The Critical Path: Tools for Resolving Construction Disputes

Resolving Bid Protests on Public Works Construction Projects

Ron White — Wed, 01 Sep 2010 14:33:31 -0800

Bidding on public works projects often leads to conflicts and claims. In a future post I will discuss claims for extra compensation arising from bids below the engineer's estimate-characterized by some (usually public owners) as opportunistic bidder claims. Disputes also arise from disappointed bidders whose bids were not the low bid or from low bidders who lose contracts after a bid protest by a competitor with a higher bid price.

Most states require public works contracts to be awarded to the lowest bidder. It is believed this inures to the benefit of the public fisc by driving competitive bids to the lowest reasonable price. But how do you reconcile the public's desire for the lowest price with the public's need for safety, quality, and reliability? In California, these competing interests are addressed by requiring public works contracts to be awarded to the lowest responsive and responsible bidder. In other words, the award goes to the contractor with the lowest bid that fulfills the bidding requirements who can also demonstrate that it is a responsible contractor with the requisite bona fides such as licensure, experience, bonding capacity, etc.

There is an inherent problem with this system: while the lowest bid price is an objective standard, the requirements of responsiveness and reliability are subjective standards that can be manipulated. Yesterday, in a case called Great West Contractors v. Irvine Unified School District, the California Court of Appeal addressed problems that arose when subjective criteria were used to reject the low bids on two school district projects and awarding them to two other contractors at an additional cost to the taxpayers or, as the court put it, "the Irvine School District appears to have paid $800,000 more than was necessary to remodel two elementary schools." To read the opinion click here.

Summarizing the case is relatively simple: Great West submitted the low bids on two school remodel projects. Contractors with higher bids protested claiming Great West was not a responsive bidder due to a question in the bid documents about the existence of additional contractor licenses. The school district rejected Great West's bids and awarded the projects to two other contractors. The Court described the importance of the case as follows:

This case is important for two reasons. First, it presents a challenging problem in public contracting law: How to distinguish a "nonresponsive" bid from a de facto determination that the bidder is not a "responsible" bidder. The difference is significant not only to the bidder, but to the taxpaying constituency of the public entity: A truly nonresponsive bid may be summarily denied by a public entity even if the bid is otherwise monetarily the best for the entity. On the other hand, a determination of nonresponsibility entitles the bidder to a hearing where certain minimal elements of due process must be afforded before the contract can be awarded to the next-best bidder.
More particularly, this case illustrates the necessity of following the rule enunciated in 2007 by our Fifth District colleagues in D.H. Williams, supra, 146 Cal.App.4th 757 (D.H. Williams). Under the D.H. Williams rule, a public agency cannot reject the bid of the lowest bidder on a public works project on the theory that the bid is "nonresponsive" to the agency's request for bids when, in substance, the real reason for the rejection is that the agency thinks the lowest bidder is "not responsible" -- at least not without giving the lowest bidder the chance for a hearing on whether the lowest bidder really is "not responsible." On the record before us, because D.H. Williams was not followed, the Irvine Unified School District appears to have paid $800,000 more than necessary to remodel two elementary schools.

The second major reason this case is important is that it presents an object lesson in how evidence that, at least on its face, tends to show favoritism -- indeed, on this record, favoritism most foul -- never got squarely presented to, or considered by, the trial court. The reason? An unfortunate combination of trial court calendaring beyond a petitioner‟s control, and a public entity‟s delay in complying with a request for information. (Readers can judge for themselves, when we recount the facts in detail in part II below, whether "stonewalling" might not be a better word than "delay.")

The Court went on to describe what it considered to be suspicious circumstances leading to the rejection of the low bids on the remodel projects:

Here, one competitor in a bid for a school remodeling contract, for some reason never adequately explained by the public entity, had access to the lowest bidder‟s bid information within 24 hours of the opening of all the bids. Thus, this competitor was able to present a bid challenge almost immediately to the contracting school district based on the allegation that the lowest bidder had omitted to disclose some licenses with which it or its principals had been associated. And that competitor went on to be awarded one of two contracts up for award. after the critical first court hearing in the case.
But when the lowest bidder tried to get a copy of that very same competitor‟s bid (as well as that of another company that was awarded the second contract), the school district did not turn over that information until several weeks later. More pointedly, the information was deliberately not made available until after the critical first court hearing in the case.
However, when, in the second hearing on the lowest bidder's main request for relief, the lowest bidder tried to proffer evidence that would show how it had been treated differently from the winning competitors, the school district vigorously objected on the ground that the evidence was submitted too late! It doesn't take Hamlet to figure out that something rotten happened in this case. In fact, it suspiciously fits George Washington Plunkitt's definition of honest graft -- the use of tips to gain an advantage over one's rivals in public contracting.

In the end, the Court of Appeal reversed the trial court's decision, holding in favor of Great West which meant Great West could amend its complaint to claim damages for payment of its bid costs. But the injunctive relief requested by Great West had been made moot with the passage of time. The case illustrates the difficulty and even futility of many bid protests in California. Due to the time it takes to file a petition with the trial court for an injunction to prevent the award of the contract to the other guy, and then if you lose, the time to file, and have heard, a writ of mandate with the Court of Appeal, more often than not, during the time necessary for the legal proceedings to roll out, the contract is awarded to the other contractor and the work is started, and sometimes completed, before the legal proceedings are concluded. If an injunction does not occur, the rejected low bidder is left with a claim for damages in the amount of the bid costs. This is not a satisfying solution when you lose profits from a job (and work for your employees) through no fault of your own.

Given the timing difficulties with bid protest, here are a couple of things you could do to speed up the process:

Have your lawyer prepare a "canned" public document request for the bid documents of your challenger(s) that you could immediately fill out and serve on the public entity in the event your low bid is rejected.
If you choose to fight it, send a copy of your bid documents to your counsel as soon as possible so a petition for injunction can be filed as soon as possible. Make sure you have available all personnel who may be required to sign affidavits in support of the petition.
In the event the trial court can not or will not set the hearing at an early date, have your attorney file an ex parte hearing to shorten the time for the hearing on your petition.

Note: The Court of Appeal made it clear that Great West and its counsel reacted as promptly and as efficiently as possible under the circumstances. On the other hand, the Court went out of its way to suggest the reasons for the school district's motivation in (1) rejecting the low bid and (2) delaying the production of records in response to Great West's request for documents. While I have no idea of the school district's motives, it is noteworthy to point out the Court's strong language about what happened. I'll end this post with one such quote.

The sweaty haste with which the District consummated the contracts with the third-from-lowest bidders, contrasted with the insouciance and delay with which it honored the lowest bidder's request for records, are all susceptible, of course, to at least an inference that the fix was in from the beginning not to award the contracts to Great West.

You don't read that kind of stuff everyday. At least not in the published opinions of the Court of Appeal.

Construction Claims and Catch 22: Spoliation vs. Remediation

Ron White — Mon, 23 Aug 2010 15:58:56 -0800

It is one thing to assert construction claims; it is another thing to prove your case with admissible evidence. Therefore, those who intend to litigate construction claims must keep Steven Covey's advice in mind: Begin with the end in mind. This mindfulness must begin prior to the commencement of the project. Systems must be put in place to manage, sort, and preserve potential evidence. If you wait until a lawsuit is filed to get your ducks in order, it may be too late. At that point, the more appropriate aphorism has something to do with cats, not ducks, because organizing admissible evidence at that juncture is like herding cats. With enough time and money, you may get most of what you want organized and ready for trial, but something is bound to get away from you-or taken away from you by the court.

The reality of being precluded from using evidence at the trial of a construction defect case was aptly demonstrated in a recent decision of the New Jersey Supreme Court in the Tri-Form Construction case (August 2010). To read the entire opinion click here. This case is a useful primer on a number of levels. First, it deals with the issue of spoliation, meaning, the destruction of evidence. What happens when evidence is destroyed in the remediation process so that the defendant no longer has the evidence to defend itself in court? The New Jersey Supreme Court also does a good job summarizing the competing interests and corresponding difficulties of parties involved in construction litigation.

How Courts Perceive Construction Claims

Commercial construction projects often present unique challenges to the courts, in part because when an argument erupts over a claimed construction defect, it is inevitably complicated by the conflicting interests of the parties. The project owner wants the building to be free of defects, while other parties to the project, including the general contractor, its subcontractors and suppliers, the construction manager, if any, the architect and other design professionals, each may dispute the existence of, the extent of, and the responsibility for, any claimed defects. Moreover, each of them may seek to shift the blame for any conceded defect to others and each will likely assert that it has the right to investigate the claim and to attempt to cure any defects that are identified.

Further compounding those competing interests, time itself may create overriding considerations for the building's owner. Particularly if the claimed defect threatens the building's integrity or the owner's ability to conduct its business, the owner will view the time within which to remedy a defect in a building's construction as being constrained. The building's owner, fearing that existing, identified defects, if not cured promptly, will worsen or adversely affect other parts of the structure, may have limited patience with a contractor who does not resolve a problem quickly. The owner may lose confidence in the contractor's ability to remedy a defect if that contractor's response is slow or if proposed resolutions are inadequate. In either situation, the building owner may hasten to seek solutions from experts, consultants, or contractors in an effort to prevent a relatively minor problem from turning into a major failure of one of the building's systems.

Nor is the building's owner the only party whose interests complicate the dispute. A contractor who is being blamed for a problem may conclude that there is no defect to be cured and, if the complaints persist, may come to regard the owner as unreasonable or as seeking perfection when the work was performed in an adequate, acceptable, and workmanlike manner. Alternatively, the contractor may recognize that there is a defect and try to resolve it, or it may decide that the problem was caused by a supplier, laborer, or another contractor outside of its control, or has resulted from faulty plans or specifications.

Other parties to a large construction project will also have their own unique perspectives on the owner's claim that there is a problem to be addressed. General contractors, construction managers, architects, and engineers each have a role to play in the project and interests to protect in the event that a claimed defect is identified. Questions about whether the defect arose because of faulty plans and specifications, improper design, poor workmanship, defective materials, insufficiently skilled subcontractors, or inadequate supervision may divide the participants and confound the ability to reach a workable solution.

As complicated as the relationships inherently are, they are compounded when they play out in the shadow of threatened or actual litigation. The reality of how project owners, contractors, and related professionals behave, each with distinct and often inconsistent goals and motivations, frequently leads one or more of them to act in ways that impact on the eventual conduct of that litigation.

The building owner who only wants to solve a problem and prevent it from getting worse may undertake testing and repairs without waiting for a resolution by the contractor whose work the owner believes is the cause. The contractor called back to the building for a repair may make suggestions or corrections without undertaking a thorough investigation or fully documenting the alleged defect or identifying other potential causes. Even if the parties act with the purest motives, evidence of the extent or the cause of any claimed defect may be compromised or destroyed as testing and investigations are undertaken and as repair, retrofitting, or replacement of affected building systems or components is completed.

It is preferable, of course, to have an orderly procedure for identifying a defect, alerting the allegedly culpable party, conducting an investigation and testing that is observed and documented by representatives for all potentially responsible parties, identifying a cause, and achieving a solution. In the real world of construction projects, however, the parties do not always behave that way and may proceed to develop a solution without preserving all of the evidence that is needed to determine liability or prove damages.

Owner's Catch 22: Remediation vs. Spoliation

Catch 22 has come to be known as a situation in which a desired outcome is impossible to achieve because of a set of illogical rules or conditions. As will be shown, the owner in the Tri-Com Construction case was in a Catch 22 situation. The curtain wall system in the owner's large new commercial building leaked, and the subcontractor that installed it eventually stopped responding to the owner's request for help. What is an owner to do? On the one hand, he must take action to protect his building and the health and safety of those who work there. On the other hand, if litigation is contemplated, remediation could destroy evidence that may be necessary to prosecute or defend the claims.

In this case, after the owner fixed the problems with the window system, the company sued its construction manager, its consultant Tri-Form Construction, and the installation subcontractor, Academy Glass. The defendants filed motions to exclude all evidence regarding the curtain wall system on the grounds of spoliation of evidence. The New Jersey Supreme Court summarized the proceedings as follows:

On March 21 and 22, 2006, the trial court separately granted defendants' motions to exclude evidence relating to the window system installation. In reaching that conclusion, the court found that plaintiff had never given notice to defendants about the proposed remediation prior to the commencement of the work; had failed to respond to defendants' initial requests to conduct an inspection; had first notified defendants of the remediation work on January 24, 2003, when there was insufficient time to permit them to perform an independent investigation; and had completed the repairs when there was no real emergency.

The trial court concluded that plaintiff had engaged in spoliation of the evidence and that there was clear prejudice to defendants because their expert had not been given an opportunity to fully investigate the leaks and their cause. The court also concluded that the expert's photographs and his records about his visual observations were not sufficient^[to permit defendants to secure an expert opinion contrary to that offered on plaintiff's behalf.

Shortly thereafter, the trial court granted summary judgment to one defendant and partial summary judgment to another on the grounds plaintiff owner could not no longer prove its claims following the order excluding evidence. The plaintiff owner appealed and the appellate division reversed the order of dismissal, holding that the preclusion of evidence was unreasonably harsh under the circumstances. The defendants then appealed to the New Jersey Supreme Court, and that court held:

In this dispute, plaintiff has already lost claims as a result of the spoliation and its claim relating to the strip-window system has been limited significantly. There remains, however, one further step in our analysis, because defendants are not similarly situated. As to defendant Academy Glass, we agree with the Appellate Division that there is a sufficient basis on which to permit plaintiff to proceed, limiting its claims to the conditions that were observable prior to remediation and its experts to a review of only those conditions.

