In this 2 part blog post I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted living facility or hotel they share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.  Considerations 1 to 3 are here.

The fourth consideration is the type of recovery available.  Generally the cost of repairing the defective condition is the damage that can be recovered.  In the event that such repair would be economically wasteful courts may consider diminution of value to be a valid damage.  In addition, depending on the type of property there may also be lost rents, lost profits claims for the time that the property was not able to be used for its intended purpose or for partial loss of use.  Attorney’s fees are often not recoverable in defect claims in most jurisdictions. The exception to the “American Rule” is where the fees are awarded to the prevailing party through contract or statute or what is called a “proposal for settlement” or “Offer of Judgment.”  The question of recovery is maybe the most important one for owners because no one wants to spend money on experts and lawyers where the damages do not warrant such claims.

The fifth consideration is the defenses available.  I have never handled a defect claim where there was no claimed defense by one of the parties identified above.  The typical defenses are that the owner failed to maintain the condition, that the damages were not mitigated, lack of notice of the condition, failure to comply with a statutory notice procedure, the repair is a betterment, the repaired items consist of first costs that the owner would have incurred anyways.  The determination as to the validity of a given defect claim or defense rests with the trier of fact, whether that be a judge, jury or arbitrator.  The applicability of a defense is based upon the specific facts of each case.

The sixth consideration is the cost in moving forward with such claims and the prospects of recovery. Given the complicated nature of these cases they often settle.  Driving settlement is the cost of moving forward in the litigation as well as likelihood of recovery from the named defendants or their sureties or insurance carriers. Not evaluating these items at each step of a case is a trap for the unwary client or counsel.

I have represented numerous owners, condominium associations, contractors and developers in these types of cases and I can guarantee that none of them wanted to be in this type of litigation.  However, sometimes construction projects go wrong and everyone bears some of that eventual cost.

In this 2 part blog post I wanted to touch on some basics of the typical “multifamily” construction defect case. Whether the project is a condominium, apartment, assisted living facility or hotel they share many of the same issues.  There are six primary considerations in bringing these claims but each of those has many subparts which depend on specific facts of the project.

The first consideration is who is the true owner and is that entity able to recover for the defective construction.  Is there a condominium association or building owner? Maybe it is the hotel or facility operator that is the aggrieved party or is the developer of the building?  Knowing who has the rights to make the defect claims is a critical first step.

The second consideration is to determine against whom any claims may be asserted.  Is there a claim against the developer of real property who designed, built and sold the units or buildings in questions? Or maybe there are claims against the general contractor and subcontractors who coordinated and performed the work?  What about the design professionals who designed the building improvements?  The reality is that all of these entities could be responsible for defects in the improvements.  How much each of them is responsible for is dependent upon the warranties, contracts and legal theories at play where the property is located as well as any contracts that may exist between the parties.

The third consideration is what types of claims available depend greatly on the jurisdiction you are in.  There may be contractual express warranties which would arise out of the contracts negotiated between parties. There are implied warranties pursuant to the common law that may be at play.  In some jurisdictions and depending on the type of property, Florida condominiums for example, statutory implied warranties may exist that protect the owner.  Most states still allow claims for negligence in the construction or design of the structures.  An important note is that not every claim can be made against every party. Careful consideration is needed as to what parties should be asserted against whom.

Part 2 next week.

 

As I pointed out in my last post, things are slowly improving for the Florida construction industry, but the operative word, on so many levels, is “slowly.” The obvious implication of the slow-paced recovery is that there still is not enough work for contractors to reach their comfort zone yet. But a less obvious implication is that the money behind the projects is still more tentative than the recent boom years. Although projects are starting, the money behind them remains tight, meaning any little thing can cause a payment dispute that could turn the already small margins into losses at the blink of an eye. Change order disputes, delays and job interferences, quality of work issues and more can turn a tightly run job into litigation and loss. The contractors who will be best positioned to handle this will be those who have perfected their lien and bond claims. The comfort of claiming a secured position, combined with the possible entitlement to recover your attorney’s fees should you be forced to litigate, will put you in a better position to stand your ground when dealing with a payment conflict. 

                                            

The key will be to fully perfect your claim. Follow all your contract requirements for claim perfection and notice to your client. Some contracts require claims to be submitted within a few weeks for evaluation and determination by an architect or initial decision-maker. Most contracts set deadlines by which your client must be advised in writing of the existence of a claim. Some contracts even contain onerous requirements for the contents and format of your claim. Not only should you familiarize yourself with your contractual claim requirements, but since you’re likely starting new jobs now, this is a great time to review your contract and change the claim requirements to be more favorable for you.

 

Make sure you’re fully perfecting lien and bond claims by sending notices to owner and contractor, respectively, and timely recording liens and serving notices of non-payment. Familiarize yourself with the other requirements of the Construction Lien Law and bond statutes that may impact you, remembering that strict compliance is often required.

 

On the other side of the equation, if you’re an owner or general contractor, you need to be aware that your contractor or subcontractors should be perfecting their claims and you should therefore be proactive in assessing them and determining the manner in which they should be handled. You’re better off dealing with them early in the job, even if you decide to merely address them conceptually and save final resolution until the end of the job. The sooner you address them, the easier it is to maintain the proper chain of releases and the cleaner you can keep the payment requests and similar paperwork, so the claim can either be quickly resolved or more neatly packaged for resolution at the project’s end. The longer it takes to review and assess the claim, the messier and more uncertain the paperwork becomes, making it much harder to resolve when the time comes.

