Caldwell & Kearns, P.C.
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Using escrow agreements to resolve construction disputes

As mentioned in the last entry of this blog, all construction projects begin in an atmosphere of hope, and that is perhaps most true of residential construction. Often the owners are building their "dream house," marshalling a significant portion of their assets to build a home they hope to occupy for many years. The builder, too, is hopeful, anxious to please the customers and optimistic that things will go smoothly and a reasonable profit will be made.

A few months later, reality sets in. The house is nearing completion, but the stairway to the second floor is overly squeaky, nail pops have appeared in the drywall and the kitchen cabinets do not match the stain sample provided when the owners were choosing materials. The scheduled completion date now appears unattainable, and the situation is made worse by the sudden absence of key subcontractors who are off to another project. The next to last draw is due to be paid, but the owners are unsure whether they should release it before the problems they see have been remedied. The contractor is desperate for cash flow to get the subcontractors back to the site and to meet his own expenses necessary to finish the project.

The owners consult their attorney, whom they haven't talked to since she drafted their contract, to see what they should do. Construction Law Litigation

They want to consider terminating the contractor and hiring a different builder to finish the job. The afternoon before they meet with their attorney, the builder sends an email threatening to walk off the job if the draw is not released within the next seven days. In short, everyone has awakened from their pre-project dreams, and hope seems to be at an end. Fortunately, the owners' attorney is experienced in these matters and sees an available compromise which will address her clients' concerns without the need to terminate or otherwise alienate the builder. She suggests that the parties prepare an escrow agreement listing the owners' legitimate concerns and how they are to be addressed, with a dollar value assigned to each item. The net amount of the draw will be released to the contractor, with the value of the listed items set aside in an escrow account to be released when all parties agree that the items have been adequately addressed. This will give the builder the incentive to complete or repair the items of concern, while being assured that he will be paid for those efforts. It also assures the owners that their concerns will be addressed in a timely manner, and will save them the expense of switching contractors at an advanced stage of completion.

Obviously, the preparation of the escrow agreement will require that the parties sit down and have an honest discussion as to the items that need to be repaired or completed. There is also the risk that, when a contractor applies for release of the escrow funds, there may be disagreement as to whether the items have been satisfactorily completed. To address that risk, the owners' attorney suggests that the parties agree to a mediation clause in the escrow agreement by which both parties agree to submit any such disputes to one day of mediation, since the experienced attorney knows that most disputes will be resolved at such a mediation session.

In the hands of an experienced attorney, the escrow agreement can be used as an effective tool to address the disputes that inevitably arise during the residential construction project and to restore the parties to a positive working relationship as they both seek to fulfill their hopes and dreams.

Next time" "When Is A Well-Written Contract Not Enough?"

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