However, we reach a different result as to defendants Tri-Form and Karabinchak. In spite of the fact that the wealth of evidence ordinarily generated during construction projects lends itself to leveling the playing field, in this case the opportunity to inspect the leaking windows before remediation was critical. Because plaintiff deprived defendants Tri-Form and Karabinchak of that opportunity, and because we therefore perceive them to have no independent source of evidence or testimony sufficient to permit them to mount a defense, the claims as to those defendants cannot proceed at all. As to defendants Tri-Form and Karabinchak, the only fair remedy for plaintiff's spoliation is to impose the sanction of dismissal.

The Tri-Form Construction case shows the rationale of courts trying to fashion a just remedy when evidence has been destroyed. Each state will have different factors to consider. In New Jersey, the courts consider the following factors:

In summary, courts confronted with spoliation in the context of commercial construction litigation should recognize that a variety of factors bear on the appropriate remedy. In particular, courts should consider all of the following: the identity of the spoliator; the manner in which the spoliation occurred, including the reason for and timing of its occurrence; the prejudice to the non-spoliating party, including whether the non-spoliating party bears any responsibility for the loss of the spoliated evidence; and the alternate sources of information that are, or are likely to be, available to the non-spoliator from its own records and personnel, from contemporaneous documentation or recordings made by or on behalf of the spoliator, and from others as a result of the usual and customary business practices in the construction industry. Courts should then balance all of those considerations in crafting the appropriate remedy with an appreciation for the ways in which the construction industry itself provides them with unique tools with which to "level the playing field" and achieve an appropriate remedy for spoliation.

Suggestions

Owners are faced with this kind of Catch 22 situation ail of the time. Here are a few suggestions to prepare for the next time it happens:

Draft contract language that addresses this issue. State the address where notices can be sent to advise the other side of defective conditions. Include reasonable time frames within which inspections and repairs are to be performed.
Before taking corrective measures, advise the other side in writing of the date, time and place of the remediation efforts, giving the other side ample time and warning about the remediation efforts that are to take place, and invite them to be there to observe, take pictures, take notes, etc.
Make sure to establish an unassailable record of your efforts to get the contractors to (1) take corrective action, (2) the contractors refusal to do so, and (3) that the contractors had actual notice of the time and place of your remediation efforts.
During the remediation process take pictures and video of the work; handle with care any portion of the work that is removed; take special efforts to preserve the materials; keep a log of the chain of custody in case someone alleges that the materials have been tampered with.

As was mentioned at the beginning of this article, the success of the prosecution or defense of construction claims begins before the project begins: contract language, systems and controls to preserve evidence, diligence in ensuring the other side is on notice of plans for remediation, and so much more, all have a role in being prepared for potential litigation. The Tri Form Construction case is a perfect example of the uncertainty of litigation, that evidence matters, that courts have tremendous power and influence over what the jury will ultimately hear and see during trial

Insurance Coverage for Construction Defect Claims Causing Continuous Damages: How, What, When, and Why

Ron White — Sat, 14 Aug 2010 15:03:33 -0800

On June 28, 2010, the California Court of Appeal published Pennsylvania General Insurance Company vs. American Safety Indemnity Company (2010), Cal. App. 4^th, a case involving the following recurring coverage issue in construction defect litigation that vexes primary and excess insurers alike: what, if any, obligation does an insurer owe to its policyholder where: (1) the commencement date of the damages is not certain, (2) the damages caused by the defective workmanship are continuous, and (3) the damages span the successive annual policies of one or more carriers? The short answer is it depends on the language of the insurance policy. But the Pennsylvania General case tells us more than that; it is a primer on the basic coverage issues arising from continuous damage claims.

While no new ground will be plowed for seasoned insurance coverage lawyers, it is hoped that some seeds of understanding will be planted for construction lawyers and other construction industry professionals. One aspect of the case is most interesting because the policy language at issue was a direct effort by the insurer to draft language that would avoid coverage in these kinds of continuous damage cases and thereby circumvent the holding in the seminal California Supreme Court case, Montrose Chemical Company v. Admiral Insurance Company.

1.Summary of Underlying Construction Defect Case

Whitacre Construction was insured under a commercial general liability policy issued by Pennsylvania General Insurance Company for the period October 1998 through December 2001. During this time, Whitacre entered into a subcontract to perform framing and rough carpentry work on a project. At the conclusion of Pennsylvania General's policy period, and after Whitacre's work on the project was completed, American Safety Indemnity Company issued a CGL policy to Whitacre for the period December 2001 through December 2002.

In the underlying construction defect litigation, various parties alleged that Whitacre’s work was improperly done and had created various problems with the project. Whitacre tendered its defense to both Pennsylvania General and American Safety Indemnity. Pennsylvania General accepted Whitacre’s tender of the defense under a reservation of rights and ultimately paid the defense and settlement costs for Whitacre. American Safety declined Whitacre’s tender, asserting there was no possibility of coverage under its policy since the work was completed prior to the inception date of its policy, and did not participate in defending or indemnifying its insured.

After the settlement of the construction defect case against Whitacre, Pennsylvania General filed suit against American Safety seeking equitable contribution from American Safety for a portion of the defense and indemnity costs paid by Pennsylvania General. The trial court, ruling on cross-motions for summary judgment, concluded American Safety had no responsibility to pay any portion of the defense or indemnity costs because there was no potential coverage under American Safety's policy for the claims asserted against Whitacre and entered summary judgment for American Safety. Pennsylvania General filed an appeal.

2. General Coverage Issues

A. First Party Claims vs. Third Party Claims

How coverage is triggered in an insurance policy depends on whether the policy is a first party property insurance policy, such as a homeowners policy, or a third party liability policy, such as the CGL policy at issue in the Pennsylvania General case. A first party homeowners policy provides coverage for a homeowner in case of a fire, theft, or some other covered peril like earthquake, water, or wind. A third party liability policy, on the other hand, provides coverage for the liability of the insured to a third party, such as a building owner who sues for defective workmanship.

Just as the risks being insured are different in first party and third party policies, so too is the coverage analysis for each policy."[T]he right to coverage in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause and duty. This liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded in the contract. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks." Garvey v. State Farm Fire & Casualty Co. (1989) 48 Cal. 3d 395,407.

Another difference in first party homeowner policies and third party CGL policies centers on the notice of loss requirements. Standard homeowner policies have time limitations within which damages must be discovered, notice to the insurer must be given, and a lawsuit must be filed. CGL policies do not have time limitations on coverage based on the date of discovery of the loss. Instead, CGL policies cover damages caused by an “occurrence” which is typically defined as an accident or continuous exposure to conditions that result in bodily injury or property damage during the policy period. Likewise, there is no limitation period for filing suit in a CGL policy. It is the damaged party who makes the claim against the insured and, if coverage is established, the insurer is required to indemnify the insured up to the limits of the CGL policy.

As has been noted, for CGL policies the focus is on whether there has been an “occurrence” during the policy period. But what if, as was alleged in the Pennsylvania General case, the inception date of the occurrence can not be determined and the damages are continuous, spanning more than one policy and implicating the policies of more than one carrier? That question was answered fifteen years ago in Montrose Chemical Corp. v. Admiral Ins. Co.(1995) 10 Cal.4th 645, 655-58.

B. The Montrose Case

Montrose Chemical Company manufactured the pesticide known as DTD from 1947 until 1982.

In 1983 it became embroiled in the infamous Stringfellow cases where the State of California and the U.S. government sued Montrose for the clean up cost at several disposal sites where the company had dumped its chemicals.The governments alleged there was progressively deteriorating property damage caused by chemicals being released into, or migrating through, soil, groundwater, and surface water. Montrose tendered the claims to its insurance carriers (warning: the following is a gratuitous editorial comment), seeking the defense and indemnity for which it had paid handsome premiums for many years.

Between 1960 and 1986, seven different insurers, ending with Admiral Insurance, issued CGL policies to Montrose. Admiral’s four CGL policies covered the periods from 1982 to 1986, and contained the standard language requiring Admiral to "pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of ... bodily injury, or ... property damage to which this insurance applies, caused by an occurrence...." "Occurrence" is defined as "an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured."

Montrose filed a declaratory relief action against the various carriers to establish the rights and duties of the parties under the policies of insurance. Admiral moved for summary judgment on the issue of its duty to defend, arguing that there was no potential for coverage under its policies given the effective dates of its policies and the fact that the dumping of the waste predated its policies. The trial court granted the motion for summary judgment, finding there was no potential for coverage, and thus Admiral had no duty to defend the lawsuits.

Montrose appealed the ruling and the Court of Appeal reversed the order granting summary judgment. Admiral’s petition to the California Supreme Court was granted, but the decision of the Court of Appeal was affirmed, with the Supreme Court explaining:

[W]e conclude that the standard CGL policy language, such as was incorporated into Admiral's policies in issue in this case, provides coverage for bodily injury and property damage that occurs during the policy period. In the case of successive policies,bodily injury and property damage that is continuous or progressively deteriorating throughout several policy periods is potentially covered by all policies in effect during those periods. Stated in the insurance industry's parlance, we conclude the "continuous injury" trigger of coverage should be adopted for third party liability insurance cases involving continuous or progressively deteriorating losses. In this case, because the potential of coverage arose under Admiral's policies, so too did its duty to defend Montrose in the underlying lawsuits.

The “continuous injury trigger” rule in Montrose has been applied to construction defect claims over the years. In the Pennsylvania General case, it was alleged that the insured’s framing and rough carpentry work caused damages that continued beyond Pennsylvania General’s policy period, and into the policy period of American Safety. Interestingly, the Court noted that when American Safety denied the claim, it was relying upon its policy language that “was designed to 'circumvent the continuous injury trigger of the coverage rule laid down' in [Montrose]."

3. Interpretation of American General’s Insurance Policy

The Court analyzed the American General policy based upon three important principles of insurance law: (1) “[w]hen construing an insurance policy, [a court ] must resolve ambiguities in coverage clauses most broadly in favor of coverage”; (2) “[a] policy provision is ambiguous when it is capable of two of more constructions, both of which are reasonable”; and (3) when the language of the policy is not clear it should be construed in a manner the “satisfies the hypothetical insured's objectively reasonable expectations.”

The Court summarized the relevant policy provisions as follows:

ASIC's CGL policy provided it would indemnify Whitacre for any amount Whitacre became obligated to pay as " 'property damage' to which this insurance applies," and specified that "[t]his insurance applies to . . . 'property damage' only if: [¶] (1) The . . . 'property damage' is caused by an 'occurrence' that takes place in the 'coverage territory'; and [¶] (2) The . . . 'property damage' occurs during the policy period." (CGL, Section I, Coverage A, ¶ 1(a) & (b).) ASIC's CGL policy provided a "per occurrence" {Slip Opn. Page 11} limit of $1 million, and provided a "Products/Completed Operations" aggregate limit of $1 million

ASIC's CGL policy also contained two 1999 endorsements that modified the standard policy provisions. The standard definition of "occurrence" contained in the 1997 version of the CGL policy was replaced by ASIC's 1999 endorsement that refined the definition of "occurrence" by adding the following italicized language: " 'Occurrence' means an accident, including continuous or repeated exposure to substantially the same general harmful conditions that happens during the term of this insurance. 'Property damage' . . . which commenced prior to the effective date of this insurance will be deemed to have happened prior to, and not during, the term of this insurance." (Italics added.)

At the same time, ASIC added another 1999 endorsement, entitled "PRE-EXISTING INJURY OR DAMAGE EXCLUSION," which stated: "This insurance does not apply to: [¶] 1. Any 'occurrence', incident or 'suit' . . . [¶] [(a)] which first occurred prior to the inception date of this policy . . .; or [¶] [(b)] which is, or is alleged to be, in the process of occurring as of the inception date of this policy . . . even if the 'occurrence' continues during this policy period.

The Court of Appeal summarized the trial court’s reasoning in granting American Safety’s motion for summary judgment as follows:

ASIC's policy excluded coverage for the claims asserted against Whitacre in the construction defect litigation because Whitacre's work was completed before the inception of ASIC's policy. The trial court reasoned that under ASIC's CGL policy: "The terms 'occurrence' and 'property damage' are distinctly defined and are not synonymous. In evaluating the trigger of coverage in the policies, there are two separate triggers, 'occurrence' and 'property damage' which are not the same, in light of the fact that 'property damage'' is caused by an 'occurrence.' [Citations.] An occurrence is a causal event. [Citation.] [¶] . . . [ASIC's] policy requires that . . . the occurrence [both] . . . 'happen during the term of the insurance' . . . and cause property damage during the policy period. It also excludes a prior 'occurrence' . . . .In the context of the underlying action, the Court finds that the 'occurrence' (the act causing the injury/damage), here the defective framing work performed by Whitacre, could arise no later than the time Whitacre's framing work on the project was completed. The undisputed evidence establishes that Whitacre's work was completed by June of 2001. . . . Therefore, the evidence establishes that the 'occurrence' commenced during [Pennsylvania General's] policy period, which was prior to the inception of [ASIC's] policy.

The Court did not agree with the analysis of the trial court. In analyzing the policy, the Court stated the proper construction of “occurrence,” as defined by the policy, requires a focus on “when the damages caused by the negligent causal acts of the insured first commenced, and is not on when the insured completed its work.” Since summary judgments are appropriate only if there are no triable issues of fact, the Court noted “the facts were disputed on when those damages first commenced and the trial court's entry of summary judgment in favor of ASIC was based solely on its conclusion that there was no potential for coverage because Whitacre's causal acts happened before the inception of ASIC's policy. We conclude, however, the policy was reasonably susceptible to the interpretation that the trigger of coverage was not when the insured completed its work, but was instead based on when the damages caused by the negligent causal acts of the insured first commenced.”

