Payment disputes are undoubtedly one of the most common types of discord in the construction industry, particularly with large scale projects. Timely and accurate payments are the foundation of smooth business operations as construction processes are highly dependent on the flowing of interrupted funds.
When payment disputes occur, contractors must initiate a resolution quickly to minimize time, financial, and reputational damages.
Why Construction Project Payment Disputes Occur
Disputes are not uncommon in the construction industry. Conflict often occurs due to disagreements between the contract’s parties, and in some instances, violations of the contract.
Payment is often withheld if there is a lack of understanding of the contract’s conditions, the contractor has failed to administer the contract, or if there have been extended project delays that have created animosity between the parties.
Although disputes do not necessarily constitute a breach of contract, they can quickly escalate. Some of the most common reasons for payment disputes include:
- Scope of work non-compliance
- Late payment
- Design failure
- Professional negligence
- Breach of contract
- Failure to release retention
- Delay in project
Of the disputes common in the construction industry, those regarding payment are the most prevalent. Project owners, contractors, subcontractors, and suppliers may disagree about the terms of payment, quality of the work, or the value of the work completed causing the progression of the construction project to come to a halt.
Steps to Resolution
To prevent costly business disruptions, address any discord quickly and carefully. Review the project contract to determine what provisions or stipulations exist that could potentially resolve the payment issue.
When drafting a construction project contract, all parties understand that there must be some degree of compromise to achieve a final contract that is mutually acceptable.
A negotiation clause is often included in contracts requiring all parties to agree that in the event of a dispute, they will attempt to reach a satisfactory resolution among themselves before engaging third parties for assistance.
In the absence of resolution based on contract terms, any of the following may be necessary next steps:
Introduce a Third-Party Mediator
In addition to having a negotiation clause, a construction contract may also contain a mediation clause. This will state that a neutral third party may be enlisted for payment dispute resolution by serving as a mediator between the contract parties.
Although mediation is not a legal course of action, a mediation agreement becomes binding and legally enforceable once agreed to and signed by both parties. If mediation is not a contract requirement for resolution, it can be a mutually agreed option.
Reach Resolution Via Arbitration
If a payment dispute cannot be resolved directly between the contract parties or with the guidance of a mediator, arbitration may be considered.
Arbitration is a private process with steps that are similar to a trial, although quicker and less formal, both parties still have the opportunity to make opening statements and present evidence. A neutral third party then considers the evidence and makes a binding decision.
This differs from mediation, as the mediator does not have the authority to make a decision. Some contracts make this a requirement, and may also include a stipulation regarding a preselected arbitration party.
Take the Case to Litigation
Litigation is often included in a dispute clause and may be executed if the parties to the contract cannot reach a satisfactory resolution. Litigation involves a series of detailed steps, from the initial preparation to filing of the suit to requisite court processes. Litigation is a complex and lengthy process that requires expert skill and experience.
Does My Case Require An Attorney?
The dynamics of payment disputes, particularly with the involvement of multiple parties, can often prove to be intricate and multifaceted. As a result, construction companies must be vigilant and proactive in their approach to resolution.
Consultation with a litigation attorney is advisable at the first sign of a looming issue. Problems may manifest in delayed or partial payments, disputes regarding change orders, or disagreements concerning the quality of work delivered.
At this juncture, legal counsel can provide invaluable guidance in assessing the situation, interpreting contractual obligations, and formulating a strategic plan to address the dispute effectively.
The proactive engagement of a litigation attorney during the contract negotiation phase allows for a review of the terms and conditions, ensuring they are fair, clear, and adequately protect the company’s interests.
However, by adopting a preemptive legal strategy at any early stage, including disagreements, construction companies can significantly mitigate the risks associated with payment disputes and safeguard their investments in large-scale projects.
Partner with KPPB LAW for Help with Your Payment Dispute
Payment disputes can cause disruption of a construction project, stopping the flow of all payments. When construction projects involve multiple stakeholders, resolving these issues can be even more challenging and time-consuming.