When Resolving Construction Disputes, Three Is Company, Too

You’re a general contractor on a large commercial construction project impacted by significant delays. You place most of the blame for the delays on the project architect, who you contend issued a wrongful stop work order arising from the performance of one of your subcontractors and performed other construction administration services negligently. Both you and the sub have incurred significant extended general conditions as a result of the work suspension, and you invite the sub to make a delay claim you intend to pass through as a component of your own claim to the owner, who, under the contract documents, is legally responsible for the acts of its architect.

The sub wants to participate in a pre-litigation mediation you’ve scheduled with the owner, but you’re hesitant to oblige. The owner, after all, will spend mediation blaming your sub for the issues giving rise to the stop work order, and you worry your sub’s presence could actually hamper, rather than facilitate, the settlement negotiations.

Are you better off refusing the sub’s request to participate in the mediation, trying to settle with the owner first, and then circling back to resolve open issues with your sub once things are squared away up-the-chain?

That would be a risky play, as a 2011 North Carolina Court of Appeals decision demonstrates.

My hypothetical doesn’t deviate too far from the facts of Cleveland Construction, Inc. v. Ellis-Don Construction, Inc., 210 N.C. App. 522, 709 S.E.2d 512 (2011), a case where the GC on a hospital construction project recovered $10.9 million on a $21 million claim through various settlements with the owner and its designers, all without the involvement of a key subcontractor. When the sub sued the GC to recover its subcontract balance and delay claim, the GC countered that the sub was responsible for a 12.5 week delay at the end of the project.

The GC prevailed in its argument that the doctrine of concurrent delay did not bar it from recovering delay damages against the owner up-the-chain as well as from its sub down-the-chain, since the GC wasn’t responsible for any portion of the alleged delays. Unfortunately for the GC, winning that argument only got it halfway home. As the sub pointed out, and as the GC conceded, the GC’s settlement with the designers included some amounts “necessarily attributable” to the 12.5 week end-of-project delay for which the GC now sought recovery in-full against the sub. The GC, however, couldn’t demonstrate precisely how much of its settlement with the designers related to that particular delay. On these facts, the Court of Appeals held that the GC couldn’t recover against the sub, ruling as follows:

Without any evidence identifying the amount [GC] recovered from the designers, it is impossible to determine how much, if any, [GC] is entitled to recoup from [sub] without obtaining a double recovery. See Markham v. Nationwide Mut. Fire Ins. Co., 125 N.C. App. 443, 455, 481 S.E. 2d 349, 357 (1997) (“Simply put, although plaintiff is entitled to full recovery for its damages, plaintiff is nevertheless not entitled to ‘double recovery’ for the same loss or injury.”).

The moral of the story? When multiple parties are involved in a construction dispute, and more than one might be responsible for a particular subset of your damages, it might not be wise to settle with one party without the participation of the other(s).

The smarter play might be to enlist the services of an experienced, capable mediator equipped to manage the complexity, personalities and nuances of multi-party mediation and work toward a global resolution within that context. Otherwise, as Ellis-Don suggests, you run the risk that settlement with less than all of the key players could have significant consequences for dispute resolution with those left behind. An experienced construction attorney can help you sort out the pros and cons of the various options.