You do not need to make admissions or concede points, especially if all relevant facts are not yet known, but there also is little upside to committing to an argument that is unlikely to be well-supported. If you like, you can state the investigation is ongoing and the analysis preliminary, giving yourself room to maneuver if contrary facts are later discovered. But you should identify the key facts that are known at the time (even qualifying your position as based upon what is then understood), cite the applicable contract provisions (even quoting them), and refer to relevant supporting materials (even attaching them). Be sure to reserve all rights, as necessary. And at a minimum, make sure you are complying with any applicable notice requirements. Much is to be gained by articulating a reasonable position, stating why additional time and costs should (or should not) be awarded, and defining the event in favorable terms through contemporaneous records. Note that this is true for both owners and contractors—each should take an interest in creating a project record favorable to its own position.
In return, seek formal responses disclosing any contested facts or alternative interpretations: such replies will provide tremendous insight as to whether a dispute may be imminent and how it may take shape. Moreover, a failure or inability by the other party to respond can also be used to your advantage, as silence can be argued to be a presumed agreement or a waiver of any objection. Push your site team to ask questions and glean information “on the ground” about how the other party views the relevant issues. In these ways, you can continue to gather information and re-assess. Having used qualifying language in your letter, you should be free to negotiate or evolve your argument as necessary as the project moves forward.
Reasonable parties should recognize the need and desire to record facts and positions in writing when an unforeseen event threatens to impact a construction project, especially one of considerable size, scale, and value. Remember the benevolent purpose of a notice requirement is to ensure all parties are aware of a potential impact and can respond accordingly. In short, they exist to promote engagement and joint discussion—with a penalty of possibly waiving rights for non-compliance. Thus, many goals are met by early communication that addresses the issue and potential ramifications, serving both the project’s progression and your ultimate claim or defense in a future dispute. In any event, committing to a position (even one later proved inaccurate through additional discovery) generally is better than silence, which at best may allow the other party to define the event and its impact, and at worse will escalate tensions and be seen as an inability or refusal to deal with the situation. If you are concerned about appearing aggressive, the tone and manner of your communication can in many respects control how it is received. Indeed, adding requests to work together, promises to mitigate as possible, and even stating that the letter’s purpose is to ensure full disclosure and communication often go a long way. While you have many choices regarding how you communicate, there is one clear best choice as to whether you do so.
Inertia is a powerful force, and it is easy to sit back and see how a situation develops before deciding the best way to react. However, the stakes can rise, initial (mis)conceptions can become “frozen” into perceived realities, and opportunities to keep the impact contained may not last. Being proactive by undertaking a swift preliminary investigation helps achieve an accurate and clear-eyed analysis, establishes a consistent and reasonable position, and prepares for any outcome ranging from resolution to litigation. In a best-case scenario, timely action can push the project forward while avoiding costly and unnecessary disputes. Even the worst-case scenario with this approach generally provides better understanding regarding the facts and the other party’s arguments, allowing you to make a more informed evaluation should a disagreement become a dispute. In these ways, immediate analysis and engagement during the pre-dispute phase can help minimize risk and lead to positive results.
About the Authors
Benjamin E. Pollock is a business litigation partner in King & Spalding’s Houston office, and his practice focuses on construction and energy disputes litigation, as well as litigation arising from industrial accidents and catastrophic events. He may be reached at [email protected].
Martha Buttry Daniels is a business litigation associate in King & Spalding’s Houston office and focuses her practice on energy-related construction disputes, as well as other general commercial disputes. She may be reached at [email protected].
This article first appeared in the King & Spalding Energy Newsletter, available at energylawexchange.com.
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