 

No matter which side of the fence you’re on, until job flow improves to the point where the pocketbooks open a little more, money issues on construction projects will continue to be closely scrutinized. Be aware, proactive, and prompt in your handling of these claims and the process of resolution will be cleaner, more efficient and less costly for everyone.

You are about to embark on a new construction project, hoping for the best but preparing for the worst. The construction contract is almost done. At issue is what the contract should state about how disputes among the parties should be resolved; should they be arbitrated, mediated, or litigated? (If nothing is stated the default is generally litigation.) Each of these methods of dispute resolution has its own unique characteristics.

Arbitration: Arbitrations are typically not matters of public record. A contract calling for arbitration may provide that the arbitration proceedings are to be kept confidential. Although the American Arbitration Association has rules governing arbitration in construction disputes, the normal rules of evidence typically do not apply. There is no judge or jury. Rather, and depending upon the case or the parties’ agreement, one to three arbitrators will decide the dispute. The arbitrator(s) will typically have experience in the construction field, unlike perhaps a judge or jury.

Some view arbitration as less expensive and providing for a relatively faster resolution of a dispute; not always so. Discovery is not typically allowed in an arbitration proceeding [if allowed it is typically limited], so any arbitration testimony might take longer than might otherwise be if pre-arbitration discovery were taken.

There is also a more limited right to challenge an arbitration proceeding. For example, in Florida the right to modify an arbitration award can exist where (a) there is an evident miscalculation of figures or an evident mistake in the description of any person, thing or property referred to in the arbitration award, (b) the arbitrator(s) rendered an award upon a matter that was not submitted to them, or(c) the award is imperfect as a matter of law, not affecting the merits of the controversy. Fla, Stat. § 682.14.

Mediation: Mediation can also be a cost effective means to resolve a construction dispute. Some construction contracts provide that the parties shall consider mediation, whereas other contracts make mediation a condition precedent to filing a lawsuit. The mediator is usually someone who is well versed in construction. The actual mediation process may take a day or so, depending upon the complexity of the issues. Mediation is generally not binding unless the parties reach a settlement.  At times, a party may, however, believe it needs certain information in order to effectively mediate a matter. Pre-suit mediations may not allow for a full opportunity to present one’s case. Also, a party may be concerned about tipping its hand; wanting to lock in the other side to a position before exploring settlement through mediation.  On the other hand, mediation may enlighten everyone as to the basis for the parties’ positions in an expedited inexpensive manner without the need for tedious time consuming discovery.

Litigation: Finally, there is litigation. Under this approach the parties can have a judge or jury decide the case. The court is bound to follow the substantive law that applies to the case. Rules of evidence apply. Those who testify are, of course, required to tell the truth. Discovery is allowed. The parties proceed through the structured judicial process, taking depositions, serving interrogatories and requests for production upon each other, conducting site inspections, retaining experts, and otherwise going through the formal court proceedings. The right to appeal, on a broader basis than in arbitration, exists as well. Litigation can be expensive too, but you will have “your day in court.” (In Florida, courts may also require the litigants to participate in arbitration or litigation as part of the pretrial process. Chapter 44, Florida Statutes)

Conclusion: There is not per se a “one size fits all” approach to the best method of dispute resolution. Instead, consideration should be given to what works best in your particular case.

As often happens on construction projects, disputes arise between the contracting parties. One party may claim they have not been paid. The other party may claim the work has not been done or was improperly done. What happens when the parties are unable to amicably resolve their differences and their contract has an arbitration clause? Must the parties arbitrate their dispute or can their dispute be decided in a court of law?

Florida courts generally find arbitration provisions enforceable. Public policy considerations favor arbitration. When practical, all doubts regarding the scope of an arbitration clause should be resolved in favor of arbitration. In determining whether there should be arbitration in a particular case, courts generally consider three matters: (1) whether a valid written agreement to arbitrate exists; (2) whether an arbitrable issue exists; and (3) whether the right to arbitration was waived.

Whether a valid agreement to arbitrate exists will typically be determined by the terms of the parties’ contract. In this respect, the parties should ensure the contract makes clear that arbitration shall be the legal mechanism to resolve their disputes.

Whether an arbitrable issue exists will also typically be determined by the language in the contract; including what matters are defined to be subject to arbitration. For example, is the arbitration agreement limited to claims arising out of alleged breaches of the contract? Are tort-type claims within the scope of the arbitration agreement? The parties should be mindful of fully indentifying the scope of issues they wish to have arbitrated.

Whether the right to arbitration was waived is generally examined in the totality of the circumstances, and whether a party has acted inconsistently with its right to arbitrate. Filing an answer in a lawsuit without seeking arbitration, or active participation in a lawsuit, may be viewed as inconsistent with and act as a waiver of the right to arbitrate.

In sum, a carefully worded arbitration provision will go a long way toward defining what types of disputes will and will not be subject to arbitration. The party seeking arbitration also needs to be mindful that it does not take any actions that are inconsistent with their arbitration rights.