The Critical Path: Tools for Resolving Construction Disputes : California Construction Lawyer & Attorney for Dispute Resolution in Los Angeles, San Diego & the S.F. Bay Area

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.)

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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.

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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.

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