October 15, 2010
By Robert Kennaley
McLauchlin & Associates

Robert KennaleyIf you don’t have a dispute with the client every now and then, you don’t have enough clients. Knowing that disputes will arise is why a business owner must take steps through risk management, contract drafting, recordkeeping and communication to minimize their impacts. You hope the steps you take will put you in the best possible position to resolve disputes as they arise. You also hope that when disputes arise, the other side is reasonable in negotiating a resolution, so as to avoid unnecessary time and expense.

Litigation is time-consuming

It has been said that a good settlement is one where neither side is happy. There is a lot to this saying. Litigation is time-consuming, expensive and inconvenient. It is also fraught with uncertain outcomes and no one gets all of their legal costs back, even if successful. Accordingly, parties with excellent cases often do, and should, settle for far less than what they are entitled to. The earlier settlement occurs, of course, the more inconvenience and expense can be avoided.

When settlement occurs, you have no doubt already agreed to discount your position in order to obtain the resolution. It is therefore important to ensure that the settlement is properly documented to avoid gaps or misunderstandings which can come back to haunt you, down the line.

Answer all questions

Where you are in the middle of a project and have negotiated a resolution over a change in the work (such as unforeseen site conditions or the need for additional materials or engineering), settlement documentation should clearly determine whether or not the settlement includes for all ‘impacts’ associated with the change.  In other words, if you have settled, how much you are to be paid for additional excavation?

Have you also settled the issue of delay?  Will the owner expect you to keep to the original schedule? Will you be entitled to additional compensation if the delays push you, for example, into winter work? If these questions are to be left to another day, the settlement documentation should make this clear.

Often, dispute resolution occurs after the contractor has left the site, with no intention of returning. This generally occurs when the dispute is over alleged deficiencies or monies owing, or both. An important consideration in such a circumstance is the extent to which the contractor will maintain his warranty over the work performed. If, in your view, the resolution of the dispute should bring all possible obligations of the owner under the contract to an end, you should probably incorporate this into the settlement documentation. If not, you run the risk that the owner may claim on the warranty, if a further dispute arises.

Settlement agreement

Another important consideration in drafting a settlement agreement is to consider how and when payments to the contractor are to be made. Is the settlement monies payable by certified cheque, bank draft or money order? If not, a number of days (perhaps up to two weeks) will be required before the payment will clear. Does the contractor have the luxury of waiting? Will his lien rights, for example, expire in the interim? Is he counting on the monies for some immediate purpose? If it is important for the contractor to have the monies in hand right away, a provision for certified funds should be made part of the agreement. The appearance that the contractor doesn’t trust the client can be avoided with an explanation as to why the immediate receipt is required.

If the agreement calls for the contractor be paid amounts over time, the settlement documentation should address what happens if one or more of the payments are missed. Sometimes, settlement documentation is drafted to provide an incentive for the owner to make payments on time. This can be done by an agreement that if the missed payments are not corrected within a certain period of time, the contractor will automatically receive a court judgment in a greater amount (perhaps as much as the contractor’s initial claim, less payments received to date on the settlement). Also, if the owner is a corporation, a principal of the corporation can be asked to personally guarantee the settlement obligations.  

Where litigation has already commenced, the settlement documentation should address who will incur the cost of taking out any necessary court orders to conclude the litigation.  

Full and Final Release

A document commonly used by lawyers to bring finality to a dispute is the Full and Final Release. Care, however, needs to be taken in drafting these documents. First, the release must accommodate any future obligations, such as the owner’s obligation to pay additional monies, a party’s obligation to address court filings, or the contractor’s warranty obligations. Sometimes, the Full and Final Release is held in escrow, pending the completion of certain steps.  Also, items not covered by the release can be expressly excluded from its scope.

Full and Final Releases, like contracts, can sometimes be vague and ambiguous on the one hand, or overreaching on the other. If you do not intend to give up all possible claims against the other side, you should never sign a release. Also, it should be remembered that (pursuant to the doctrine of “contra proferentum”), an ambiguous full and final release will generally be interpreted in favour of the party that did not draft it, so long as that person’s interpretation of the document is reasonable.

Seek legal advice

All of the above leads us to recommend that, depending on the issues and amounts involved, even where a resolution can be negotiated directly between the parties, it is often worthwhile to seek legal advice with respect to the settlement documentation, to avoid confusion and possible disputes down the line. Unfortunately, we have seen over the years far too many settlements that went sideways, resulting in increased costs and inconvenience.
Robert Kennaley practices construction law in Toronto and Simcoe. He speaks and writes regularly across North America. He can be reached for comment at 416- 368-2522, or at kennaley@mclauchlin.ca. This material is for information purposes and is not intended to provide legal advice in relation to any particular fact situation. Readers who have concerns about any particular circumstance are encouraged to seek independent legal advice in that regard.