Understanding Construction Law

Understanding Construction Law

As property owners, developers, contractors, construction managers, subcontractors, design professionals, engineers, and lenders can attest, the legal issues that can arise in the construction industry are unique and complex. The stakes are also extremely high, which makes it imperative to have a solid understanding of construction law and how it impacts your legal interests.

Construction projects are generally subject to a myriad of federal, state, and local laws. For instance, a project may be subject to federal regulations involving the workplace and environmental safety, state laws governing licensing and building codes, and local ordinances establishing zoning and permitting requirements. Further complicating matters, the legal standards often differ for commercial, industrial, and residential projects.

Construction law is also unique in that it encompasses several distinct areas of law and often overlapping areas of responsibility. Below are some examples:

• Contract law: All construction projects are governed by at least one contract (often, there are many.) Well-drafted agreements help ensure that everyone is on the same page about key issues such as the scope of work, project timelines, and payment terms. Solid provisions governing project delays, late payments, early termination, and breach of contract can often prevent costly disputes in the first instance or maximize your chances of winning the unavoidable disputes that often arise.

• Environmental law: Many projects are subject to environmental regulations, whether due to the location or scope of the project. For instance, prior contamination of the property may require compliance with federal and state remediation laws. Projects may also be subject to regulations requiring property owners, developers, and others to take steps to minimize or remediate environmental impacts.

• Financing law: Construction and development costs are often financed through construction loans and other financing structures. Lenders, property owners, investors, and even contractors are often involved in structuring, negotiating, and drafting the financing documentation that accompanies construction projects, including loan agreements and various types of security agreements.

• Insurance law: Insurance policies play a key role in mitigating risk for many construction industry players. Certain types of insurance, such as workers’ compensation insurance, may be mandated by regulation. Other types of coverage, such as construction general liability insurance, builder’s risk, contractors’ errors, and omissions insurance, contractors’ pollution liability insurance, and excess liability insurance, may be required under the contract. Entities may also be required to carry a surety bond to back their obligations and contracts financially.

• Labor law: Entities that employ workers on a construction project are generally subject to health and safety regulations, including the Occupational Safety and Health Act of 1970. Additional employment issues, such as those related to hiring, termination, hours, and wages, are also common in the construction industry.

• Land Use and Zoning Law: Construction projects must comply with a host of laws that govern the suitable use of land and establish requirements for both planning and construction. Large and complex projects may involve a complex web of federal, state, and local regulations related to permitting, zoning, project closeout, and other land use matters.  

While it may seem overwhelming, understanding construction law has numerous benefits, including ensuring enforceable contracts, maintaining regulatory compliance, protecting your company’s legal rights, and reducing the risk of legal disputes.

The legal complexities of the construction industry often result in disputes. Lawsuits often arise around issues such as breach of contract through late or non-payment for work and services, late or non-complete work, material selections, and design and workmanship defects.

Because lawsuits can be costly and time-consuming, alternative dispute resolution (ADR) is often preferred over traditional construction litigation. As discussed in greater detail here, mediation relies on a neutral third party to help negotiate the differences in the parties’ positions in order to lead to the settlement of all or some of the issues in dispute. Unlike a judge or jury, the role of the mediator is to help the parties settle rather than make any binding decision regarding the dispute.

Arbitration is similar in that a neutral third party is appointed to resolve the dispute; the key distinction is that an arbitrator renders a decision, which is generally final. The process is much more formal than mediation but still offers many advantages over litigation, including a significantly faster and less costly resolution. In both forms of ADR, the parties can select a mediator or arbitrator who specializes in construction industry claims and, therefore, may be more knowledgeable than a judge or jury. Another key advantage of ADR is the ability to privately resolve disputes out of the public eye.

Litigation is sometimes unavoidable. Some legal remedies, such as mechanic liens, must be pursued in strict accordance with applicable statutory provisions. In some cases, it can also be advantageous to file a lawsuit because any court decision, whether rendered by a judge or jury, is eligible for appellate review. Since every legal dispute involves different legal and factual issues, it is advisable to consult with an experienced construction litigation attorney who can help determine the best dispute resolution mechanism.

Construction projects involve a complex web of regulations and contracts involving numerous entities, many of whom have diverging financial and legal interests. It is imperative to legally protect your business and your projects.

Scarinci Hollenbeck’s construction lawyer team has extensive industry experience, particularly in New Jersey and metropolitan New York City. Our construction law attorneys also have the benefit of relying on their colleagues in related practice areas, such as Commercial Real Estate, Financing, Environmental, and Land Use, which gives our clients a tremendous advantage. By leveraging years of legal experience in every discipline related to construction law, our team can provide strategic legal guidance through every phase of a construction project.