COST EFFECTIVE CONSTRUCTION DEFECT LITIGATION

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1 COST EFFECTIVE CONSTRUCTION DEFECT LITIGATION Alexander S. Polsky, Esq. Mediator/Arbitrator/Discovery Referee, JAMS Professor of Law, University of Southern California The linchpin of this article is the use of a special master (SM) to ensure implementation of a process for delivery of accurate information to permit early evaluation and resolution of construction defect cases. The SM is not a discovery referee. If the case does not settle using this protocol, the court might appoint a discovery referee. To avoid conflicts the discovery referee and the SM should generally not be the same person. THE PARTIES STIPULATE & THE COURT ORDERS The SM s jurisdiction is through the Case Management Order (CMO), which is filed and served on all parties. It is preferred that the parties agree to the CMO and it is adopted as an Order of the Court. In this manner the CMO is not forced upon any party. (CCP section 638 & 639) A DISCOVERY STAY IS CRITICAL The CMO should provide for a discovery stay pending completion of the settlement conference process, and a well-designed information exchange process that insures integrity of the information. A model CMO is available for download by contacting the author.

2 The process should last for about 8 months under a discovery stay and mediation privilege. The privilege encourages communication, candor and compromise. If the case does not resolve via the below outlined process, the stay will be lifted, significant costs incurred, and admissible discovery will be obtained. Of course, the results of the invasive testing performed by a party will be admissible (to avoid economic waste). ORGANIZATIONAL MEETING The goal is to discuss the case and identify pleading and discovery issues, discuss insurance issues and set a preliminary time-line. An organizational meeting (OM) should be set within 30 days following the order appointing the SM. The meeting should include all counsel. The goals: Select the executive committee if appropriate; Specify a date for final service on all defendants/cross defendants; Identify investigation protocol; Set scope and timetable and cost allocation for inspection and destructive testing; Set date for joint caucus with all parties; Obtain agreement for distribution of defect; Agree on document depository; Agree on CMO. If on was already adopted, ensure that all parties have an opportunity to comment upon it and raise any objections. 2

3 THE EXECUTIVE COMMITTEE A large case may require an executive committee to serve as coordinator and liaison with the SM. Any party may request a meeting with the EC. The SM may call a meeting with the EC at any time. If the stay is lifted, the executive committee works with the discovery referee to prepare and implement a discovery schedule. PLEADINGS and PARTIES A date must be set by which all parties are in the action, and Doe amendments are cut off absent good cause. After the CMO is served on a party, a notice of appearance should result in the presumption of a general denial, and the assertion of all available affirmative defenses. No other document need be filed. All parties are deemed to have filed cross complaints for Implied Equitable Indemnity and/or comparative fault. Express indemnity cross complaints should be specifically filed, served and answered. DOCUMENT DEPOSITORY (DD) ORDER IN PLACE OF CHAOS The depository should have conference rooms for conferences and depositions. This ensures documents are accessible throughout the investigation, settlement conference and possible litigation process. The CMO should order that all relevant and non-privileged documents in the possession or control of any party, pertaining in any manner to the property, be deposited.

4 Parties without documents file a certification attesting to reasonable search. Newly discovered documents are deposited within 10 days of discovery. New parties deposit within 20 days of their appearance. The idea is to limit the parties, later on, to the documents produced. To avoid duplication, the deposit is not mediation privileged. PLAINTIFF S INITIAL DESTRUCTIVE TESTING As soon as practical to ensure maximum attendance by developer and subcontractor experts, plaintiff should commence destructive testing. Written notice should provide the testing sites and activities. Parties may request specific areas of testing. However, if they do, those parties share in the costs. It is practical to perform joint testing but, in reality, plaintiff s testing is usually complete when the case is filed. DEFECT LIST PRODUCTION Construction defect cases are economically managed through an open information policy. To properly assess damage claims, and determine insurance coverage available, claims must be identified with specificity. Plaintiff should serve on all parties, within 60 days of the destructive testing, a list of the claimed defects. If the testing occurred pre-filing, then the CMO should set out the disclosure timetable. The list includes: description of each type of defect; location; 4

