Construction litigation is expensive, time-consuming, and unpredict able. Fortunately, there are steps you can take to help keep your company out of court. This article discusses the ABCs of avoiding construction claims: agreements, bonds, and change management.
Agreements
A well-written agreement can help you avoid disputes and resolve any that do arise. Agreements should be in writing and address scope of work, price, and procedures for changes and defaults.
Some agreements include clauses mandating that disputes go to arbitration instead of court. Arbitration can sometimes be faster and cheaper than the court process. In the court process, documents and hearings are available and open to the public; some parties prefer arbitration because it can be confidential. Additionally, in an arbitration, the parties can choose an arbitrator with expertise appropriate to the dispute, such as an accountant or an engineer.
Arbitration comes with limitations and drawbacks, however. It may not be possible to include others who are not par ties to the agreement in the arbitration. In an arbitration, you may not have the procedural rights you would in court, like the right to question a representative of the other party before the hearing. It can also be difficult or impossible to appeal the arbitrator's decision. Arbitration can be preferable to the court process but is not the best choice in every circumstance.
Bonds
Bonds are another useful tool in avoiding construction claims. The main types of bonds are discussed below.
Bid bonds protect the owner or contractor if the chosen contractor or subcontractor refuses to enter into the construction agreement. Owners/contractors may require that contractors/subcontractors obtain bid bonds as part of the tender process.
Performance bonds protect the owner or contractor if the contractor or subcontractor defaults in the performance of work. The surety will either complete the work or pay the lesser of the cost to complete the work and the amount of the bond.
Labour and material bonds protect subcontractors and suppliers if the contractor does not pay them. They can also help owners by avoiding a situation where an unpaid subcontractor or supplier registers a builders' lien against the project.
Change management
Changes to scope of work and timelines often lead to disputes. Handling changes proactively can help you resolve these disputes at an early stage and avoid litigation.
When a change arises, check your agreement and ensure you follow any process set out for making changes. Depending on the circumstances, a contractor/subcontractor who does not follow the agreed process for changes may be barred from claiming compensation for them.
Authorization to go ahead with changes should be in writing. Ideally, the parties should agree on the price of the change or at least a method for calculating the price (e.g., time and materials) before the work starts. It is typically easier to reach an agreement before the work begins.
Conclusion
Ensuring that your team follows the ABCs of avoiding construction claims - agreements, bonds, and changes - will help keep you out of the courtroom and on the construction site.
Originally published in the Spring 2023 issue of We Build.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
