While parties building a construction project agree that the finished project should be free of defects, complaints nevertheless often arise over the project’s design, workmanship or materials during or after construction. Allegations of defective work can derail the progress of a construction project by shifting precious time and resources away from efforts to complete the project. Not only can these claims significantly delay the project, but the financial drain on the parties involved can be devastating. Understanding what steps can be taken to prevent or resolve a construction defect lawsuit is paramount for owners to maintain their financial stability and avoid the costly and time-consuming affair of a construction defect lawsuit.
Pre-contract Steps to Prevent Defect Disputes from Becoming Defect Litigation
Many construction defect claims arise from disputes surrounding project drawings and specifications. The contracting parties must confirm that the parties performing the work receive all related construction drawings and specifications. Owner provided drawings and specifications come with an implied warranty that they are adequate and if properly followed, the contractor should not be liable for any resulting defect. However, if there are any questions or perceived omissions, the contractor should follow up and request clarification before bids are placed, contracts are signed or really as early in the construction process as possible. Unresolved ambiguities or gaps in these technical documents will only result in a more costly dispute down the road. If possible, preconstruction meetings should be held with the project architect or design team to help identify and resolve any issues to avoid a potential defect claim.
Quality and performance standards are also contested issues that can accompany a construction defect claim. Ensure that these standards are clearly defined in the contract and detail how quality control is being performed to ensure those standards are met. If the contract includes performance specifications requiring the work to achieve certain results, the risk will often fall to the general contractor or subcontractor guaranteeing that the construction will meet those specifications or performance criteria. If the standards by which the work will be judged are not clearly defined, contractors may use standards or industry guidelines that do not align with those expected by the project’s owner or architect.
The contract must also detail the quality control processes for the identified scope of work. The terms should clarify whether the contractor, owner, or a third-party is performing quality control and who is responsible for the cost of the inspections. Inspections should be tied to specific times or milestone events. Importantly, the inspections and their results must be documented with detailed written reports and pictures. A clearly defined quality control process is vital to ensure that potential defects can be caught and corrected early enough to minimize their impact and ultimately avoid litigation.
Preserving Rights and Reducing Long-term Financial Exposure
Construction contracts should explicitly identify the rights and responsibilities each contracting party has and the steps that must be taken to either exercise or preserve those rights. Proper and timely notice to the other contracting party is often one of these required steps. Therefore, notice provisions in the contract should be clearly defined and followed.
For example, when a potential construction defect is discovered, written notice must be provided to the applicable party as soon as possible, and any resulting damages ought to be clearly documented. While defective work can trigger a default under the terms of the contract, default provisions often allow the defaulting party a period of time to cure or take reasonable steps towards curing the alleged defect before a default is declared. If the defaulting party acts timely, the default, and any subsequent litigation, may be avoided.
Construction contracts should also provide for early alternative dispute resolution procedures to help avoid litigation. One common mechanism is to require the parties to mediate their disputes before an arbitration demand or litigation can be filed. However, other tools are available to help resolve defect issues even before mediation. Because construction defects can be complex, technical issues, the parties may agree that allegations of defective work be assessed by a third-party expert for a proposed resolution. While the expert’s proposal would not be binding, the presence of a knowledgeable and experienced third party may bring the parties closer to a resolution. Additionally, the parties could require a meeting with each parties executive team to attempt to resolve the defect issue. Having individuals more connected to the business aspect of the project provides a different perspective from those tied up in the day-to-day intricacies of the defect dispute. Both of these useful and relatively inexpensive procedures can help resolve a defect dispute before a lawsuit is filed.
It is important for parties to require performance bonds to ensure the work will be performed correctly and timely. All parties should request copies of any performance bonds in place on the project because they contain important information, including the notice requirements, to trigger their activation. In the event of defective work, a bond claim should be made by providing written notice according to the terms of the performance bond to trigger a financially solvent entity, the surety, to step in and guarantee the performance of the contractor’s work. The performance bond provides financial security in the event a party does not have the funds or available workforce to correct the issue. Without a performance bond, owners could be stuck with an incapable contractor and mounting delays while a third-party contractor must be brought in to remediate the work, often at a premium cost.
What Insurance Coverage Disputes Mean for Owners
Similar to a performance bond, insurance plays an important role in minimizing the financial risks that come with defective work by providing financial security in the event a construction defect arises. However, disputes can still arise over whether any or which types of insurance provide coverage, leading to additional costs and delays during litigation. Insurance dispute litigation will involve multiple parties, including contractors, architects, and engineers, each with their own insurers. Experts are a common, and often necessary, expensive given the complex nature of construction defect claims, especially when insurance coverage rests of determining the responsibility of the defect. Insurers may also seek legal determination for whether they are obligated to defend the insured before the dispute concerning construction defect liability begins. Meanwhile, the owner will likely have to pay out of pocket to complete the repairs while these disputes play out. These repairs can be extremely costly and may only be partially reimbursed through insurance funds months or even years later. Therefore, owners should be familiar with the specific types of insurance related to construction defects to minimize potential coverage disputes and ensure adequate coverage. Otherwise, they could be left with footing most, if not all the resulting costs after a lengthy coverage dispute.
