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Protocol for Repairs: The Heart of Construction-Defect Resolutions

Protocol for Repairs: The Heart of Construction-Defect Resolutions

Source: Daily Journal
Date: September 19, 2005

The singular issue damning construction-defect cases from prompt and efficient resolution is the confluence of multiple interests, most of which are in a head-on conflict with cost-efficient resolution.

Without discussing the separate and conflicting interests of contractors, developers, insurers and lawyers, this article recognizes that the process of litigating and resolving these disputes has been fraught with waste and inefficiency and that a sane and disciplined approach to resolution is required.

Construction-defect cases are product-liability claims. They should start and conclude based on an honest and objective analysis of the conditions that reasonably might fall below acceptable construction standards and that are producing damage or likely to produce damage.

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

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

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

When meeting with the subcontractor's insurers, the builder should be prepared to articulate a percentage of the total costs requested from each participating subcontractor.

Rather than spending enormous sums on additional consultants to split hairs on specific issue and allocation analysis, the carriers for the subcontractors should recognize this as an art, not a science. If the overall settlement number has been achieved through the process outlined above, it will represent a fair and bid-produced repair.

The developer should identify subcontractors by fitting them into percentage of settlement slots, such as 1 percent, 5 percent, 8 percent, 10 percent and 15 percent. When the developer's percentage for supervision is added, the total should be 100 percent of the settlement amount.

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

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

If not settled, mediation efforts should cease until all relevant discovery concludes and the matter is close to trial. The mediation process should no longer be a component of litigation of the claims.

Parties must understand that the benefit of the expedited claim evaluation and resolution process is to avoid litigation expenses and risk and to produce a fair method to address homeowner claims. That is the reward and the incentive to work together, cut through the competing interests, and resolve the claim based on the real issues at hand.

Reprinted with permission from the The Daily Journal Corporation. © 2005 Daily Journal Corp. All rights reserved.

Alexander S. Polsky, a principal of JAMS, provides mediation and arbitration of complex-commercial, serious-injury and employment disputes nationwide.