The Court reversed the judgment and awarded Pennsylvania General its costs on appeal. Presumably, the case will be remanded to the trial court for a trial on the disputed fact of when the damages caused by Whitacre’s negligent construction first commenced. Even if the trier of fact concludes the damages commenced prior to American Safety’s policy period, under Montrose, the findings will not be complete, and American General will not be off the hook, unless there is also a finding that there is no continuous or progressively deteriorating losses that fall within its policy periods.

Alternatively, the parties may elect to resolve the dispute through mediation rather than risking an unacceptable outcome by a judge or a jury. That’s an option I can support.

Editor's Note: This article originally appeared in Mealy's Litigation Report: Consruction Defect Insurance, Vol.7, #7, August 2010.

Don't Sit on Your Arbitration Rights: Assert Them or Risk Losing Them

Ron White — Thu, 12 Aug 2010 15:11:34 -0800

The right to arbitrate a dispute can be waived. One way to waive arbitration rights is to sit on them, figuratively speaking, of course. By sit on them, I mean delay enforcement of the right or take steps that leads the other side to believe you do not intend to arbitrate the dispute. In a recent unpublished opinion (meaning, the case can't be cited in legal pleadings or used in oral argument as persuasive authority), the California Court of Appeal addressed the waiver issue. The case is important to the The Critical Path because the facts present a common set of circumstances that can result in a waiver. Therefore, even though the opinion is unpublished, it is instructive, and it is helpful in that it refers to most of the published California opinions on the subject. Click here to read the opinion.

Here's What Happened

Thompson Building Materials was a defendant in a construction defect case. The homeowners alleged the stone pavers provided by Thompson cracked and deteriorated due to latent defects, and that debris from the defective material damaged the pool filter and pump system. Thompson filed an answer to the complaint and participated in court-ordered proceedings, discovery, and a mediation. A week before the discovery cut-off and a month before trial, Thompson filed a motion to compel arbitration, claiming that it had recently discovered an arbitration provision on the back of the invoices for the sale of the building materials.Apparently, when the invoices were copied, only the front side was copied, leaving the backside boilerplate, including the arbitration provision, uncopied.

In support of the motion to compel arbitration, Thompson's counsel informed the trial court that

although he had-known of these invoices and had been-litigating these invoices for probably 20 years, his associate (to whom he had delegated the responsibility of responding to plaintiffs discovery) had not, and-she simply didn't know any better in terms of knowing there should have been a back side on [the invoice].

Plaintiff homeowners opposed the motion to compel, arguing Thompson waived the arbitration provision by participating in the litigation for over a year and that plaintiffs were prejudiced by the fact that Thompson was attempting to compel arbitration of a case that was only a month away from trial. Plaintiffs also argued that they were prejudiced because Thompson obtained information in discovery that it would not have been able to obtain in arbitration.

The trial court granted the motion to compel arbitration, and the homeowners filed a petition for writ of mandate. The Court of Appeal held the trial court's order was not supported by substantial evidence and granted the homeowners' petition. The court concluded Thompson had waived its arbitration rights:

Although there is no uniform test for determining whether a party‘s conduct amounts to a waiver of the right to arbitrate, the courts have formulated a list of factors that are relevant in making that determination. These include ‗―(1) whether the party‘s actions are inconsistent with the right to arbitrate; (2) whether ‗the litigation machinery has been substantially invoked‘ and the parties ‗were well into preparation of a lawsuit‘ before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) ‗whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place‘; and (6) whether the delay ‗affected, misled, or prejudiced‘ the opposing party.(St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196, quoting Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 992.)

Thompson‘s conduct in this case satisfies virtually all of these factors and compels a finding of waiver. Thompson did not raise arbitration as an affirmative defense in its answer. (SeeGuess?, Inc. v. Superior Court, supra, 79 Cal.App.4th at pp. 557-558.) Thompson participated in the litigation for nearly a year. In opposition to Thompson‘s motion, plaintiffs‘ counsel submitted a declaration in which he listed 54 items plaintiffs considered to be ―significant litigation activities by the parties. Nearly half of these items are discovery propounded by Thompson. The parties designated expert witnesses; Thompson‘s expert inspected plaintiffs‘ property in June 2009 and March 2010. The parties also participated in a case management conference in September 2009 and court ordered mediation in February 2010. Suffice it to say, ―the litigation machinery has been substantially invoked and the parties ―were well into preparation of a lawsuit before Thompson notified plaintiffs that it would seek to compel arbitration.

Lessons to be Learned

Usually, the decision to include an arbitration provision in a contract is the result of a deliberative decision making process. Therefore, when a claim arises, it would be wise to take steps to preserve that right, or at least, consider your options. You may want to create a checklist that could include one or more of the following points:

make sure there is a written contract
assume the contract has a dispute or claims clause and check to see if there is an arbitration provision
decide if the arbitration provision should be enforced or waived, if it is believed that litigation would be more advantageous under the circumstances of the claim
decide if there are mechanics lien rights, statute of limitations issues, or other equitable remedies that must be preserved by filing a lawsuit, then seek a stay of the action, and proceed with the parts of the claim that are subject to arbitration.

You might also want to be sure that both sides of documents are copied before providing them to your attorney or to the other side. You would be surprised how many times issues seem to disappear simply because both sides of documents are inadvertently not copied.

Draft Settlement Agreements with Care or You May Give Up More than You Bargained For

Ron White — Tue, 03 Aug 2010 14:03:36 -0800

The first sentence in an appellate opinion can strike fear in the heart of any advocate. I should know. Nearly twenty years ago the California Court of Appeal began its opinion on a losing appeal of mine with this sentence: “This case presents a real doozy of a puzzle in mechanic's lien law.” Last week, in a case involving an attempt to undo a settlement agreement by way of subrogation and reverse an award of expert witness fees, the California Court of Appeal began its opinion even more dramatically: “What the heck?!? At one point, the trial court commented, ‘This is one of the most screwed up cases I’ve ever seen.’ We heartily agree.” Click here to read the opinion.

Why highlight such a “screwed up” case in a blog dedicated to helping people resolve construction disputes? Well, we can learn a lot from the opinion-someone else’s pain can be our gain, so to speak. First, the case reminds us that settlement agreements are contracts with consequences. And second, rejecting statutory settlement offers also has consequences.

Facts About the Case

A man was injured when he stepped on a nail in a restaurant that was being refurbished. As a result of the accident, the man’s leg was amputated, and he sued the restaurant and property owner, alleging that they “negligently managed, controlled and supervised the demolition being done on the premises, and failed to take reasonable precautionary measures to protect him from a risk of harm, which caused his injuries.

Essex Insurance Company provided a defense to the purported property owner who was not its named insured, but did not discover its mistake until after judgment was entered following a jury verdict in the plaintiff’s favor. Litigation ensued over Essex’s obligation to pay the judgment. Essex eventually entered into a global settlement with the plaintiff that had the effect of resolving three lawsuits, including the personal injury action and a bad faith action plaintiff brought against Essex, in exchange for a lump sum payment. The settlement agreement did not allocate the payment among the three lawsuits or resolve issues regarding the identity of Essex’s insured.

Essex then sought indemnity from plaintiff’s physician who had treated him after the accident with the nail, on a theory of equitable subrogation for his proportionate liability for the amount Essex paid in settlement. The doctor filed a motion for summary judgment, which the trial court granted on the basis that Essex had waived any claim for equitable subrogation. In a post-judgment order, the trial court also awarded the doctor the cost of his expert witness fees. On appeal, Essex challenged both the judgment and the order. The Court of Appeal " agreed with the trial court that Essex must lie in the bed it made,” and affirmed.

Settlement Contract

The settlement agreement between Essex, the property owner, and the plaintiff included a lump sum payment of $700,000 which resolved three pending cases, including a bad faith action against Essex. The settlement agreement did not allocate payment amounts among the three pending cases; there was no statement about how much was being paid to compensate plaintiff for his personal injury. Accordingly, the trial court found Essex had impliedly waived its subrogation rights when it failed to enter into separate settlement agreements or otherwise apportion the amount paid among the three lawsuits. The Court of Appeal agreed:

Essex’s contention, however, shows why an implied waiver is applicable here — without resort to extrinsic evidence that is most likely inadmissible, it is impossible to prove how much was paid to settle each claim. Moreover, Essex ignores the other issues it failed to address in the settlement agreement apart from apportionment of the damages between the three lawsuits that shows it did not step into its insured’s shoes in paying the settlement, such as the failure to identify its insured or to apportion damages between economic and non-economic damages.

On appeal, Essex contended the trial court should have considered the inference that the settlement payment was compensation for the personal injury claim of the plaintiff and even suggested that evidence outside the body of the settlement contract could be offered to show the intent of the parties. The Court disagreed, stating that such extrinsic evident would most likely be inadmissible and that in any event, Essex waived its right to equitable subrogation by its actions.

Expert Witness Fees

The doctor made a statutory offer of settlement to Essex in compliance with California Code of Civil Procedure section 998. (Click here for a previous post on statutory offers: Settlement Negotiations: Don't Get Smacked by the Statutory Stick.) The good doctor’s offer to Essex was this: dismiss your claims for a waiver of costs. Essex did not accept and after the trial court ruled in favor of the doctor, he asked for an award of costs that included payment of his expert witness fees of $28,000. Essex opposed the award on the grounds that the statutory offer for a waiver of costs was not given in good faith. In denying Essex’s challenge to the order to pay expert fees, the Court of Appeal noted:

An offer to compromise may be “realistically reasonable” and justify cost shifting even though the party receiving the offer is unlikely to accept it as a consequence of the party’s skewed valuation of the case. Here, Essex recovered nothing from Dr. Heck. Dr. Heck’s offer is presumed reasonable and it is Essex‟s burden to show otherwise.

As a result, Essex was ordered to pay the doctor's expert witness fees. Thus, not only did Essex lose the right to shift the burden of its settlement payment to the doctor through equitable subrogation, the doctor was able to shift the costs of litigation onto Essex through the statutory offer procedures of Code of Civil Procedure section 998.

Lessons to be Learned

Settlement Agreements are contracts. They will be interpreted and enforced according to the standard rules of contract interpretation and the laws of evidence. Therefore, settlement agreements must be written with the utmost care. In particular, one should be concerned about the scope of the release to be sure that the intent of the parties is accurately reflected.
Statutory offers must be considered in the light of the laws of the local jurisdiction where the case is pending. It is not wise to react emotionally to a statutory offer of settlement. One should seek to evaluate such offers based upon objective criteria rather than the party's skewed valuation of the case, as noted in the Essex case. Remember, the party challenging the statutory offer generally has the burden of proving it is unenforceable.

So now you know about the "What the heck?!?" case. I hope it will help you when you are attempting to resolve your next case, even if it presents a "doozy of a puzzle."

A Case of First Impression: Duty to Defend Construction Defect Claims in Prelitigation Proceedings

Ron White — Wed, 28 Jul 2010 15:10:38 -0800

In response to an onslaught of construction defect cases, California enacted statutory procedures to encourage settlement of claims before a lawsuit is even filed. But those procedures usually involve attorneys and experts, and they cost money, so are insurance companies obligated to pay the defense costs even though a lawsuit has not officially been filed? In a case of first impression, a California Court of Appeal has answered that question in the affirmative.

In Clarendon America Insurance Company v StarNet Insurance Co. (2010) Cal App 4^th, Centex Homes was the developer of a residential development in Simi Valley, California known as Westwood Ranch. In July 2006, the Westwood Ranch Homeowners Association served a notice of commencement of legal proceedings pursuant to California Civil Code section 1375 on Centex that set forth a list of alleged construction defects at Westwood Ranch. This step was taken in compliance with the Calderon Act which requires that developers and homeowners associations engage in a prelitigation effort to settle construction defect claims. If the claims can nor be settled, the homeowners association is then authorized to file a lawsuit.

StarNet Insurance had issued two successive CGL policies to one of Centex’s subcontractors on the project, and Clarendon America Insurance had issued a CGL policy to another subcontractor. Centex was a named additional insured on the policies issued by both carriers.

In December 2007, Centex filed a complaint against Clarendon seeking payment of defense fees and costs incurred in defending against the construction defect claims in the prelitigation proceeding known in California as the Calderon Process. Clarendon filed a cross-complaint against the other insurers, including StarNet, seeking a declaration they were obligated to provide Centex a defense and/or coverage. In the first amended cross-complaint, Clarendon sought indemnity, declaratory relief, and contribution from the additional insurers. Clarendon reached settlements with all of the other CGL insurers except StarNet.

StarNet moved for summary judgment asserting the prelitigation process did not constitute a "suit" within the meaning of the defense agreement in the StarNet CGL policies. The trial court denied the motion, holding the prelitigation procedure “ is a civil proceeding in which damages are alleged and therefore falls within the StarNet CGL policies' definition of ‘suit’…Additionally, the definition of 'suit' also includes alternative dispute resolution procedures to which the insured submits with the insurer's consent…Thus, even if the Calderon process is not considered to be a 'civil proceeding' if that phrase is narrowly interpreted to mean 'court action[,'] but rather is considered an 'alternative dispute resolution proceeding[',] there is a question of fact as to whether or not Star[N]et has a duty to defend once the Calderon process has begun."

After analyzing the language of StarNet’s policy according to the standard rules of insurance policy interpretation, the Court of Appeal made this important observation:

The Calderon Process is more than a prelitigation alternative dispute resolution requirement: It is part and parcel of construction or design defect litigation initiated by an association and, as such, cannot be divorced from a subsequent complaint.

In affirming the trial court’s ruling, the Court stated, “The function and significance of the Calderon Process in construction or design defect litigation, and the StarNet CGL policies' definition of "suit" to include civil proceeding, lead to the reasonable inference the parties' intended StarNet would have a duty to defend the insured in the Calderon Process. Extending the duty to defend to the Calderon Process is therefore consistent with a hypothetical insured's reasonable expectations.”

