Virginia Lawyers Weekly

Construction litigation is booming as the economy continues its downward spiral.

The economic situation has spawned lawsuits over disputes that would be settled in a better economy.

“In tough economic times, construction litigation always increases,” said Robert Denney, a Wayne, Pa., law firm management consultant who has named construction law as one of the hot new practice areas in his annual list of “What’s Hot and What’s Not in the Legal Profession.”

The triple threat of soaring fuel prices, a credit crunch and slumping real estate sales are conspiring to send more disputes into litigation.

“Construction disputes tend to get resolved if there’s enough money in the project. But the impact of financial problems and lack of sales has just heightened problems and hardened each party’s position much faster,” said Randolph Ruff, a shareholder at Ogletree & Deakins in Chicago, who represents builders and suppliers.

In Chicago, a number of major condo projects have ended up in litigation because banks have stopped funding them.
In Florida, where foreclosures are among the highest in the country, builders are bringing counterclaims in foreclosure to collect on loan funds.

In Mississippi, the lingering effects of Hurricane Katrina combined with the rise in the cost of gas and petroleum-based building materials has caused a spike in contract disputes over construction delays.

In addition to more litigation, parties are spending more time on negotiating contracts.

John Yacovelle, a partner at Sheppard Mullin Richter & Hampton in San Diego, said that in the past several months he has seen a lot more work from owners and developers in drafting contracts with builders.

In particular, owners are now seeking contract terms that address cost and liability issues related to indemnity, delay, change orders and termination of the agreement for cause or for any other reason, Yacovelle said.

“The ability to terminate the agreement is a big issue, not just terminating for cause, but for whatever reason they may decide not to go forward. Owners are concerned about the ability to walk away from a deal without a ton of extra costs,” he said.

Multiple claims

Here’s a look at some of the recent activity in construction litigation:

• Construction defects

Lawyers in a number of states are reporting an uptick in claims over construction defects.

“There has been so much construction going on in the past five years that it’s only now that defects start rearing their ugly head, when people realize they are not simple to fix,” said Clifford Shapiro, a partner and chair of the construction law practice group at Barnes & Thornburg in Chicago.

Another driving factor is that people are trying to recoup their losses, Yacovelle said.

“A lot of construction defect claims have to do with real estate prices going down. People are trying to get out of their homes and are using litigation as a way of recouping some of the loss in value,” he said.

Construction defect claims will also show up as counterclaims in suits by builders against owners or developers for unpaid sums under the contract.

“In every dispute, you’re almost bound to see claims back against the contractor by an owner that the work wasn’t done properly or wasn’t timely,” Yacovelle said.

• Construction delays

The price of fuel and materials, as well as the tightening on financing, is causing a rise in claims over construction delays or “interference” claims.

“When you have volatile economic conditions, it’s very difficult for contractors to wrap their arms around what it’s going to actually cost to do a project,” said Robert Williamson, owner of Robert Chapman Williamson, P.A. in Jackson, Miss., a firm concentrating on construction law.

Any delay by an owner can cause a much larger increase in the cost of the work, and many of these claims are ending up in litigation, he said.

Another type of claim arises when contractors or sub-contractors run into financial trouble and get sued for bills they owe to other parties, such as suppliers, Williamson said.

• Collection claims in foreclosure

The foreclosure crisis has had a big impact on lawsuits among developers, contractors and banks.

In many cases, building contractors are joining foreclosure actions in states requiring judicial foreclosure.

“If a contractor put in improvements to the infrastructure like sewer, gas, septic or road, they are joining in the bank’s lawsuit against a developer in foreclosure,” said Terri Pickens, a real estate and construction litigator with Givens Pursley in Boise, Idaho.
In other cases, builders are suing the bank that handled the construction loan, seeking undisbursed loan funds or a “stop notice.”

This has become a valuable remedy, because in the current real estate climate in which an owner has little or no equity in a property, a mechanics’ lien would be wiped out by the mortgage.

However, the types of claims and whether a builder can succeed on them vary widely from state to state.

In Florida, for example, where builders are suing lenders by making cross-claims in foreclosure actions to recoup their costs, a state statute says a bank can only be liable to a builder if it failed to give written notice to the builder to cease construction, said Robert Hill, an attorney in Fort Myers, Fla., who represents creditors.

If a bank fails to give notice, the builder can sue for labor and materials only, but so far courts have not allowed builders to collect undispersed loan funds, Hill said.

On the other hand, California courts have allowed contractors to collect against not only the undisbursed loan funds, but also against fees, points and other monies that a bank has paid itself as part of the loan, Yacovelle said.

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