By QUINN MURPHY
For years the debate has raged: Is poker a game of chance or a game of skill? In most countries poker is still legally regarded as a game of chance over the vehement objection of professionals, who argue it is a game of skill and should be respected as such. The professionals most prevalent “skill argument” is that it is a game of skill because the poker player’s opponents are the fellow players, not the house. Because human nature is understandable, predictable, and can be strategically manipulated, poker professionals believe that skill (not luck) determines outcomes. In the movie Rounders, Matt Damon’s character is quoted as saying that in poker, “If you can’t spot the sucker in your first half-hour at the table, then you are the sucker.” The implication is that players who don’t understand the controllable variables of the game should never sit down at a poker table.
Successful construction litigation strategy is just as nuanced as poker. In certain instances, being the litigation aggressor appears to pay dividends while in other instances, it only increases costs. But the truth is, succeeding in construction litigation is about knowing your opponent better than he knows you. It is about understanding your opponent’s tendencies, predicting his or her reaction to certain actions and inactions and strategically manipulating those tendencies with factors you control before you ever see the inside of a courtroom. And few tendencies are more predictable than your litigation opponent’s desire to minimize risk/cost and maximize reward. And hedging against these tendencies can, and should, take place at the time of contracting by strategic inclusion of the following five provisions:
- Mediation Provision
Mandatory mediation provisions require the parties to participate in mediation before initiating arbitration or litigation. Mediation allows the parties to hear each other’s legal and factual position before incurring further costs and permits a mediator to attempt to negotiate an early voluntary resolution. Mandating contractual mediation adds an additional step that slows the timing of payment, and costs both parties’ attorneys’ fees and (normally) half the fees of a qualified mediator.
Advantage: Mediation favors parties holding funds as delay can exacerbate cash flow concerns among those demanding payment. Mediation will also benefit financially strong parties in that it allows an early evaluation of an opponent’s liquidity and financial desperation. Information presented at mediation (e.g., payment plan duration, demands for large down payment) are “tells” that can allow more financially stable parties to secure more favorable settlement terms. Most mediators require an advance deposit, so the initial cash outlay can incentivize the claimant to compromise more heavily to avoid the initial out of pocket expense.
- Arbitration Provision
Like mediation, requiring the parties to arbitrate can be time consuming and costly. While commonly considered to be less expensive than litigation, the process is rarely less time consuming and often equally burdensome. Filing fees for the American Arbitration Association can range from $2,000 to more than $10,000 depending on the amount of the claim, which can be a significant obstacle to pursuing dispute resolution through the AAA if required by contract. Importantly, any arbitrator’s award must be registered in Court for collection through initiation of a typically expedited form of litigation, which only adds to the overall cost of arbitration.
Advantage: As with mediation, the timing and often significant up-front cost of initiating arbitration typically favor parties withholding funds creating negotiating leverage against claimants seeking payment. Specifying the location of arbitration in a party’s “home forum” can create inconvenience and further negotiating leverage.
- Forum Selection Clause.
Forum selection clauses require all litigation between the contracting parties to be brought in a particular state forum and court.
Advantage: For projects that require work across state lines, requiring an opponent to litigate outside its home state can create significant strategic advantage to the home state litigant. Out-of-state contractors will need to retain a local attorney, witnesses will need to travel for depositions and trial, the out-of-state contractor may be general unfamiliarity with local litigation and trial practice, and the time and administrative inconvenience can create negotiating leverage that significantly favors the local litigant.
- Prevailing Party Provision.
Prevailing party provisions require the losing party of a lawsuit or arbitration to pay the legal expenses of the prevailing party, including attorney’s fees.
Advantage: The risk of having to pay damages and your opponent’s attorney’s fees greatly increases both parties’ risk exposure. This increased risk creates a disincentive for pursuing smaller disputes and incentives both parties to compromise in negotiation.
- Indemnity and Hold Harmless Provision.
Indemnity provisions require one contractor to reimburse another contractor for losses covered by the provision. Hold harmless provisions require that contractor to pay the attorney’s fees and costs of the contractor having to defend and seek indemnification.
Advantage: Requiring an indemnify and hold harmless provision creates significant risk exposure for contractors which, in turn, can discourage small claims and encourage compromise in lieu of litigation. While the impact of this provision is equal, financially stable litigants may be more able to risk paying its opponents damages/fees/costs than smaller, less stable contractors. This contractually increased risk exposure can be exploited to create leverage and drive settlement.
As with poker, successful litigation strategy is as much about creating favorable odds as it is any particular strategic decision. Many of these odds are created at the time of contracting, long before any actual dispute arises. Strategically including these five provisions in your construction contracts will give you a meaningful litigation advantage that helps put your litigation adversaries on tilt.
Quinn Murphy heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.