This is good news for contractors, developers and, of course, homeowner associations. Hopefully CGL carriers will be more forthcoming in participating in prelitigation procedures such as the Calderon Process in California. This holding should lead to more prelitigation resolutions of construction defect cases and facilitate the public policy reasons for the enacting such laws.

Study Shows Attorney Overconfidence is a Barrier to the Efficient Resolution of Disputes

Ron White — Tue, 20 Jul 2010 13:30:08 -0800

Barriers to conflict resolution are many, and much has been written about them. In Insightful or Wishful: Lawyer’s Ability to Predict Case Outcomes, a legal studies research paper for the new law school at the University of California at Irvine, noted American psychologist Elizabeth Loftus addresses another barrier to settlement that we lawyers are loath to admit: overconfidence. Indeed, the “saber rattling” of mediation colloquy can sound like the dramatic dialogue out of a Star Wars movie:

Luke: Soon I’ll be dead and you with me. Translated: We’re spending a boatload of money litigating this case but you will run out of money before we do.

The Emperor: [laughing] Perhaps you refer to the eminent attack of your rebel fleet? Yes, I assure you, we are quite safe from your friends here. Translated: Perhaps you refer to your army of expensive expert witnesses. They are no threat to us. I assure you we are prepared to destroy their testimony.

Luke: Your overconfidence is your weakness. Translated: Your overconfidence is your weakness.

The Emperor: Your faith in your friends is yours. Translated: Don’t count on the jury to bail you out of this one.

But lawyers are supposed to be confident, right? Yes, but there is a difference between having confidence and the courage of your convictions and overconfidence and the consequences of poor judgment. In an amusing analogy, Professor Loftus compares and contrasts lawyers and weather forecasters.

First, meteorologists cannot in any way influence the outcome of their predictions. Nothing they do can make it rain. Lawyers, on the other hand, can behave in ways that influence the case outcome. Because they have this opportunity, they may overestimate their own capacity and neglect the importance of factors beyond their control. Second, lawyers have a much keener interest in the goals of their predictions than do meteorologists. Because of this, lawyers might be susceptible to over optimism and wishful thinking.

The central focus of Professor Loftus’ study is the degree of accuracy in lawyers’ forecasts of case outcomes. To read the entire research paper click here. (PDF) Meanwhile, the following quotes provide a glimpse of her insightful observations :

In summary, whether lawyers can accurately predict the outcome of a case has practical consequences in at least three areas: (a) the lawyer’s professional reputation and financial success; (b) the satisfaction of the client; and (c) the justice environment as a whole. Litigation is risky, time consuming, and expensive.

The consequences of judgmental errors by lawyers can be costly for lawyers and their clients, as well as an unnecessary burden on an already overloaded justice system. Ultimately, a lawyer’s repute is based on successful calculations of case outcome. A lawyer who advises clients to pursue litigation without delivering a successful outcome will not have clients for long. Likewise, a client will be most satisfied with a lawyer who is accurate and realistic when detailing the potential outcomes of the case. At the end of the day, it is the accurate predictions of the lawyer that enable the justice system to function smoothly without the load of cases that were not appropriately vetted by the lawyers.

A lawyer who cannot accurately predict the outcome of a case or who does not thoroughly and efficiently appreciate the litigation risks may ignore alternatives to trial and advise the client to reject reasonable settlement offers. A lawyer who underestimates potential outcomes may advise the client to accept an unreasonably lower amount in settlement than is warranted.

Another factor that might affect the realism of lawyers’ assessments of future goals is perception of control. The extent to which an individual believes he or she can take steps to increase the likelihood of a desirable outcome has been shown to bias confidence estimates in those outcomes. When an event is perceived to be controllable, overconfidence is likely. This bias is linked to what Langer (1975) called an illusion of control, defined as “an expectancy of a personal success probability inappropriately higher than the objective probability would warrant”.

Lawyers frequently made substantial judgmental errors, showing a proclivity to over optimism. The most biased estimates were expressed with very high initial confidence: In these instances, lawyers were extremely overconfident. These findings are consistent with a large body of literature documenting overconfidence in a range of judgments.

With regard to gender, we replicated results obtained by Malsch (1990) that female lawyers were better calibrated than their male colleagues. Male practitioners were more overconfident than female practitioners. These findings are in line with gender differences observed in research on metacognition.

One implication of the present findings is that lawyer performance can be improved by implementing case management strategies that take into account the potential overconfidence biases of the litigators.Case consultations with legal peers can take place informally. For example, in many legal firms, regular meetings are held where cases are periodically reviewed so that the partners can manage the caseload efficiently and ethically. These meetings provide ideal opportunities to obtain objective opinions from other legal professionals in the form of third-party feedback about the strengths and weaknesses of a case and the likelihood that the stated goals can be achieved.

This study shows that lawyers can be too confident. When lawyers do not fully assess the risks or acknowledge certain aspects of the case that may be beyond their control, over-(and under) valuations can happen, making settlement impossible. Objectivity requires lawyers to walk a fine line, some would call it a high wire balancing act, between zealous advocacy and wise counsel. Indeed, wisdom is the safety net that keeps litigators from crashing to the earth.

May the Force be with you.

A NEW CALIFORNIA SUPREME COURT OPINION AFFECTING THE CONSTRUCTION INDUSTRY: TO DISCLOSE OR NOT DISCLOSE IS NO LONGER THE QUESTION

Ron White — Tue, 13 Jul 2010 15:18:04 -0800

Construction claims for non-disclosure on public works projects got a little easier to prosecute yesterday with the publication of the California Supreme Court’s decision in Los Angeles Unified School District v. Hayward Construction. (PDF) The importance of this case is reflected by the list of attorneys who represented the parties, a veritable Who's Who in the legal community.The contractor and surety were represented by veteran construction lawyers John Immordino of Wilson Elser and Joseph Miller of Montelone & McCrory. The school district was likewise well represented by its General Counsel, Roberta Fesler, Gregory Bergman of Bergman & Darcey and lawyers at Jones Day, including Ellwood Lui, a former associate justice of the California Court of Appeal, Second Appellate District, Division 3..

In the Hayward Construction case, and for the first time, the Court was asked to resolve a construction dispute brought solely on a theory of non-disclosure during the bidding phase of a project. The question was whether a contractor can recover extra costs of construction when the plans and specifications are correct, but the public entity failed to disclose information in its possession that materially affected the cost of performance.

The case is also important because it resolves conflicting opinions between four of the California Courts of Appeal. One Appellate Court, followed by the trial court in the Hayward Construction case, held that to recover for nondisclosure, the contractor must show the public entity affirmatively misrepresented or intentionally concealed material facts that rendered the furnished information misleading. Another Court of Appeal held a contractor need not prove an "affirmative fraudulent intent to conceal" when disclosure would have eliminated or materially qualified the misleading effect of facts disclosed. A third Appellate Court suggested that the careless failure to disclose information may allow recovery if the public entity possessed superior knowledge inaccessible to the contractor. And the Appellate Court in the Hayward Construction case broadly held that a contractor need show only that the public entity knew material facts concerning the project that would affect the contractor's bid or performance and failed to disclose those facts to the contractor.

SUMMARY OF THE FACTS

Hayward entered into a contract with a school district to complete the work of the original contractor who was in default. The scope of the work was based on a 108 page “pre-punch list” and required Haywood to correct the defective, missing and incomplete work on a time and material basis up to a guaranteed maximum price.

Shortly after beginning work, Hayward informed the district there were significant deficiencies in the existing work that had not been noted on the pre-punch list and could not have been detected by a visual inspection. As a result, Hayward made a claim for extra compensation to perform this additional work. The district then sued Hayward and its surety and Hayward filed a cross-complaint against the district, alleging misrepresentation and concealment. In support of these theories, Hayward alleged the district failed to disclose the extent of the defects in the existing construction, and failed to disclose information that would have put Hayward on notice that some of its assumptions about the scope of the required work were erroneous.

After losing a motion for judgment of the pleadings in the trial court, Hayward won at the Court of Appeal, and then the school district appealed to the California Supreme Court.

THE COURT'S DECISION

The California Supreme Court affirmed but narrowed the court of appeal’s opinion in Hayward Construction, holding that a contractor need not prove an affirmative fraudulent intent to conceal. Rather a public entity may be required to provide extra compensation if it knew, but failed to disclose, material facts that would affect the contractor's bid or performance.

In narrowing the Court of Appeal's opinion, the California Supreme Court stated:

[W]e conclude the Court of Appeal's rule was, in turn, overbroad in suggesting that recovery may be had for any failure to disclose material information. Rather, we hold that a contractor on a public works contract may be entitled to relief for a public entity's nondisclosure in the following limited circumstances: (1) the contractor submitted its bid or undertook to perform without material information that affected performance costs; (2) the public entity was in possession of the information and was aware the contractor had no knowledge of, nor any reason to obtain, such information; (3) any contract specifications or other information furnished by the public entity to the contractor misled the contractor or did not put it on notice to inquire; and (4) the public entity failed to provide the relevant information.

The Court noted the circumstances affecting recovery may include, but are not limited to, positive warranties or disclaimers made by either party, the information provided by the plans and specifications and related documents, the difficulty of detecting the condition in question, any time constraints the public entity imposed on proposed bidders, and any unwarranted assumptions made by the contractor. The public entity may not be held liable for failing to disclose information a reasonable contractor in like circumstances would or should have discovered on its own, but may be found liable when the totality of the circumstances is such that the public entity knows, or has reason to know, a responsible contractor acting diligently would be unlikely to discover the condition that materially increased the cost of performance.

The is an important case in the construction industry. The risks of the bidding process became a little less risky. The uphill battle for contractors claiming extra work for unknown conditions got a little easier. They will still have to overcome the Spearin rule stated by the U.S. Supreme Court nearly a hundred years ago, that a contractor can not avoid its contractual obligations or seek additional compensation for performing them merely because unanticipated circumstances are encountered. Contractors will still have to get past disclaimers and other contractual language that attempt to place the burden of unanticipated conditions on them. But the Hayward Construction case now gives them some relief when making a claim for non-disclosure: they do not have to prove an intent to defraud; only a failure to disclose material facts that would affect the contractor's bid or performance.When such a claim arises, the contractor should make a demand for all documents in the owner’s possession, custody or control relating to the conditions of the project.

As for the parties in the Hayward Construction case, they are back in the trial court preparing for trial.

NOTE: Nine amicus curiae (friends of the court) briefs were filed in the Supreme Court of California on behalf of various organizations. Such briefs are often filed in appeals concerning issues of broad public interest. Four amicus curiae briefs were filed on behalf of various construction industry organizations, including the Associated General Contractors Association of California and the American Subcontractors Association. Five amicus curiae briefs were filed on behalf of various governmental organizations, including the California School Boards Association and The League of California Cities. The filing of these briefs by outstanding lawyers and law firms is another indication of the importance of the Hayward Construction case to the respective interests of construction professionals and public entities in California.

A New Case Upholding Customized Dispute Resolution Provisions

Ron White — Fri, 02 Jul 2010 08:46:35 -0800

It is an interesting paradox that construction professionals who devote their lives to building unique structures according to customized plans generally use "cookie cutter" form contracts to govern the duties and obligations of the parties. When a construction dispute arises, most construction professionals and their lawyers will spend many hours scrutinizing the contract documents to analyze their rights. Since so much time is spent evaluating the contract after the dispute, shouldn't there be at least an equal amount of time and thought put into it before the project begins? Instead of standard cookie cutter provisions, doesn't it make sense to think about the risks of the project and clearly define what will happen in the event of a dispute? I have been preaching this sermon for many years, and recently posted an article on the subject called, Resolve Construction Disputes More Efficiently With Customized ADR Provisions.

A new case in California (PDF) illustrates the benefit of customized contract provisions related to dispute resolution. The case involved the proposed development of a parcel of property and a contingent lease for a drug store build-out for Rite Aid. Here is the smart part of what happened: the lease agreement did not have the standard "prevailing party" language in the event of a dispute. Instead the lease stated that the prevailing party is entitled to "reasonable expenses," and then listed what the parties meant by that term: attorney fees, court costs, witness and expert fees.

The developer won the case and asked the court to award reasonable expenses including attorney fees and expert witness fees. Rite Aid challenged the developers request for $83,000 for expert witness fees in a motion to tax costs. The trial court denied the motion and Rite Aid appealed the judgment in favor of the developer, including the award of expert witness fees.

The California Court of Appeal affirmed the award of expert witness fees, holding that the the lease expressly called for them as an item of cost. The Court gave deference to the fact that this was a customized provision negotiated by sophisticated parties:

This does not mean-and we do not hold-that expert witness fees are recoverable in every case where "costs" are merely mentioned in a contract. A general cost provision should be interpreted according to the established statutory definition. But where sophisticated parties knowingly and intentionally negotiate a broader standard into their contract-and particularly where, as here, that standard specifically includes "witness and expert fees"-the intent of the parties should be upheld by the court. (Emphasis added.)

In most states, there are other ways to obtain an award of expert witness fees. I wrote about them in a post entitled, Settlement Negotiations: Don't Get Smacked By The Statutory Stick. But statutory awards of expert fees are discretionary awards made by the trial court after certain facts are established to the satisfaction of the judge. This Rite Aid case, on the other hand, provides a blue print for construction professionals who want to clearly define what will happen to the losing party in the event of a dispute rather than hoping for the favorable discretion of the trial court.

