June 19, 2009

The singular issue damning construction defect cases from prompt and efficient resolution is the confluence of multiple interests most of which are in a head on conflict with cost efficient resolution.  Without discussing the separate and conflicting interests of contractors, developers, insurers and lawyers, the purpose of this article is to recognize that the process of litigating and resolving these disputes has been fraught with waste and inefficiency, and a sane and disciplined approach to resolution is required.

CD cases are product liability claims.   They should commence and conclude based on an honest and objective analysis of the conditions that reasonably might be determined to fall below acceptable construction standards and which are producing damage or likely to produce damage.

Getting through the interests requires that the plaintiff's and developer work cooperatively with a neutral to reach an objectively verifiable and fair repair protocol.  To do this claimant should produce a confidential and mediation protected defect list and cost of repair.  This should not be the worst-case scenario that would be presented to a jury.  It should reflect an honest and conservative analysis of conditions and a reasonable bid based cost of repair.

Once this is completed and the reports are produced, developer's retained consultants should review and be prepared to accept or present appropriate contrary opinions regarding the issue or the repair.  They should meet and confer with a neutral mediator to arrive at a mediated scope of repair.  The mediator should be empowered to retain a neutral general contractor.  This contractor will resolve issues that the plaintiff and developer's consultants cannot seem to compromise.  The neutral will then produce a firm bid to do the work identified in the mediated scope of repair.

This bid, plus attorney fees and hard costs (reduced to reflect a reduction of time committed and risk incurred), will form the basis for settlement of the claims.  Claimants should agree to accept this amount if offered within 120 days of its determination (as long as the bid will remain open).  This delay will permit the builder an opportunity to meet with its subcontractor's insurers in an effort to fund the agreed amount.

When meeting with the subcontractor's insurers the builder should be prepared to articulate a % of the total costs requested from each participating subcontractor.  Rather than spending enormous sums on additional consultants to split hairs on specific issue and allocation analysis, the carriers for the subcontractors should recognize this as an art, and not a science. If the overall settlement number has been achieved through the process outlined above, it will represent a fair and bid produced repair.  Developer should identify subcontractors by fitting them into percentage of settlement slots - such as 1%, 5%, 8%, 10% and 15%.  When developer's percentage for supervision is added, the total should be 100% of the settlement amount.

All parties should understand that this allocation of a substantially compromised claim and that if resolution is not obtained, the mediation process will end and the cost of repair will be higher, attorney fees will be higher, and litigation costs will, as they generally do, substantially exceed the settlement value of the claims.

If full funding of this mediation compromised repair protocol cannot be obtained, developer and its insurers should accept the reasonable contributions committee, fill the gap, and then litigate to recover indemnity under their contracts.  Juries are sympathetic to builders who step up and repair agreed adverse conditions.  The case will be trimmed and much easier to prosecute.  The cycle of costly inefficiency will be broken and fees will be recoverable, generally, under subcontract agreements.

If not settled, mediation efforts should cease until all relevant discovery is concluded and the matter is close to trial.  The mediation process should no longer be a component of litigation of the claims. Parties must understand the benefit of the expedited claim evaluation and resolution process is to avoid ongoing litigation expenses and risk - and produces a fair method to address homeowner claims.  That is the reward and the incentive to work together, cut through the competing interests, and resolve the claim based on the real issues at hand.

About the Author

Mr. Polsky has experience in construction dating back to his work for a general contractor in the 1970’s. When he was a litigator, his firm represented both developers and subcontractors involved in construction defect claims. As a mediator, arbitrator and discovery referee, he has participated in the resolution of over 500 construction defect claims in California and Nevada. As a Special Master, Mr. Polsky designs cost effective investigation and settlement protocols designed to ameliorate the cost of litigation. These claims ranged from single-family homes to projects involving over 375 homes as well as large commercial projects, shopping centers, specialty buildings and condominium projects.