5 current owner of each unit; contentions re manifestation date; contentions re cause; repair cost estimate; date and cost of any repairs already made or expenses incurred. The list may be supplemented upon a showing of good cause. INSURANCE It is essential that all available coverage be identified early, and all potential insurers be placed on notice. Any coverage disputes should be identified early. The CMO should order all parties to provide a statement of insurance (or answer attached insurance interrogatories) describing insurance policies, and certificates of insurance, which MAY provide coverage. The statement lists the insurer, policy number and type, limits, named insureds. Meeting of insurers: The SM should be made aware of issues between the insurer group, especially for the developer, that might impact the orderly progress and resolution of the case. If there are issues concerning coverage, additional insured endorsements, or inter insurer disputes, the

6 SM should schedule a meeting of the insurers or coverage counsel. If the issues cannot be addressed or tabled for other proceedings, the settlement conference process could derail. CASE PRESENTATION Within 30 days following the initial damage matrix, plaintiff provides a presentation of the case. This is the show and tell. Insurance representatives should be present if possible. Experts should attend. Peripheral party settlement conferences may follow this overview. INVASIVE TESTING SCHEDULE A testing schedule affords interested parties an opportunity to engage in destructive testing.. Within 30 days following plaintiff s defect list counsel for each party desiring destructive testing should provide notice to plaintiff and developer s counsel advising of the nature and scope of testing desired. Site inspections and destructive testing should be completed within 75 days following finality of the matrix. STATEMENT OF DEMAND/PRELIMINARY MEDIATION It is time to narrow issues and begin the settlement conference process. 45 days following defensive invasive testing, plaintiff, GC and the SM should meet and set a range for settlement. There will be posturing but that s for the SM to sort out. Plaintiff 6

7 should identify peripheral subcontractor that can be settled directly, and an issue release provided to the GC. This takes isolated issues out of the case. The 45 days provide time for the GC s experts to ascertain their cost of repair. These competing costs of repair set the parameters for settlement of the case. Within 10 days following this meeting or, if no meeting, then 45 days from the defensive invasive testing, counsel for the GC should send written settlement demands to each cross defendant. The demand shall set forth the basis for the amount requested. Within 60 days following the defense invasive testing, a preliminary mediation will occur between the GC and the subcontractors. All counsel, insurers and/or client representatives/counsel with settlement authority should attend. This will provide an opportunity to settle out peripheral parties and discuss pertinent insurance coverage issues. GENERAL MEDIATION Discovery and testing is complete, the experts have met if needed, and a pre-mediation has occurred. It is time to resolve the case. The key to this process is order and communication.

8 To minimize posturing I recommend the subcontractors be scheduled in at intervals. The goal is for each to commit to a specified contribution to a global settlement (excluding additional insured issues, infra). To ensure candor, the specific amount will be confidential to the SM. Thereafter, the SM will meet with the GC. GC will be provided with the total subcontractor contribution. GC will then add to that total its share of a settlement. This total will be communicated to the plaintiffs. Where settlement is not achieved, specific sessions with experts and claims professionals/counsel for key parties may be set to address issues impacting valuation. ATTENDANCE AT MEDIATION TOO MANY CASES TOO FEW ADJUSTERS I use a coordinating adjuster. This permits all of the other adjusters on the risk to designate one to appear for all. The others will be available by phone. Settlement conferences should run pursuant to a schedule, with the actual conference commencing at 10:00 a.m. and concluding at 6:00 p.m. This permits morning meetings for those who need it, and traffic avoidance for everyone else. The cattle call should be avoided and a minimum of two weeks notice given for all proceedings. CONCLUSION A skilled mediator is the thread that holds the tapestry of the construction defection case together. With his/her assistance, the case should proceed from selection to conclusion 8

9 within 300 days. Following the SMs guidelines, the cost of litigation should be reduced considerably, and trial risks eliminated entirely. ALEXANDER S. POLSKY Biographical Data Mr. Polsky is a principal and founder of JAMS and provides mediation, arbitration, discovery referee services as well as training programs and seminars throughout the United States. He is also a Professor of Law at the University of Southern California where he teaches a course on ADR - Negotiation, Mediation and Arbitrations. Alex has participated in the resolution of thousands disputes and enjoys a settlement rate of over 95%. His practice emphasizes complex commercial litigation, serious injury, construction defect, errors & omissions, insurance coverage/bad faith, environmental and labor/employment matters. Alex is a Judge Pro Tempore of the Superior Court, a Fellow of the International Academy of Mediators and has been a visiting lecturer at Pepperdine University - Strauss Institute for Dispute Resolution. He can be reached directly via apolsky@jamsadr.com.