OVERCOMING BARRIERS TO CONFLICT RESOLUTION

Ron White — Tue, 22 Jun 2010 14:55:25 -0800

Yesterday a district court judge appointed a special master to mediate a lawsuit between four major record labels and Jammie Thomas, a Minnesota woman who allegedly downloaded and distributed more than a thousand songs on the internet in violation of federal law. The case is deemed by many to be a vanguard in the music industry’s effort to thwart the practice of peer to peer (P2P) file sharing, which is costing the music world a bundle, according to industry experts. The strategy seems to be that the threat of a lawsuit and heavy fines will deter music lovers from unlawfully downloading and distributing music to their friends.

The special master/mediator, Jonathon Lebedoff, a former chief magistrate judge of the District of Minnesota, has a great deal of mediation experience-he was responsible for the settlement of the Dalkon Shield litigation, for example. Nevertheless, the good judge must overcome a number of barriers to resolve this conflict.

Barrier No. 1-Mediation is Less Likely to Succeed if it is Involuntary

Mediation is based on the premise that parties who voluntarily participate in the process and agree to devote their time, money, and resources toward problem solving will be sufficiently invested to find a way to resolve their dispute. In this case, the record industry and Ms. Thomas were ordered to mediate the case prior to July 16, 2010, and Plaintiffs’ representative, Recording Industry Association of America, was ordered to pay the special master $400 per hour to conduct the mediation. In my experience, parties who are ordered to mediate a dispute rarely have the requisite personal investment to fully engage in the mediation process and maximize the opportunity to settle the case. They simply show up to comply with a court order but their hearts are not into it. Furthermore, unless the parties decide it is in their mutual best interest to have one side pay for the mediator, it is unwise to force one side to pay for the mediator because the side being forced to pay the full freight will resent it and the side going along for the free ride will not be sufficiently invested in the process to care if it succeeds or not.

Barrier No. 2-Bad Timing Can Destroy the Chances of a Successful Mediation

The best time to mediate a case is when both sides feel they have sufficient information to analyze the risks of trial and calculate the reasonable range of settlement. If parties attempt to mediate too early, the defense may feel it needs more information before a reasonable offer can be made; mediate too late and the plaintiff may have spent so much money on the litigation that its only viable option to recoup its fees and costs is to proceed with trial. If you wait to mediate the case until after the verdict, then the prevailing party has less risk to consider and will be less flexible in the negotiations.

In the Jammie Thomas case, the special master/mediator is being asked to mediate a dispute that has already resulted in two jury verdicts in favor of the record companies. The first trial resulted in a jury award of $222,000 in statutory damages which was thrown out by the trial judge. The second trial resulted in a jury award for $1,920,000 in statutory damages which the trial judge reduced to $54,000.

Thus Judge Lebedoff must try to facilitate a settlement by helping Ms. Thomas see the wisdom of paying all or part of the $54,000 and convincing the record companies to waive their right to appeal the trial judge’s reduction of their seven-figure verdict. This will not be easy.

Barrier No. 3-Litigation Risk Analysis Should Include Collectability

Assuming liability and damages have been properly analyzed, the collectability of a judgment must be factored into a litigation risk analysis. In other words, does the defendant have sufficient assets to satisfy a judgment? If not, it may be very difficult to settle the dispute. With nothing to lose, a party may not feel it necessary to work out a compromise.That seems to be the case with Ms. Thomas.

Ms. Thomas is a young mother of four who works as a natural resource coordinator for the Millie Lacs Band of Ojibwa Indians. While I know nothing about her finances, it is interesting that the record companies are the ones who seem anxious to get the case settled, not Ms. Thomas. Perhaps they realize that they are spending a lot of money to enforce a judgment that may not be collectable.

Greg Sandoval of CNET News reported in January 2010 that Ms. Thomas rejected a settlement offer of $25,000. In response, according to Mr. Sandoval, the record companies released the following statement, "It is a shame that Ms. Thomas-Rasset continues to deny any responsibility for her actions rather than accept a reasonable settlement offer and put this case behind her[.]"

Barrier No. 4-A Zero-Sum Attitude in a Dispute Resolution Setting

Commercial mediation works very well when all the parties share the same objective: the resolution of a dispute. But when a party simply wants to prove it is right and that the other side is wrong, reason or logic rarely prevail in a mediation session. This zero-sum attitude does not take into account the emotional and financial toll of a trial, an appeal, and perhaps more trials and appeals.

This seems to be the situation that Judge Lebedoff faces as the mediator in the Jammie Thomas case. One of her defense lawyers told CNET that they have always sought a $0 award and that the defense lawyers planned to challenge even the reduced damage award. And though the Plaintiff record companies appear to want to settle the case, Mr. Sandoval reports that they would be just as happy to appeal the ruling of the district court judge that greatly reduced the statutory damage award.

Fortunately, all of these barriers can be overcome if the parties will set aside their trial advocacy skills and focus on their negotiation advocacy skills.This change in attitude coupled with the problem solving skills of Judge Lebedoff can overcome any barrier that may exist. Best wishes to Judge Lebedoff and the parties in the upcoming mediation.

SHARPENING YOUR NEGOTIATING AX: PREPARATION PRECEDES THE SETTLEMENT

Ron White — Tue, 15 Jun 2010 12:15:00 -0800

I like Abraham Lincoln’s adage about preparation: “If I had eight hours to chop down a tree, I'd spend six hours sharpening my ax.” This post is about sharpening our negotiating axes through a pattern of preparation that includes rigorous legal analysis. My friend and fellow mediator, Don Philbin of San Antonio, Texas wrote one of the finest articles I have read on the subject entitled, “Prepare for Mediation: A Multidisciplinary Approach to Negotiation Preparation." You can read his article by clicking here. (PDF) It will surely sharpen your negotiation skills and help you efficiently resolve many difficult disputes. Here is a summary of Don's article:

Rigorous Legal Analysis Forms the Basis Negotiation Preparation.

[Preparation] is the be-all of good trial work. . . . Everything else, felicity of expression, improvisational brilliance, is a satellite around the sun. Thorough preparation is that sun. -Louis Nizer

In reviewing the essentials of the rigorous legal analyses that lie at the base of any economic analysis, New York litigator Louis Solomon concludes that “the importance of intelligent, critical, analytical, yet realistic case evaluation cannot be overstated.” Solomon notes that case evaluations should begin early and be updated consistently, including at certain regular intervals.The goal is assessing risk, not achieving perfection. In a recent article, he condenses the evaluation process into five key steps:

identify potential issues;

evaluate issue relationships and overall case bearing;

evaluate the risk or probability of each outcome (fact and law intensive);

evaluate possible upside and downside exposure; and

identify the indirect and collateral issues from the client’s perspective.

2. Decision Tree Analysis Helps Develop and Test Scenarios

In decision tree analysis, you establish the key events of the litigation through trial. You then estimate the probability for success of the key events and the dollar values of the potential final outcomes. A decision tree visually depicts this process in as much detail as may be desired. A more complex decision tree may include the chances of success of potentially dispositive motions, such as summary judgment, or the impact of rulings on certain key evidence. On the other hand, a basic decision tree may only depict liability and damage issues.

When evaluating liability and damages, you start with the basic question: what is the chance of prevailing on the issue of liability? If liability can be established, what is the amount that will be awarded for damages? The outcome will provide a range for settlement purposes

The process itself is as valuable as the result because it structures our analysis and focuses our attention on the component parts of the problem. In considering the range of outcomes and their probabilities, the parties not only come to a more realistic view of their options, they are able to communicate those scenarios in a common vernacular.

You can read my post on decision trees entiled, Dispute Resolution, Decision Trees, and Albert Einstein by clicking here.

3. Anchoring

As we move from dispute analysis to negotiation planning, we are often faced with the decision to either make the first offer or await one from the other side. That decision turns on a number of variables. One commentator argues that anchoring “describes the process by which the human mind does virtually all of its inferential work.” Anchors function much like our “gut” reactions to the value of an object or lawsuit – the “thin slice” our subconscious sends our conscious mind to evaluate. The more relevant information our analytical mind has, the less we are swayed by an unreasonable anchor. Mistaken or misguided anchors can increase the odds of impasse and have other unintended consequences.

4. Preparation Provides a Framework for Options

Litigants must make choices [about the claims] or turn them over to others for a binding decision. Unwilling to drain every swamp looking for evidence, they are often faced with making decisions with less than perfect information. The challenge then is to make the best decision with the information they do have or budget an appropriate amount based upon the developed choices. Economic analysis helps narrow the field from the legally possible to the economically viable

Outstanding trial lawyers spent considerable time and effort honing their skills to be effective courtroom advocates. But since most cases settle before a verdict is reached, it is equally important to develop effective negotiation advocacy skills. I hope you will spend some time with Don's article to help you sharpen your ax.

NEGOTIATING DISPUTES WITH THE WORDS OF A WIZARD IN MIND

Ron White — Thu, 10 Jun 2010 12:20:27 -0800

Bear with me as I pay my respects to a lifelong hero who influenced my life for good:

John Wooden, the Wizard of Westwood, was the greatest coach of all-time. He passed away June 4, 2010; 4 months shy of his 100^th birthday. While he will be remembered for his 10 NCAA basketball championships as the head coach of the UCLA Bruins, he always considered himself first and foremost a teacher. He taught principles of living based on his Pyramid of Success, and shared his wisdom through sayings that have been quoted for decades in virtually every educational, athletic, professional, and business forum and setting.

Even though I was never very good at handling a basketball (giving hard fouls was my forte), I have been pretty good at finding ways to sharpen my skills as a negotiator and a mediator.

Here are a few of the things I learned from Coach Wooden’s playbook:

PREPARATION: “Failure to prepare is preparing to fail.”
HARD WORK: “Nothing will work unless you do.”
PATIENCE: “Do not let what you can not do interfere with what you can do.”
PERSEVERANCE: “It’s not so important who starts the game as who finishes it.”

And here is how I have applied these sayings of his to the field of negotiations and dispute resolution:

If you do not prepare for mediation, you are preparing for the mediation to fail. Claims are not settled in a vacuum, they must be rigorously measured against the realities of trial before the negotiations begin. Questions about liability and damages, evidence and admissibility, costs and fees, must all be evaluated; the impact of litigation and trial on clients in terms of time, emotion, and resources must be scrutinized; and an objective study of the strengths and weaknesses of the other side’s positions must be undertaken in advance of the mediation. This is not to say that extensive discovery on every conceivable issue must be completed but sufficient thought must be given to these issues to enable you to negotiate to the best of your ability and with your client’s best interests in mind.
Mediation does not work unless the parties are willing to work on both objective and subjective levels. They work better when lawyers are willing to set aside trial advocacy skills in favor of negotiation advocacy skills. They work best when both sides focus on finding ways to resolve the dispute instead of perpetuating it.
Do not let the tactics of the other side interfere with the implementation of your settlement strategy. You can not control your opponent but your preparations will enable you to take control of the negotiations by anchoring the offers and demands within a reasonable settlement range based on the facts of the case, the applicable law, and the record of verdicts in similar cases. Studies have shown that the first party to make a reasonable demand or offer anchors the negotiations in his favor. Thereafter, the negotiations tend to be driven in that direction.
Have the mindset that you are going to see the mediation process through to the end. Be prepared to endure the ups and downs of a mediation session. Don’t allow your emotions to take you out of your game plan. Unfortunately, I see this happen all too often. For example, plaintiff believes the reasonable range of settlement to be $500,000 to 250,000. The defense, believes the settlement value is between $150,000 to 225,000. In other words, unbeknown to each other, they begin the negotiation with only $25,000 separating Plaintiff’s potential lowest demand and the defendant’s potential highest offer. However, the plaintiff wants to give himself plenty of room to negotiate so he makes an initial demand of $1,000,000. The defendant’s reacts emotionally to this number: “It’s outrageous; they are not negotiating in good faith; I’m not even going to respond with a counter offer.” After some time, defendant may respond with an equally ridicules number, $25,000. How does the plaintiff react? The same way and before you know it, both sides become frustrated and the mediator declares an impasse. If you are going to convene mediation, be prepared to finish the process. Allow the mediator to help the parties work through the process to find clarity and to maximize the chances for a reasonable resolution of the dispute.

Mediators are not miracle workers; they can not create a settlement out of thin air, and no amount of their “hot air” will convince parties to settle a case that has not undergone rigorous analysis by both sides. Take a page from Coach Wooden’s playbook: prepare, work hard, control what you can, and endure to the end. And when you are in the middle of a difficult negotiation, remember one more thing John Wooden taught, "Flexibility is the key to stability."

Thank you, Coach Wooden. Thanks for everything.

SETTLEMENT NEGOTIATIONS: DON'T GET SMACKED BY THE STATUTORY STICK

Ron White — Fri, 04 Jun 2010 16:46:51 -0800

Parties hungering for their day in court must digest the potential repercussions of the carrot and stick procedures enacted by their respective legislatures to encourage the pre-trial settlement of disputes. Federal Court Rule 68 provides that a plaintiff whose judgment is less than defendant’s statutory settlement offer may be required to pay defendant’s costs, including deposition costs, filing fees, and other costs incurred after the offer expires. In certain cases, Rule 68 can also be used to cut off plaintiff’s claims for attorney fees incurred after the settlement offer. Some state courts rules, such as California’s Code of Civil Procedure section 998 and Texas’s Rule 167, add to the list of recoverable costs, attorney fees and expert witness fees in cases where the terms of the statutory settlement offer were more favorable that the final judgment.

It has been suggested that the correct usage of the carrot and stick idiom is actually “carrot on a stick,” referring to the hapless donkey tricked into pulling a cart by the lure of a carrot dangling from a stick. But studies have shown that rewards alone have little impact on cooperation among human beings, although punishment alone can be motivational. But when rewards and punishment are combined the effect on cooperation is dramatic, suggesting that the more realistic image of the donkey and the cart would have the driver holding the stick attached to a carrot in one hand and a prodding stick in the other. Similarly, in civil trial courts, the benefits of compromise alone may not be enough to induce parties to negotiate in good faith, but when combined with the threat of having to pay the other side's costs, litigants are generally sufficiently motivated to settle their lawsuits.

