When Construction Owners Disagree: How to Break Deadlocks Legally

Your construction company has two founding members. You’ve grown fast, taking on multimillion-dollar jobs with steady profitability. But over the last six months, one partner wants to scale aggressively while the other wants to consolidate and reduce overhead.

Then, the disagreement spreads. Disputes arise over:

• Whether to pursue a new $6 million commercial bid

• Whether to purchase additional field equipment or lease

• Whether to hire new estimators or stay lean for another year

Each partner owns 50%. Each has veto rights. And each believes their vision is the one that will keep the company alive.

No one’s malicious—but you’re stuck. Payroll is due. Projects are pending bids. Subcontractor negotiations are frozen.

Your business is now paralyzed—not because of external market forces, but because your operating agreement didn’t plan for internal gridlock.

Why Construction Companies Are Especially Vulnerable to Disputes and Deadlocks

LLC operating agreements are drafted with optimism—partners assume they’ll make rational decisions and agree on direction. But construction companies face volatility that amplifies disagreement.

Here’s why deadlocks and internal disputes can hit construction harder than other industries:

1. Project-Level Pressure

Construction companies make high-stakes decisions constantly—bids, subcontract awards, project financing, and field staffing. Small disagreements escalate quickly when millions sit in the balance.

2. Uneven Work Contributions

Sometimes, one partner runs day-to-day operations while the other brings capital or administrative insight. Disputes over "sweat equity" versus "capital equity" lead to resentment without structured roles.

3. Thin Operating Margins

Cash flow timing, retainage disputes, and delayed progress payments create high tension environments. Partners under stress are often more likely to disagree—and less likely to compromise.

4. Leadership Turnover Impact

Key partner departures (or even planned retirements) create uncertainty. Without clear deadlock procedures, successor partners may disagree on leadership transitions or replacement voting rights.

5. Client Relationships at Stake

Construction clients value stability. When internal disputes surface, clients start questioning your ability to perform. You risk losing repeat clients and bids.

How Strong Operating Agreements Resolve Disputes Before They Explode

Effective operating agreements build an escalation pathway for disputes—turning potential litigation into structured resolution.

Think of it like a multi-tiered safety net: each layer catches disagreements before they fall into formal dissolution.

Tier 1: Mandatory Discussion and Cooling-Off Period

Most disputes in closely held construction companies can resolve with time and communication. The first provision should force that process.

Consider the following practices:

• Require written notice of the issue.

• Impose a 10 to 30 day “cooling off” period where no unilateral action can be taken.

• Mandate a meeting in person within 15 business days.

• Prohibit litigation or arbitration during this period.

Tier 2: Mediation Before Arbitration or Litigation

For construction companies, mediation is often the most efficient middle ground. It keeps confidential matters private and minimizes project disruption.

Why It Works:

• Cost-effective compared to litigation

• Encourages creative solutions (buyout terms, management adjustments, voting threshold changes)

• Often preserves relationships

Consider the following practices:

• Designate mediation under the AAA Construction Industry Rules or similar standards.

• Require mediators with construction or business law experience—or both!

• Specify mediation venue (neutral ground) and cost-sharing.

Tier 3: Arbitration—Fast and Private Resolution

When mediation fails, arbitration ensures finality without years in court.

Advantages:

• Faster resolution timelines, especially when required by the arbitration clause

• Confidential proceedings preserve client trust

• Arbitrators with construction and business experience understand project realities

Consider the following practices:

• Tailor your arbitration clauses however you see fit, in terms of length of the arbitration, limits on discovery, available remedies in the event of decision-making deadlock, and other variables.

• Choose arbitrators with commercial construction and business experience

Note that, if neither business partner is doing anything wrong—and the deadlock is a true deadlock—then arbitration may not be available with most stock or run-of-the-mill arbitration clauses. Most arbitrations are intended to resolve legal claims, not pure business deadlock. You may have to get creative with your contract drafting to generate an enforceable arbitration clause suitable for pure deadlock.

Breaking Deadlocks in a Two-Member or Evenly Owned Company

Deadlocks most often arise in 50/50 ownership situations. Without clarity, every major decision—capital call, new hire, project bid—can turn into paralysis.

There is no one-size-fits-all fix, but effective operating agreements use predictable and practical mechanisms to break ties before they destroy the company. Consider the following options:

1. Appoint a Tie-Breaker or Independent Advisor

For medium to large contractors, appoint a neutral advisor (CPA, retired contractor, or board member) who acts as tiebreaker when members disagree on financial or operational issues.

2. Use a “Buy-Sell Deadlock Clause” (Shotgun Clause)

When two equal owners simply can’t coexist, a buy-sell mechanism lets one exit—and forces the other to decide quickly.

How it works:

• One member offers to buy out the other’s interest at a specified price per unit.

• The recipient must either accept the offer or buy the offering member’s interest at the same price.

Result:
The bidder must name a fair price—too low and they risk being bought out. This “Russian roulette” model is high-stakes but decisively resolves stalemates.

3. Capped “Put/Call" Exit Mechanism

More controlled than the shotgun clause, a Put/Call mechanism allows:

• A dissatisfied member to “put” their ownership for sale to the company at fair market value.

• The other member(s) to exercise a “call” and purchase that interest under agreed valuation terms.

This avoids immediate confrontation and allows time for appraisal and structured financing.

Integrating Dispute Resolution with Other Agreement Provisions

Deadlock language should cross-reference—and harmonize with—other provisions such as:

• Capital Call Procedures: Avoid requiring unanimous approval that blocks emergency funding.

• Buyout Rights: Prevent opportunistic “exit under pressure” behavior.

• Valuation Provisions: Ensure consistency between general and deadlock-triggered buyouts.

• Non-Competes: Keep exiting members from immediately competing for company clients.

The Big Takeaway

When your construction company faces internal conflict, the goal isn’t to “win.” It’s to keep the business operating.

Deadlocks destroy profitable firms not because the work stops—but because decisions do. Without a way to resolve disputes, cash dries up, clients leave, and reputations suffer.

With clearly drafted escalation and deadlock provisions, you can:

• Resolve disagreements privately and quickly

• Preserve client trust and project schedules

• Avoid courts, litigation costs, and forced dissolution

• Keep good partnerships intact—or end them cleanly

Ready to Strengthen Your Construction Operating Agreement?

As outside general counsel or as your business counsel, we help construction companies draft and revise operating agreements that prevent internal disputes from becoming business-ending crises.

We understand how ownership structures, project cycles, and partnership dynamics intersect in the construction industry—and we tailor dispute resolution and deadlock provisions that actually work in real life, not just on paper.

Whether you’re forming a new company, adding partners, or updating a legacy agreement, consider whether your operating agreement lets you resolve disputes before they cost your company millions.

Contact Elkhoury Law to discuss how to build customized dispute resolution and deadlock provisions that keep your construction business moving forward, even when owners disagree.

Stay tuned for the installments in this series.

Series Installments:

Part One: Capital Call Provisions

Part Two: Buyout Provisions for Death, Disability, Divorce, or Departure

Part Three: When Construction Owners Disagree: How to Break Deadlocks Legally