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

The Critical Path recently reported on a study showing lawyer overconfidence as a barrier to the efficient resolution of disputes. This post will focus on a different study and a recent case that illustrate another barrier to conflict resolution: parties who view disputes as warfare and litigation as a battlefield.

Researchers have found that men in war simulations often overestimated their chances of winning, making them more likely to attack and behave aggressively, resulting in unnecessary losses that could have been prevented with a more balanced approach. In a recent "unpublished " opinion of the California Court of Appeal, a case in which the defendants engaged in "scorched earth tactics," according to the court,  overly aggressive conduct resulted in unnecessary losses for the defense. Click here to read the case. (Note: California Rules of Court prohibit courts and parties from citing or relying on opinions not certified for publication, except as specified by rule 8.1115.) 

The plaintiff in the case was a flight attendant on a corporate jet. She was fired and sued her former employer, two corporate officers, and the pilot. At one point in the litigation, the case could have settled for between $200,000 and $400,000. One of the defendants told his lawyers that he was not interested in settling the case, but rather in destroying the former employee and her lawyer at whatever the cost. As a result, his lawyers engaged in an aggressive litigation strategy described by the court as follows:

The ensuing pace and vitriol of this litigation is suggested by the circumstance that no less than five summary judgment motions were filed, two of them by Medvig. Unsurprisingly, the discovery process was reduced to warfare that was as intense as it was costly.

Costly indeed. With bills of $150,000 to $200,000 per month, the inevitable happened. First, the case did settle, with the defendants paying the former employee not $200,000 or even $400,000, but rather $675,000. And a second dispute erupted between defendants and their lawyers over legal fees, so the law firm withdrew from the case and sued for more than $1,000,000, having only been paid $200,000 for the work of its lawyers. An arbitrator awarded the law firm $938,457 for the unpaid fees, $327,000 for attorney fees incurred to collect the fees, costs of $152,105, plus 10% interest.

The law firm then filed a petition with the trial court to confirm the arbitration award against the defendants. Ultimately, the trial court entered judgment for $1,551,215. The defendants appealed, lost, and the court of appeal awarded costs of appeal to the law firm for an unspecified amount. 

Moral of the Story

To paraphrase a 1970's catchphrase, "Stuff happens." So do disputes. They happen in life, and in business. How we respond to them is our choice. Is there an alternative to the "destroy the opposition at whatever cost" approach to litigation? Of course there is. One of my favorite Japanese proverbs describes an approach that is both economical and wise: "Even a piece of paper has two sides". 

You can spend a lot of money hammering the opposition with discovery to beat them into submission or use it as a precise instrument to figure out what's on the other side of your own story. This will enable you to evaluate the case, analyze the risk of going to trial, and engage in meaningful settlement negotiations. In addition to a factual inquiry, you may want to consider the emotional elements that may be driving the litigation. For example:

• What are the conditions and circumstances of the other side?
• What is the financial condition of the other side?
• What business or personal pressures is the other side facing?
• What would my interests be if I were on the other side?

When we try to see things from the other side's perspective, we can more clearly focus on the strengths and weaknesses of our side of the story. Anger is replaced by wisdom. Fewer mistakes are made. Economical resolutions are reached. On the other hand, when the focus is on destroying an opponent, our judgment becomes slanted; we look at the dispute solely through the narrow lens of our own experiences filtered by our own prejudices.

In the case cited above, decisions based on anger and retribution thwarted a $400,000 settlement and left the defendants with a bitter 1.8 million dollar pill to swallow. I hope their experience is good medicine for us all.

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 In the past week, the California Court of Appeal  published two opinions involving recurring construction law  issues. A brief summary of the cases and a link to the opinions are provided below.

1.Oral Construction Contracts and Attorney Fees Under the Prompt Payment Statute

This Second District case arises from a dispute between a contractor and homeowners on an extensive home remodel project. Click here to read the opinion. The court addresses two important issues:

• The conditions under which an oral contract will be enforced despite the statutory protections that require a written contract for home improvement work.
• Enforcement of an attorney fee award despite the ambiguity in the attorney fee provision of the prompt payment statute.

2. Stop Notices and Reputed Lenders

• The Fourth District published an important decision regarding stop notices. Click here to read the opinion. Stop notices, like mechanics' liens, provide a form of protection to contractors to ensure payment. Properly implemented and served, a stop notice can force a construction lender to hold funds for the benefit of an unpaid subcontractor.
• The issue before the Court was the validity of a stop notice when the institution served with the requisite 20-day preliminary notice was not the actual construction lender. Instead, the subcontractor served the 20-day notice on the institution reflected in the “Preliminary Information” sheet provided by the owner. Unpaid at the end of the project, the subcontractor sued the construction lender for disbursing money owed to the subcontractor in violation of the stop notice. The construction lender defended on the grounds it was not served with the 20-day preliminary notice as required by the statute. The trial court agreed and  granted the construction lender's motion for summary judgment. The Court of Appeal reversed the trial court's order, holding there was a triable issue of fact on the question of whether the institution served, the "reputed lender," was properly served with a 20- day preliminary notice under California Civil Code section 3097. The case was remanded to the trial court for further proceedings.

Although the two cases are from different Districts of the Court of Appeal and involve different legal issues and facts, a single thread runs through both cases: courts will try to find results that are just and equitable. In the Second District case, the position taken by the homeowner on the oral contract would have resulted in a tremendous windfall for the owner and a massive loss for the contractor. Likewise, the subcontractor in the Fourth District case did the work and was deserving of payment. I have often thought that litigants and advocates who take cases to trial should first view the facts of their case through the lens of the potential jury or trial judge and that, to the extent possible, positions should be staked out on grounds that seem fair and reasonable. In the days and weeks of a trial, jurors and judges will never know the facts of a case as well as the parties and their lawyers do. But they can detect unfairness in a matter of minutes.

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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:

1. 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.
2. 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.
3. 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.

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