In California, for example, a party may serve a written offer to compromise prior to trial, and if the offer is rejected and the opponent does not receive an award at trial greater than the offer, then the party that rejects the pre-trial offer may be ordered to pay the offeror's costs. This gives the parties strong financial incentives to make reasonable settlement offers and burdensome disincentives to discourage the rejection of them.

Unfortunately, some litigants do not even consider the possibility of paying the other side's costs when considering the settlement value of their cases, or, in some states where attorney and expert witness fees can be awarded, they make the mistake of only evaluating general litigation costs such as filings fees, the cost of deposition transcripts, and service of process fees. When a statutory pre-trial offer is made, the trial lawyer must understand that the offer has created a floor that must be exceeded in order to collect his costs and avoid having to pay his opponent’s litigation costs.

The possibility of a statutory offer of settlement can induce parties to participate cooperatively during a mediation session. In preparation for mediation, counsel will usually calculate the settlement value of a case by analyzing the likelihood of success at trial both as to liability and damages. The damage estimate will then be discounted by some percentage to reflect the possibility that the trial will not proceed according to plan. If, however, counsel must also consider whether the damage award will exceed the amount of a "statutory offer," then the analysis becomes more complicated and the stakes at mediation increase.

For example, suppose plaintiff's counsel believes his case is worth $1,000,000 in damages, but for purposes of settlement discussions considers $800,000 as a reasonable amount for settlement. Without the carrot and stick of a statutory pre-trial offer, plaintiff's counsel need only worry about the other side's costs if no money is awarded at trial. Being extremely confident, counsel considers the likelihood of a jury awarding nothing to be zero. Therefore, counsel concludes $800,000 is the minimum amount that should be accepted at mediation.

On the other hand, suppose counsel's preparation includes an analysis of the other side's costs and what would have to be achieved at trial to avoid having to pay them, and then he fully explains the ramifications of statutory offers to his client.prior to the mediation. Now he will be better prepared to evaluate the risks of trial should the other side's best offer be less than he expected, say $500,000. As a result, plaintiff's counsel will be in stronger negotiating position and better able to meet the needs of his client, knowing the likely floor that he must exceed at trial in order to prevent his client from having to pay defendant's costs which, for a million dollar case, could be hundreds of thousands of dollars..Given this risk, plaintiff's counsel will be more willing to come off the original $800,000 target number during mediation.

The possibility of paying the other side's costs, especially if they include attorney and expert fees, is a powerful incentive to negotiate in the utmost good faith. As demonstrated above, the cost-shifting feature of statutes such as Federal Rule 68 and California Code of Civil Procedure section 998 can be a carrot to entice reasonable settlement offers and a big stick to discourage rejection of settlement offers. Use this tool to your advantage at mediation. You will increase your negotiating leverage while demonstrating that you are a wise steward of your client's litigation dollars.

SECURING EXCESS INSURANCE TO RESOLVE CONSTRUCTION DEFECT CASES

Ron White — Sat, 22 May 2010 14:06:11 -0800

This is part two of my series regarding insurance coverage issues in construction defect cases. In part one, I addressed common indemnity and defense issues. In this post, I will address how excess policies come into play when the exposure to liability for construction defects exceeds the policy limit of your primary insurance policy, typically a commercial general liability or CGL policy.

Depending on the size of the project, many contractors will have an added layer of insurance protection in the form of an excess or umbrella policy. These are policies that provide additional coverage for claims that exceed the limits of primary coverage and can be purchased for a relatively modest sum, compared to the premiums for primary insurance coverage.

Construction defects, which typically manifest slowly over time, will likely implicate the successive primary insurance policies of the general contractor and its subcontractors on large projects, and quite possibly their respective umbrella or excess policies. The questions of which excess policies are subject to the claims and when does an excess carrier’s duty to defend arise are common issues and often stand as barriers to the resolution of construction defect cases. The case of Padilla Construction v. Transportation Insurance Co. (PDF) illustrates some of these complexities.

Padilla Construction was a stucco subcontractor to a developer who was sued by the owners of two houses in an upscale development in Castro Valley, California. The developer filed a cross-complaint for indemnity against Padilla. The primary defect claims that evolved over a seven year period included foundation drainage problems, excessive crawl space moisture problems, and decay and mold contamination to the under-floor framing. Padilla’s work was implicated by the allegations that the foundation vents at some locations were blocked with stucco.

Padilla was covered by various primary policies over an eight year span and one excess policy for two of those years. The Court of Appeal summarized the applicable policies as follows:

The insured had four successive primary liability policies from January 1995 until March 1, 2003:
—From the beginning of 1995 to end of 1996: Transcontinental Insurance.
—From the beginning of 1997 to end of 1997: Reliance Insurance.
—From the beginning of 1998 to March 1, 2001: Legion Indemnity.
—From March 1, 2001, to March 1, 2003: Steadfast Insurance. Editor's Note: These policies required Padilla to pay $25,000 in self-insured retention (SIR) before Steadfast’s obligations came into effect.

Additionally, coincident with Transcontinental's primary policy (Jan. 1995 through the end of 1997), the insured had two yearly commercial umbrella policies issued by Transportation Insurance Company.

In tabular form, over the period of the continuing loss, the policies may be expressed this way:

Time	1995–1996	1997	1998–March 2001	March 2001–March 2003

Excess	Transportation
Primary	Transcontinental	Reliance	Legion	Steadfast

Initially, Padilla tendered its defense to Transcontinental which was accepted. On the other hand, Reliance and Legion were insolvent and nothing was available from either carrier by way of defense. Padilla did not want Steadfast to get involved because it did not want to pay the $25,000 self-insured retention. Instead, when the Transcontinental policy was exhausted due to the payment of defense and indemnity costs on the Castro Valley project case and other claims, Padilla tendered the defense to its excess carrier, Transportation, on the basis that all other primary policies were either exhausted or their carriers were insolvent, and that there was no primary insurance available under the Steadfast policy because Steadfast had no obligation to defend due to the self-insured retention requirement. In other words, Padilla did not have any primary insurance through Steadfast unless and until Padilla paid the first $25,000 in defense or indemnity costs.

Eventually the parties in the Castro Valley project case reached a settlement, which included a $60,000 contribution from Padilla who, in turn, filed the subject insurance coverage case against the excess carrier, Transportation. The trial court ruled in favor of the excess carrier and the California Court of Appeal affirmed, stating that “an excess insurer does not have a duty to defend an insured until ‘primary insurance’ in the form of a so-called ‘self-insured retention’ is exhausted applies here. The statement obtains with just as much force even if the excess insurer's 'other insurance' clause does not contain a direct reference to 'self-insurance'.

For a variety of reasons, the Padilla case is useful reading for anyone facing construction defect claims and trying to figure what insurance may be available to defend and indemnify the claims.

The way the Court organized the chronology of the applicable insurance policies is a good template for anyone trying to figure out the availability of insurance.
There is a good discussion of the duty to defend in construction defect cases involving continuous damages. In the Padilla case, the blocked vents led to allegations of damages that spanned several years and therefore, implicated many policies. Thus even though the inception of the loss occurs in the policy period of one policy, the continuous nature of the damages can spill into the policy periods of additional carriers, making the successive carriers also responsible for the defense of the claims.
The case points out that in California, anyway, the duty to defend the whole action arises when any portion of the damages falls within the policy period, even though the increments of harm preceding the policy period would not be covered by way of indemnity, reminding us that a carrier’s duty to defend is broader than its duty to indemnify.
We are also reminded that a carrier can seek reimbursement from its policyholder for defending that portion of the claims that may come before the inception date of the policy. Thus the good news in that situation is the carrier may have to fund the defense of all of the litigation, even the defense of damage claims that precede the policy, but the bad news is the carrier has the right to seek reimbursement for defending the uncovered damages.
Self Insured Retention or SIR must be paid and the primary policy exhausted before the excess carrier is required to defend and indemnify a claim.
The case has a good definition of self-insured retention: “while there ‘is no dispositive case law differentiating deductibles from SIRs,’ a deductible ‘usually relates only to the damages sustained by the insured, not to defense costs’ where an ‘SIR is generally a specific amount of loss that is not covered by the policy but instead must be borne by the insured.’”
The case also provides a good explanation of the differences between excess and umbrella policies:" Technically, there is a difference between umbrella and excess policies. Umbrella coverage is a "type" of excess coverage, typically providing, as in the present case, for losses for which there may be no "underlying' insurance." The other type of excess coverage is "‘following form" coverage” which, as the name indicates, follows the form of a specific underlying policy. Because umbrella insurance provides coverage ‘for certain losses for which there may be no underlying insurance,’ they provide ‘broader coverage than the underlying insurance. By the same token they provide broader coverage than “form following” excess policies."
Finally, the case identifies the timing of when an excess insurer is obligated to defend a lawsuit in California: "The rule of “horizontal exhaustion” in liability insurance law requires all primary insurance to be exhausted before an excess insurer must “drop down” to defend an insured, including in cases of continuing loss. Unless there is excess insurance that describes underlying insurance and promises to cover a claim when that specific underlying insurance is exhausted (“vertical exhaustion”), the rule of horizontal exhaustion applies to cases of alleged continuing property damage—as often happens when the insured is sued for construction defects."

Being knowledgeable about insurance is the first step in the process of getting a carrier to defend and indemnify defect claims but, as Malcolm Gladwell said in his marvelous book,Blink,: ”The key to good decision making is not knowledge. It is understanding. We are swimming in the former. We are desperately lacking in the latter (p.265).” When construction defect claims arise, it is not enough to know you have excess insurance coverage. Padilla Construction knew it had an excess policy but did not understand when or how to access it. I hope this post (and my prior one) will help you understand how to secure the full extent of insurance protection that is available to you.

RESOLVING INTERNATIONAL CONSTRUCTION DISPUTES THROUGH U.S.-STYLE MEDIATION

Ron White — Wed, 12 May 2010 09:09:36 -0800

It is a fact that a high percentage of construction disputes are resolved through mediation in the United States. Although the voluntary, collaborative nature of the mediation process seems inimical to the highly competitive, hard-charging world of the U.S. construction industry, the record of success is quite impressive. It would seem, then, if mediation can thrive in the U.S., it can also work in other countries.

I have often thought that mediation is especially well-suited for the resolution of disputes involving Japanese entities. In Japan (and other Asian cultures), saving face, honor and loyalty remain fixed in the Japanese character. I learned a lot about this during the two years I lived there. Frankly, as a Westerner, in some ways it was harder to comprehend the culture than it was to learn the language. For example, it took me a little while to apprehend the Japanese tendency of avoiding public conflict. In my first few months there, I am sure I offended some people because I did not appreciate the fact that what appeared to me to be evasiveness was actually an attempt to avoid conflict and public embarrassment-mostly mine. Now as a mediator, I can see that private mediation can help Japanese construction professionals resolve their disputes in an honorable way, consistent with their culture and traditions.

Prominent construction lawyer Robert S. Peckar recently posted an outstanding article in Who'sWhoLegal about the application of U.S.-style mediation in other countries. I have quoted below parts of the article that explain the mediation process and other parts which explore its benefits and barriers in the context of international construction disputes.

US-style mediation is the voluntary participation by disputing parties in negotiations facilitated by a third-party neutral known as the “mediator”. The mediator typically is a lawyer (although he or she need not be) who is trained in the art of negotiation used in the mediation process. The key elements of the typical mediation process are:

