NEGOTIATING A CONSTRUCTION CONTRACT CLAIM CAN FEEL LIKE LEGALIZED EXTORTION

Contractors often end up with monetary claims for nonpayment, changed conditions and/or additional work that are difficult to negotiate. Such claims are often met with counterclaims for defective work, and/or contractual defenses such as lack of notice and/or the lack of a written change order. Defeating such counterclaims are often difficult, but, when it comes to negotiating a settlement of a contractor’s monetary claim, the real difficulty is with the potential attorneys’ and/or costs associated with litigation or arbitration. Even a contractor with a six figure claim amount must seriously consider the attorney’s fees associated with litigating a matter to a final judgment or award in addition to the costs associated with the time its organization spends preparing for and attending any dispute resolution proceeding not to mention the risks associated with putting your fate in the hands of a third party whether that be a judge, jury or arbitration panel.

Anyone who has participated in a mediation has likely heard a mediator say, “Well, if you don’t like that offer, you are going to have to pay your attorneys a majority and/or all of the difference between your claim amount and what is being offered now, and, if you litigate, you will not have this resolved for another 2 or 3 years while it distracts you from your current projects, and, worst of all, there is no guarantee you will win. It is at that point that most reasonable business people accept the best offer they can obtain and move on to the next project, and, most of the time, that is the absolute correct thing to do – especially when you cannot recover your attorneys’ fees.

Under the general rule, in a litigation or arbitration, each party pays its own legal costs. For the reason explained above, a contractor trying to get paid for its work may feel like it is being extorted into accepting less than it had earned in order to avoid the risks and costs of litigation. There is no magic bullet to solve this problem, but there are ways to recover attorneys’ fees.

The best way for a contractor to be able to recover its attorneys’ fees and costs in the case of a dispute is to incorporate an attorneys’ fees provision into the contract. Such provisions state that the contractor, or, at least, the prevailing party to any litigation or arbitration is entitled to recover its attorneys’ fees and costs. The only issue is whether the court will agree that the amount of attorneys’ fees being claimed is reasonable.

A contractor may also potentially recover its attorneys’ fees and costs by making demand pursuant to the prompt payment statutes. These statutes vary from state to state, but Connecticut has a prompt payment statute with some real teeth. A successful claimant may recover its attorneys’ fees, interest at 1% per month, and an additional 10% penalty if the court determines that the payment was withheld in bad faith.

Furthermore, contractors may recover attorneys’ fees by filing a mechanic’s lien. In Connecticut, there is a split of authority as to what attorneys’ fees are recoverable. In some cases, the court awards only the fees associated with foreclosure aspects of the case. In others, the court awards all the fees associated with proving the underlying debt.

Finally, the least effective way for a contractor to attempt to recover attorneys’ fees is by alleging a violation of the Connecticut Unfair Trade Practices Act (“CUTPA”). A violation of CUTPA claim allows a prevailing party the ability to recover its attorneys’ fees, costs, and potentially additional punitive damages. The problem is that a CUTPA claim is not typically warranted in a breach of contract action.

In order to understand when an alleged CUTPA violation claim is appropriate, it is helpful to review a Supreme Court case that affirmed a decision that awarded attorneys’ fees as a result of a CUTPA violation. See Joseph General Contractors, Inc. v. Couto, 317 Conn. 565 (2015). In Joseph General Contractors, Inc. v. Couto, the parties entered into a contract for the sale of real property and the construction of a new home and a guest house on the property. When the contract was signed, the contractor agreed that if the buyers were not satisfied with the home or the guest house, they would not have to complete the purchase. Unfortunately, the location was only zoned for single family residences, which was known to the contractor, but not the buyers. After the execution of the contract, the contractor experienced financial difficulties that prevented him from financing the project. The contractor told the buyers that their right of refusal was causing his financing problems, and misinformed them that they could lose their deposit. The buyers then agreed to purchase the property and release their right of refusal. During construction, the contractor experienced a number of difficulties. The plans that the contractor’s architect produced were deficient. In addition, despite being paid to date, the contractor demanded a substantial payment that the buyers refused to pay. The contractor then abandoned the project and filed a mechanic’s lien. The buyers then hired a replacement contractor that informed the buyers about the single-family zoning, which resulted in the elimination of the guest house. See Joseph Gen. Contr., Inc. v. Couto, 317 Conn. 565, 569-572. The replacement contractor also discovered significant problems with the work that the original contractor had been performed. Id.

The Trial Court, the Appellate Court, and the Supreme Court all agreed that the contractor’s actions in Joseph Gen. Contr., Inc. constituted an unfair trade practice. “[M]any of the actions taken by [the contractor in his individual and corporate capacity] were indeed unscrupulous, oppressive, unfair and deceptive, among them blaming the [Buyers] for his inability to obtain the financing necessary to fulfill his contractual obligations, pressuring the [Buyers] into a changed arrangement for the house construction, the blatant attempt to force money that was not owed by welding the access cover to the unconnected sewer closed and dumping debris on the [Buyers’] property.” Id. at 565, 583-584. The court explained that the test to be applied is heavily dependent upon the facts of any given case, but suffice to say that the requirements for a CUTPA violation exceed mere breach of contract or even negligence.

Contractors need to protect themselves against what feels like the legalized extortion that often results from negotiations over disputed amounts that do not make economic sense to litigate. The best approach is to include a contract provision entitling you to attorneys’ fees associated with any litigation arising out of the contract, but there are also prompt payment statutes and mechanic’s liens. Beyond that, CUTPA claims should be an option of last resort, and only alleged in cases where there actually is improper conduct beyond the breach of a contract, or negligence that can be specifically alleged.

If you should have any questions regarding the negotiation of a construction contract dispute, please give me a call.

Scott Orenstein
(203) 640-8825

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