Being Proactive Pays Off in Owner-Contractor Disputes
By Chip Bachara and Michael Bonts
A generation ago, it was possible to complete a lifelong career in construction without getting involved in litigation. Unfortunately, that is no longer the case.
Due to the complexities of the construction process, it is rare that any party is completely without fault in construction disputes, and reaching a favorable resolution can be difficult even in the best circumstances. While most disputes are settled before they get to trial, it's never certain how a case will turn out.
However, with a thorough discovery of facts, reliable documentation and an organized, systematic approach, an attorney can be best prepared to successfully defend a contractor or developer against a complaint. Some valuable lessons can be taken from a federal trial arising out of a design-build contract for the design and construction of a health care facility in Florida.
In this case, a Midwest-based contractor and an engineering firm designed and built a medical facility consisting of a hospital, nursing home and medical office building in Northeast Florida. During the value-engineering phase, the owner and design-build contractor explored several options for the facility.
The initial HVAC design specified a chiller system. The contractor provided 10 options, in a grid form, of HVAC systems that affected construction and operating costs. The grid indicated the cost to install each proposed system, the simulated annual energy cost for each system, the differences in the installation cost and operating cost of each system as compared to the least expensive system, and the number of years it would take to recover the additional cost to install the more expensive system (which was generally less expensive to operate).
The owner selected a direct-expansion (DX) system instead of a chilled water system, realizing an immediate savings of almost $340,000 in construction costs. The owner used this savings to add space to the medical office building.
After the first phase of the project opened, the hospital began having problems with the air conditioning. The contractor dispatched the mechanical engineer from Wisconsin to investigate. The engineer indicated the problem was with the installation rather than with the design. The design-build contractor responded quickly and directed the mechanical contractor to act. The issues seemingly were fixed.
Solid Documentation and Expert Witnesses
Three years later, the facility began experiencing additional problems with the HVAC system. After numerous visits to the facility, the contractor again engaged the mechanical engineer, the mechanical contractor and the manufacturer to determine why the client was still dissatisfied with the system.
Despite information indicating the owner was not properly maintaining the HVAC equipment, the owner demanded that the DX system be replaced with a chiller system, which would cost the contractor $1 million. The design-build team and the manufacturer agreed to replace the original units with new DX units at a cost of $300,000. When the contractor refused to replace the DX system with a chiller system, the owner ended all settlement discussions and filed suit against the design-build contractor.
The parties hired counsel and experts who educated themselves on the various positions in an effort to settle the dispute at mediation. In this case, the owner demanded damages in excess of $1.6 million, an amount far greater than what the design-build contractor could justify. The parties were unable to settle prior to trial.
At trial, the owner insisted the DX system was inappropriate for use in the facility and wanted the court to find the contractor liable. The contractor and its legal team were faced with proving otherwise. Together they presented a defense that relied on an organization of the facts and solid documentation using expert witnesses to describe the problems with the HVAC system.
When asked why the DX system was selected after reviewing the grid, the owner's CEO testified he was forced to make an immediate decision and did not have time to properly evaluate the options provided. However, other testimony uncovered several meetings and conversations on the subject, with both the contractor and hospital facility personnel proving the owner had more than 60 days to reach a decision.
The owner also argued that the grid was inaccurate and confusing. Hours of testimony were presented at trial to educate the court about the grid and the information contained in the grid.
After a three-week trial in federal court, the litigation ended with a ruling in favor of the defendant (the design-build contractor) with no damages being awarded to the plaintiff.
The HVAC grid proved accurate and was a key trial document to display how the contractor's due diligence and proactive handling of the owner's concerns benefited the owner.
Contractor's Diligence Makes the Difference
Beyond the favorable ruling, both the contractor and its attorney took away some valuable insights from the case, including:
- The evidence presented highlighted the fact that the contractor was focused on the job being done right, rather than avoiding the client's complaints.
- The contractor responded to the mechanical engineer's letters outlining any construction issues within 24 hours of receipt.
- The contractor flew to Florida as often as needed to respond to the owner's complaints. This demonstrated to the court that the contractor never turned its back on the client.
- The contractor understood the importance of documenting all communications with the owner, manufacturer and installers. Keeping an organized record of letters and emails and maintaining phone logs proved invaluable.
- The contractor selected the right professionals for the task-from engineers, architects and subcontractors to construction lawyers and expert witnesses-and allowed these professionals to perform their jobs.
Based on the court's ruling, the HVAC expert hired by the contractor to testify at the trial provided the court with the most thorough analysis of the owner's complaints. While the contractor could have saved money with a less experienced consultant or a less expensive analysis of the existing conditions, the investment in the proper trial team proved effective.
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