The process is voluntary. While some speak of “binding mediation”, that term is misleading. The only aspect of mediation that is binding is the agreement made by the parties to settle their dispute (more on that later). All parties must agree to participate or there is no mediation. Although some contracts require mediation as a condition precedent to the next step in the process, there is agreement at least at the time of contracting.
Because the process is voluntary, the parties are making a commitment that they are willing to listen, to learn, and to make compromises to achieve a fair settlement with the other party.
The process depends on the good faith of all parties to participate with an open mind and a desire to settle.
The process is conducted under the guidance of a mediator, who is selected by all of the parties because they trust and respect the mediator’s skills, knowledge and integrity. The mediator is neutral and independent. The mediator typically is highly trained in the art of negotiation and mediation, knowledgeable in construction, and experienced in construction law. Mediation simply introduces a trusted expert into the negotiation process to facilitate a resolution of the dispute. There are several organizations that offer mediation services to members of the construction industry.
Before and during the mediation, the mediator is provided with confidential information from each party about the strengths and weaknesses of their case, their settlement goals, financial concerns that might affect the settlement, personal relationships impacting settlement, other matters of value to each party, such as maintaining relationships or receiving expedited payment, and other confidences that may assist the mediator. Armed with this information, the parties’ trust and negotiation skills, the mediator is in an excellent position to guide the parties to an acceptable settlement.
US-style mediators act in a facilitative manner, however, many will be quite strong in providing advice to the individual parties during their confidential sessions. That advice may range from “encouragement” that a party modify its position in order to achieve a settlement to a polite confrontation in which the mediator informs the party in clear terms why the mediator believes that party is not properly advancing the potential for settlement. The mediator may explain to the party that its resistance to make meaningful counter-offers is unhelpful. The mediator may also express a belief that the party is operating on an erroneous legal or factual position or that it is attempting to use a negotiating strategy that simply will not work. Many of the most successful construction-industry mediators in the United States are respected for their ability to bring strong guidance and the personal qualities of effective facilitation to the mediation process.
Because of the sensitivity of the information provided to the mediator, the parties must have complete trust that he or she will maintain its confidentiality and help them reach the best settlement possible. Trust in the mediator is the cornerstone of a successful mediation.
The mediator acts as an “honest broker of information” and never shares one party’s confidential information with another party without express permission. Thus, the parties are able to talk with the mediator about various options, including their “bottom-line number”, and other highly confidential considerations, without fear that they will be improperly disclosed to any other party. Mediators treat this obligation as a matter of sacred trust and do not violate that trust. Furthermore, the laws in most US states provide that all communications (oral and written) during the mediation process are confidential and may not be repeated in a legal proceeding.
The mediation progresses through a rather predictable process to conclusion. Typically there are short pre-mediation submissions exchanged between the parties and with the mediator, an opening joint session, at which all the parties make presentations to each other about their case and their perceptions of the other parties’ cases, followed by a series of private caucuses with the mediator held in separate rooms. However, the parties are not constrained by a specific format and joint sessions may follow a caucus, sessions may be held with principals only and the mediator, or any other process may be used that will help achieve settlement. Flexibility is a key to mediation.
An important element of the opening session of mediation is that the parties speak to each other and in particular the principals, not to the mediator. Sometimes the opening session is the first time a principal has heard a fair presentation of the other party’s position. The mediator is not a judge or arbitrator; and therefore, there is little advantage to try to convince the mediator of the merits of the party’s position. That shift in emphasis, from speaking to the third-party finder of fact to speaking directly to the other party, is at the heart of what makes mediation successful. The mediator’s role is to keep that dialogue appropriate in tone and direction both in the opening public session and then in the private caucuses.
The mediator tries to help the parties focus on what is in their best business interests as opposed who is right or wrong on the issues, since it is often difficult to convince someone that they are wrong, and the matter may have little to do with a party’s best interest as far as settlement is concerned.
The mediator helps the parties remove emotional issues or personal conflicts from the negotiation.
The mediator has the ability to use many well-tested closing techniques to achieve the final resolution.
Finally, in certain circumstances and as a last resort, the mediator can offer his or her opinion on certain issues and can suggest a settlement to assist the parties. If the parties trust the mediator, his or her opinion or suggestion may be enough to cause them to make the last move to settlement.
The mediation process continues until a settlement is achieved by the parties or until the mediator (not the parties) concludes that settlement is unachievable and declares an “impasse”, at which time the parties revert to the formal dispute resolution process provided in their contract or as required by law. It is not unusual for mediation to continue late into the night or continue day-to-day with little time for sleep as momentum towards a settlement increases. It is also not unusual for the mediation to be postponed after the parties have exchanged information, discovery has occurred, or the parties have reassessed their positions and interests. The passage of time can be used to facilitate settlement.
If the parties reach a settlement, they sign a settlement memorandum or agreement on the spot, in the mediation room, to avoid the chance that they will sleep on their agreement and change their minds the next day.
The parties’ lawyers play an important role in mediation. They advise their clients throughout, may make presentations, and, if they are experienced in the mediation process, can help their client and the mediator steer through the challenges of mediation. However, unlike arbitration and litigation, jurists are not the central figures in the drama. At the end of the day it is the client who has control of the company’s destiny in mediation, as the client is the decision maker who must make the choices on what to say, when to say it, and whether to accept a settlement.

In summary, mediation in the United States is a negotiation in which an independent, trusted expert in negotiation and construction law is inserted between the parties, is provided with all of the parties’ confidential information, and then, armed with this information, tries to guide the parties to a settlement. It has a very high success rate. So, why wouldn’t the rest of the world jump at the chance to settle international construction disputes through US-style mediation as often as the construction industry in the United States?

Mr. Peckar describes some of the challenges of international mediation as follows:

However, in the truly international case that brings parties from different parts of the globe together, the confidence that a mediator and the process will be conducted in a way that is “comfortable” for that party is often not present. For example:

International parties to construction disputes may approach any negotiation with very different perspectives on how to negotiate. For parties from some countries, it is culturally unacceptable to offer or accept a reduced amount or to even share a willingness to settle for less with the mediator, as to do so may be perceived as personal weakness. It may be more acceptable for parties from such countries to lose in arbitration or court than to make concessions voluntarily. Such attitudes make the mediator’s job very difficult. An example of a particular issue that has resulted in non-US parties becoming uncomfortable about a US-style mediator’s approach to the facilitation of a settlement is the following: US-style mediators typically remind the parties of the expense they will suffer if they fail to settle their disputes and go on to arbitration or litigation. That reminder is accepted and often appreciated by construction-industry members in a dispute in the United States. Some international parties have been heard to complain that such a consideration is not relevant or even appropriate in a discussion about how much to pay to or accept from the other party.
The language barrier can present tremendous problems, even with a translator. How easily can a party trust someone who does not speak their language? This becomes even more of a problem if the mediator speaks the adversary’s language.
For parties from some countries, because the mediator goes into a room with the other party for hours (the caucus) to discuss the dispute this can be extremely worrisome and can undermine their trust in the mediator and the process.
For others the sharing of highly confidential information, particularly if the mediator does not share their nationality, culture, or religion, is very difficult. As a result, even if they participate in the mediation they may be unwilling to share their confidences, which will make it less likely that the process will be successful.
For some, the mere fact that they have never participated in mediation before, but have been in court or arbitration, is sufficient reason to reject mediation.

Construction disputes happen in all parts of the world. Regardless of cultural differences or legal traditions, all construction professionals want to resolve their disputes as efficiently as possible. Given the high settlement rate of mediated disputes in the United States, reasonable businessmen and legal counsel everywhere should find ways to implement mediation as an alternative dispute resolution method in their respective countries. The alternative to mediation is a fight in a court of law or in an arbitration proceeding. Mediation provides a confidential forum to fully explore both sides of a dispute with the knowledge that the failure to reach a compromise will lead to increased legal fees and costs and an uncertain outcome at trial. Indeed, the wisdom of mediation is reflected in two of my favorite Japanese proverbs: (1) Even a sheet of paper has two sides and (2) A good sword is the one left in its scabbard.

RESOLVING CONSTRUCTION DEFECT CLAIMS: INSURANCE IS THE KEY

Ron White — Fri, 07 May 2010 07:51:43 -0800

The resolution of construction defect cases and the availability of insurance coverage go together like the Los Angeles Lakers and NBA Championships (sorry Celtics fans). In addition to coverage issues that arise when defect claims are made, contractors and subs will want to quickly tender the defense of claims to their carriers. Generally speaking, policies of insurance include limitations on the time in which claims can be made, so my rule has always been, “When in doubt, send the notice of claim out.”

When a claim arises, some may question if they have insurance coverage or if they are entitled to have the cost to defend the claim paid by their insurance companies. Don’t. Assume the claims are covered and make your carrier confirm in writing one way or the other. First, an insurance carrier’s duty to defend is broader then its duty to indemnify. That means, in most states, you are entitled to a defense if it is possible that the claim is covered. On the other hand, a carrier is only required to indemnify the claim (in other words, pay the settlement or judgment) if the defect is actually covered by the terms of the policy.

By tendering the claim to your carrier, you will trigger statutory time lines by which the carrier must confirm in writing its position on its coverage and defense obligations. Sometimes an insurance company will agree to defend the claim under a reservation of rights. That means the insurance company believes the possibility of coverage exists, triggering its duty to defend but it is reserving the right to withdraw the defense if it is established that there is no coverage under the terms of the policy.

Especially for large claims, you should not be surprised if the insurance company sues you at the same time it is defending you on the construction defect claim. The suit will not be for monetary damages but rather, for a declaration by the court of the rights and duties of the parties under the terms of the insurance contract. The insurance company will argue its interpretation of the policy language and why there is no coverage, and you will have to argue why there is coverage. While inconvenient for you, this is the prudent course of action for the carrier. When the tender of defense or coverage is wrongfully denied, the policyholder has the right to sue for contract damages, bad faith, and in some cases, punitive damages. Rather than risk being wrong, a carrier will often ask the court to decide questions about coverage.

If the tender of defense or coverage is denied, you should engage legal counsel to help you evaluate your options. There are outstanding insurance coverage lawyers who can help you. Look for one who specializes in insurance coverage of construction claims. Construction defects present unique issues in terms of coverage that a generalist made not understand.

My next post will continue this theme about insurance coverage for construction defect claims. I plan to address recurring problems when successive policies are implicated by the claims and how so-called self-insured retention may affect the obligations of umbrella or excess carriers.

Resolving Construction Disputes: Is A Jury Trial Right For You?

Ron White — Fri, 30 Apr 2010 08:10:08 -0800

My thanks to construction lawyer Chris Hill for the opportunity to guest post today on his superb blog, Construction Law Musings.Chris is also an avid Twitter guy and can be followed here.

Here's my guest post:

I am very happy to guest muse about construction law today, but first I want to muse a bit about the original Muses of Greek mythology, and their Dad Zeus. Why? Because some times the history of a construction project reads like a Greek tragedy.

You might remember that the Muses were goddesses of the arts and sciences, including poetry and history, geometry and astronomy, tragedy and comedy. Their Dad was a pretty powerful guy: he could control the weather and give orders to any mortal or god, except The Fates, the goddesses of destiny who controlled the life and destiny of everyone.

Construction Muses (and their male counterparts) of our day are the gifted ones who design, finance, supply, and build our edifices of granite, steel and stone. Each project has Zeus-like figures who are effective leaders and very good at giving orders but, unfortunately for schedulers and unlike Zeus, can not control the weather.

But when misfortune strikes, turning construction professionals into adversaries, it is The Fates who control the futures and fortunes of the combatants. Who are The Fates in the construction world? Jurors, ordinary men and women deemed by law as The Great Deciders of the fates of all who enter the temples of justice we call courthouses.

Since jurors wield such great power, jury dynamics should be carefully considered by anyone wanting a jury trial. This is especially true for members of the construction industry because delay claims, defect cases, and most other types of construction disputes take longer, involve more witnesses, require more exhibits, and are generally more complex than the average case pending in civil courts.

This is not to suggest that jury trials should be avoided at all costs. If your opponent’s unrealistic view of the risks of trial results in low-ball negotiation tactics or a scorched earth litigation strategy, you may decide to accept the risks and limitations of a jury trial because you feel you have no other choice. I have been there and done that. If you go this route, there are Three Myths about Juries you should know about:

Myth No. 1: Justice is served when a dispute is submitted to a “jury of one’s peers”.

The truth is the U.S. Constitution does not give you a right to a trial by a jury of your peers. The Seventh Amendment simply preserves the right to trial by jury in civil cases “and no fact tried by a jury, shall otherwise be reexamined in any court of the United States, than according to the rules of common law.” Therefore, while jurors are the judges of the facts in a trial, they need not be your peers. A “Peer” is defined as “One’s Equal,” and opposing counsel will make sure that none of your peers in the construction industry are on the jury.

Some trial consultants believe that a case is won or lost during the jury selection process. That is when lawyers ask prospective jurors, who are under oath, various questions about their backgrounds, attitudes, and experiences, ostensibly for the purpose of ensuring the jurors can be impartial, but in reality they are trying to stack the deck in their favor. This is part of our adversarial system of justice, and state laws give lawyers the opportunity to ask the judge to dismiss any jurors who may have actual or perceived biases; the lawyers are also given peremptory challenges to kick a number of people off the jury for any reason at all.

As a result of the jury selection process, you can be sure that the members of your jury will have little, if any, experience in the construction industry. They will not be your peers. If the trial concerns an architect’s alleged design errors, you can be sure that opposing counsel will not let an architect get on the jury. Likewise, it is unlikely that a spouse of a contractor would be selected when the trial is about construction defects

Myth No. 2: Jury verdicts are based solely on the evidence and the law.

The truth is jurors bring their experiences, personalities, and perceptions into the courtroom and these things shape the views of what they are seeing and sharpen the tones of what they are hearing. As a result, it is very difficult to know how the unique facts of your case will be received by the jury. The following answers to post-trial surveys conducted by Los Angeles County Superior Court Judge Jacqueline Connor are enlightening (and frightening):

I disliked that the whiny plaintiff thought his problem was worth the court's and 14 jurors' time.

Too many attorneys take too many cases to court. This was exactly one of those that should never have been brought.

The defense attorney was popping TUMS. What's wrong?

She was good, logical, kind of dull, though. And needs to update her wardrobe (button hanging off.) Stuff like that is distracting.

Skilled and articulate but his hair was a little long to be compatible with his high quality dress without suggesting shiftiness.

Myth No. 3: The evidence so clearly supports my position, the jury will be compelled to render a verdict in my favor.

The truth is you do not know what evidence the jury will hear. That will depend on the judge and how he or she applies the rules of evidence, and no two judges are exactly alike when it comes to their rulings on the evidence. Throughout the trial, the judge will rule on dozens of objections by your opponent regarding hearsay, relevance, and admissibility. These snap decisions will have long-term implications for your case.

Prior to trial the judge will likely rule on several motions in limine, in which the parties will try to exclude whole segments of your case and prevent any reference to them in front of the jury. Oftentimes the basis for such motions is that the information is more prejudicial than it is probative. In other words, that dynamite piece of information that you know will blow away the jury may never be heard because it may move the jury to an irrational decision based on passion. We called that kind of evidence “zingers” in my trial attorney days. Unfortunately, judges rarely let the zingers out of the bag.

You might think that even if the jury does not hear or understand all the evidence, they certainly will be convinced by the opinions of your expert witnesses. Most jury instructions regarding expert witnesses say something like this:

You do not have to accept an expert’s opinion. As with any other witness, it is up to you to decide whether you believe the expert’s testimony and choose to use it as a basis for your decision. You may believe all, part, or none of an expert’s testimony….”

(CACI Jury Instruction No. 219.)

Of course, the other side will offer the testimony of equally impressive experts to contradict the opinions of your expert witnesses. The jury then has to decide which set of experts to believe, which can be a fifty-fifty proposition.

Conclusion

These "myths" reflect a sobering fact: after closing argument, you cede responsibility for the outcome of your case to strangers, most of who, if not all, will have no background in construction. Before giving up that control, be sure you have carefully considered how well your case will be perceived by the jury. Try to look at your case objectively, not from your perspective as a seasoned construction professional, but through the eyes of people who have no experience in the construction industry.

We have the best legal system in the world and people who serve on juries perform an extremely important civic duty; it’s just that trials are not the most effective way to resolve construction disputes.Chris Hill has mused plenty about alternative dispute resolution procedures that are better suited for the resolution of construction disputes. In mediation, for example, you retain control over the outcome. Arbitration is another alternative to trial, but you are still giving an arbitrator control over your fate. You can, however, mitigate this by customizing the dispute resolution provisions in your contracts to fashion an arbitration proceeding to your liking.

I can’t resist the urge to end this guest post musing with a quote from Greek mythology (think jurors): “It was built against the will of the immortal gods, and so it did not last long.”(Homer, The Iliad.)

DISPUTE RESOLUTION, DECISION TREES, and ALBERT EINSTEIN

Ron White — Tue, 20 Apr 2010 14:11:22 -0800

Alternative dispute resolution often means we have to take an alternative approach to the way we think about resolving disputes. Albert Einstein wisely said, “You cannot solve a problem by thinking the same way that created the problem.” We often see this when attempting to mediate construction dispute where the residual animosity of the construction project is contagious, infecting management, counsel, and even experts with such anger and recriminations that objectivity is diminished or even lost, and when that happens mistakes are made during the negotiations.

Studies have shown that parties to a civil dispute who fail to settle their cases prior to trial often make mistakes in establishing the settlement value of their cases and as a result do worse at trial than they could have done in settlement negotiations. According to a recent study, plaintiffs, more often than defendants, make valuation errors in unsuccessful negotiations, evidenced by the fact that a high percentage of them receive somewhat less at trial than they could have received in settlement. When defendants get it wrong, on the other hand, they do it in spectacular fashion, with verdicts coming in much higher than they could have settled their cases for. In short, plaintiffs are wrong more often but when defendants are wrong, they pay a very high price.

With so much at stake in properly setting the value of a case, construction lawyers should give as much care in objectively analyzing their cases as their clients give when preparing their bids or scheduling their jobs, with every detail of the lawsuit being analyzed for success or failure, from the filing of the complaint to the preparation of dispositive motions to a jury returning a verdict; and even to the possibility of an appeal. This can effectively be done through decision tree analysis.

Decision Tree Analysis

Prior to mediation, you should prepare a negotiating strategy based on the settlement value of your case. If you represent the plaintiff, you must establish the lowest settlement amount that would be acceptable to your client. If you represent the defendant, you must determine the highest amount your client is willing to pay to settle the case. Whatever side you are on, this bottom line settlement number approximates your best and final offer that you would make during mediation. In their seminal book, Getting to Yes, Fisher and Ury call this number your BATNA-the best alternative to a negotiated agreement. In other words, your client would rather go to trial than accept an amount lower than the bottom number in your settlement range if you represent the plaintiff, or if you represent the defendant, your client would prefer going to trial rather than pay more than the highest number in your settlement range. In order to establish your BATNA, you must consider the point at which the risks of trial outweigh the concessions your client must make to reach a resolution of the dispute. Decision tree analysis is a great tool to help you help your client understand the settlement value of his case.

In decision tree analysis, you establish the key events of the litigation through trial. You then estimate the probability for success of the key events and the dollar values of the potential final outcomes. A decision tree visually depicts this process in as much detail as may be desired. A more complex decision tree may include the chances of success of potentially dispositive motions, such as summary judgment, or the impact of rulings on certain key evidence. On the other hand, a basic decision tree may only depict liability and damage issues.

When evaluating liability and damages, you start with the basic question: what is the chance of prevailing on the issue of liability? If liability can be established, what is the amount that will be awarded for damages? The outcome will provide a range for settlement purposes.

Suppose you believe there is a 60% chance liability will be established and if established, the low, medium, and high ranges of damages are as follows: 50% chance the damage award will be $250,000; 30% chance it will be $500,000; and a 20% chance it will be $1,000,000. A decision tree based on these assumptions would look like this:

             Jones v. Smith →liability→yes 60% →damages → 50% $250,000
                                    ↓
                                                                                              30% $500,000
                                    no 40%
                                                                                              20% $1,000,000
                                    ↓
                                    no damages

Next you would factor in the 60% possibility of liability to determine the range of values and the average expected value:

Low Range Medium Range High Range

(.60 x .50 x 250,000)               (.60 x .30 x 500,000)               (.60 x .20 x 1M)

$75,000                                   $90,000                                  $120,000

Average damage award = $285,000 (75,000+90,000+120,000)

This decision tree would enable you to advise your client that the average value of the case is in the range of $285,000, assuming a 60% chance of establishing liability.

You will also want to advise your client of the total average cost of litigation, which would include the average damage award and the estimated attorneys fees and costs. Assuming fees and costs of $100,000 for each side, the total average cost of the litigation for the defendant would be $385,000 (average damage award + estimated attorney fees and costs); for the plaintiff, the average value of the case would be reduced to reflect the net amount the client would actually receive, $185,000 (average damage award – estimated fees and costs). Risk analysis is not complete, however, without factoring in the possibility of having to pay the other side’s attorney fees and costs that may be awarded to the prevailing party under state or federal law.

Of course, decision tree analysis is only as good as the assumptions upon which it is based. The results, however, can provide your clients with valuable information about the potential trial outcome and the cost of litigation. You can then negotiate using objective criteria that more times than not will lead to an amicable resolution of the case.

Resolve Construction Disputes More Efficiently With Customized ADR Provisions

Ron White — Wed, 14 Apr 2010 09:55:38 -0800

Pre-nuptial agreements (or “What Happens When Our Marriage Fails?” agreements) seem awfully cold-hearted. We read about them when the Tiger Woods and Paul McCartneys of the world have marital melt-downs. Most people can’t imagine building a marriage on the foundation of such a document. I quess it goes something like this:“You are my soul mate, my one and only, now sign this…” While many would be reluctant to ask their betrothed to contemplate divorce before the "I dos" are even spoken, construction professionals should not be shy about making contractual arrangements for the disputes that will likely arise during the course of construction.

Construction professionals often fall in love with an exciting project or can’t wait to be associated with a certain owner or design team, and they enter into contractual relationships without giving much thought to what happens if the project fails. Or they are so enamored with the prospect of a lucrative venture that they do not want to consider what happens if someone breaches the contract. Instead most people rely on boilerplate contractual language that may or may not be suitable for the proposed project, and hope for the best. There is a better way.

Dispute resolution provisions in contracts (or “What Happens When Claims Arise?” provisions) are the product of this cold-hearted reality: the plans and specifications, means and methods of construction and management of a project are rarely perfect. Since everyone knows this why do disputing parties spend so much time and money trying to prove in a court of law that they are right and the other guy is wrong? Why not draft dispute resolution procedures that empower parties to resolve disputes in the most balanced, cost-effective way possible? During my 25 years as a construction lawyer, I was always amazed when sophisticated parties would bemoan the cost and time drain of litigation but never changed their contracts to limit the impact of litigation on their businesses.

There is much that can be done during the contracting phase that can prepare the parties to resolve their disputes in a more cost effective manner. For example, many construction contracts include provisions that require parties to submit to mediation before a lawsuit is even filed. Other contracts require that the parties mediate their dispute as a first step and if that fails, proceed to arbitration. Since arbitration can be as expensive as a trial in civil court, some contracts include limitations on the arbitration process.

An arbitration provision that limited discovery was the subject of a recent California Court of Appeals decision (PDF) in a case where a corporate employer fired one of its in-house attorneys, and he sued for wrongful termination. The corporate employer then filed a motion to compel arbitration in accordance with the terms of the employment contract. The lawyer opposed arbitration on the grounds that the arbitration provision was unenforceable due to the discovery limitations imposed by the contract. The trial court found that the provision concerning witness depositions was flawed, declined to sever the provision, and denied the employer’s motion to compel arbitration.

The Court of Appeal reversed the trial court, stating:

We disagree with the trial court for two reasons. First, arbitration is meant to be a streamlined procedure. Limitations on discovery, including the number of depositions, is one of the ways streamlining is achieved. In Armendariz [a California Supreme Court case], the court stated that the parties are entitled to discovery sufficient to vindicate their claims. The court also acknowledged that discovery limitations are an integral and permissible part of the arbitration process. "'Adequate'" discovery does not mean "unfettered" discovery. Armendariz specifically recognized that parties may agree to something less than the full panoply of discovery permitted under the California Arbitration Act, Code of Civil Procedure section 1283.05. (Armendariz, supra, at pp. 105-106; see also Martinez v. Master Protection Corporation (2004) 118 Cal.App.4th 107, 118-119 [agreement permitting one deposition and a document request did not as a matter of law fail to afford adequate discovery]; Mercuro, supra, at p. 183 [provision permitting an arbitrator to authorize additional depositions for "good cause" was not unconscionable].)

The discovery provision reviewed by the Court of Appeal is an example of careful pre-dispute lawyering:

Each party shall have the right to take the deposition of one individual and any expert witness designated by the other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below in paragraph 4 [[e]ach party shall have the right to subpoena witnesses and documents for the arbitration'] shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of need.

I am not suggesting that this provision is ideal in the context of a construction contract, but it does illustrate the benefit of careful draftsmanship to control the dispute resolution process and provide an efficient, cost effective way to manage claims. In addition to discovery issues, and depending on the laws of your state, arbitration provisions could be drafted to cover rules of evidence, the scope of the arbitrator’s authority, trial court review and appellate rights, the definition of prevailing party and the circumstances by which attorney fees and costs are awarded, all of which could be drafted in a way that incentivizes the parties to settle disputes prior to the arbitration proceedings.

The bottom line is this: construction professionals deal with risk every day. Those who manage it best generally do the best. Carefully drafted dispute resolution provisions are an important part of preparing for the risks associated with construction projects. Therefore, you should draft them with the same degree of care that you give to every other aspect of a project, for the success and profitability of a project can not be measured until all disputes are resolved.

Analyzing Damages in Construction Claims: Beginning with the End in Mind

Ron White — Tue, 30 Mar 2010 16:19:40 -0800

The very first sentence of a recent opinion of the California Court of Appeal (PDF) frames the essence of a prime contractor’s multi-million dollar claim on a public works project known as the Hyperion Wastewater Treatment Plant:

The City of Los Angeles (City) obtained millions of dollars worth of construction work that it does not want to pay for.

And the third footnote in the opinion reads like a consumer products warning label for construction lawyers:

The pretrial proceedings and trial presented the trial court with difficult legal and logistical issues that were made even more difficult by the inability of trial counsel to adequately define the case and state the law. Given this context, the trial court‘s effort to resolve these issues was admirable.

This preamble to the Dillingham-Ray Wilson v. City of Los Angeles opinion leads THE CRITICAL PATH to state the obvious (something I have a keen eye for): construction claims are complex, judges are usually not experts in construction law matters, and lawyers may find it difficult to reduce complex concepts in ways that are meaningful to the judge or the jury. For these reasons and more, the risks and uncertainties of trial are enormous, even for the most sophisticated parties and experienced construction lawyers. as illustrated by this case.There are, however, some dispute resolution tools that can be forged from the pages of the opinion:

Proving Damages. When evaluating a construction case, you must carefully consider the question of how you will prove damages. Oftentimes an inordinate amount of time and money is spent discovering facts to support liability but the issue of damages is not fully vetted until it is time to prepare for expert depositions and trial. You have to begin your case evaluation with the end-damages-in mind. When it comes to obtaining a verdict, proof of liability without proof of damages is no proof at all.
Method of Proving Damages. There are various methods for proving damages in construction claims: the actual cost method, the jury verdict method, the total cost method, and the modified total cost method. The acceptance of these methods of proof varies from state to state and between some state and federal courts. However, the Dillingham-Ray Wilson case recognizes the viability of the modified total cost method in California." In the published portion of this opinion, we conclude that the trial court erred because section 7107 and Amelco impact the measure of damages, not the method of proving them, and also because a modified total cost theory is permissible."
Motions in Limine. When evaluating the likelihood of success, you have to anticipate motions in limine that can gut your case. In the Dillingham-Ray Wilson case, for example, the trial court granted an in limine motion and excluded from evidence $25 million of the contractor’s claim on the theory that it could not document its actual costs as required by contract. Of course, this ruling was reversed on appeal but that only means the contractor will have a second trial with no guarantee that the new jury will award any damages.

These points should be among those you consider when evaluating the likelihood of success at trial. It is not enough to say, “My chances are 50/50 or 70/30.” Your risk analysis should break down each key element and evaluate the likelihood of success for each one. Your risk analysis should include a hard look at your damages and how you will prove them up. You should consider your chances of getting all of your evidence into trial by anticipating potential motions in limine. You should be sure you know the law and each element that you must prove and fashion your discovery plan around those elements.

What does all of this have to do with dispute resolution? Everything. Mediation is at one end of the ADR spectrum and trial is at the other end. Both processes resolve disputes; litigants retain control in mediation, but they lose control at trial. The Dillingham-Ray Wilson case is a good illustration of this fact. Once the trial begins, you lose control of the evidence. The judge decides what will be admitted into evidence. Once your closing argument is over, you lose control of the outcome of the case. The jury will decide the winner and the loser. Preparing your case with the end in mind will increase your ability to establish the realistic value of your case. Litigants who do this usually find a way to resolve their dispute before trial