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 high school English teacher, Mrs. Clegg, did her best to instill in me a love for Shakespeare. She taught me to look for metaphors and similes in the great bard’s work, and to apply them to my life. Take Juliet’s famous line:”That which we call a rose by any other name would smell so sweet” (Shakespeare’s Romeo and Juliet). I took that to mean that names or titles mean less than the actual substance of a person’s character. Sadly, I never did learn to love Shakespeare, but I have come to recognize Shakespearean moments when, for example, two factions look at the same thing and draw completely different conclusions. Such will be the reaction of owners and contractors when they read Greg Opinski Construction v. City of Oakdale, a California Court of Appeal decision that was published two weeks ago.

For real property owners, the opinion, which is favorable to their interests, may have them thinking that written notice provisions by any other name would smell so sweet. On the other hand, for contractors and subcontractors, the opinion may be reminiscent of an alternative explanation of Shakespeare’s famous line which suggests it was an inside joke about the unsanitary bathroom conditions of the Rose Theatre, a local competitor of the bard’s Globe Theatre. Thus a “Rose” by any other name would smell so sweet.

The owner in the Opinski case rejected the contractor’s claims for time extensions because they were not presented in writing as required by the contract. Past appellate court decisions have given contractors a little wiggle room on oral modifications to the contract. Basically, if there was no prejudice to the owner, the written notice provisions were not strictly enforced. However, the court in Opinski held that contractors must strictly comply with written notice provisions. The contractor’s failure to do so resulted in a waiver of the claims.

LESSONS LEARNED

Contractors claiming additional time and money must strictly comply with written notice provisions. The written notice should strictly comply with the contract requirements in terms of formatting, form of delivery, and service on the owner's designated representative. The Opinski case should dispel the notion that the old “I know they knew” argument will hold up in court.

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Benjamin Franklin's " Poor Richard's Almanack" had it right: "An ounce of prevention is worth a pound of cure."  This was true for farmers in 1739 and it is true for lawyers and their clients in 2011. Not that Ben held farmers and lawyers in equal esteem,as you may notice when reading the following Franklin favorite: "A country man between two lawyers is like a fish between two cats."

Given our adversary system of jurisprudence in America, I would acknowledge that conflicts between lawyers can get downright messy. When a dispute arises, the parties have to figure out what to do about their rights and obligations under the terms of the contract, and if they cannot resolve the issues, they hire lawyers (and sometimes mediators) to help them resolve the dispute, and if they are unable to do so, a trial court judge may be called upon to decide who is right, once and for all, unless there is an appeal, then appellate justices may be asked to sort it all out. Such was the case in Kirk Crawford, et. al. v. Weather Shield Mfg.(2008) 44 Cal. 4th 541, a breach of the duty to defend case between a contractor and a subcontractor. Ben Franklin might have summarized the dispute like this:

A duty to defend provision between two lawyers is like a fish between two cats. 

The question presented in the Crawford case was whether, under the terms of the subcontract, the subcontractor was obliged to defend the general contractor/developer for construction defects allegedly caused by the subcontractor even though (1) the jury ultimately found the subcontractor was not negligent, and (2) the parties accepted an interpretation of the subcontract that gave the builder no right of indemnity unless the subcontractor was negligent.This was a huge issue in the building industry and here's where the two cats fighting over a fish comes into the picture. Actually, as you will see, the two cats attracted a bunch of other cats because this particular fish was so big.

The general contractor  was represented by an excellent  law firm and its position on appeal was supported by three other law firms who, in representing the interests of general contractors, filed amicus curiae or friend of the court  briefs. Such briefs are filed by people who want to weigh in on a case that could later affect their interests.  The subcontractor was also well represented by a fine law firm, and with  five amicus curiae briefs filed by other law firms representing the interests of various subcontractor groups. 

 The California Supreme Court summarized the defense and indemnity provisions of the subcontract as follows:

We focus on the particular language of the subcontract. Its relevant terms imposed two distinct obligations on Weather Shield. First, Weather Shield agreed "to indemnify and save [JMP] harmless against all claims for damages to persons or to property and claims for loss, damage and/or theft ... growing out of the execution of [Weather Shield's] work." Second, Weather Shield made a separate and specific promise "at [its] own expense to defend any suit or action brought against [JMP] founded upon the claim of such damage ... loss, ... or theft." (Italics added.)

When the home owners filed suit against the contractor for a variety of construction defects and the contractor filed a cross complaint against its subcontractors, Weather Shield took the position that it was not responsible for the window leaks, and refused to defend or indemnify the contractor. This kind of decision is made every day by subcontractors. But this is where the "ounce of prevention" comes into play. Instead of scrambling around to decide what rights and duties are owed at the commencement of litigation, it would be much better if some time (and even attorneys fees) were invested in the contract phase to have a clear understanding of the terms and conditions of the contract. If you want the job badly enough, maybe it will not bother you that you may be taking on the contractor's defense obligations, even if you are not negligent. The point is to make an informed risk analysis at the beginning of the project to avoid suprises later.

The contractor JMP and the other subcontractors, except Weather Shield and the framing subcontractor, settled with the home owners before trial for an amount in excess of a million dollars.That left the contractor to press its cross complaint against Weather Shield, the window manufacturer and supplier, and the framer who installed them. The jury found that the framer was liable for a million dollars in damages, and that Weather Shield was not responsible.

Since Weather Shield was not negligent it had no indemnity obligations, but the contractor JDM claimed Weather Shield had a duty to defend the contractor against the window claims from the commencement of the litigation. In essence, the contractor said to Weather Shield, you refused to defend us in violation of the subcontract, and we want to be reimbursed $131,000 for the cost of defending your portion of the window issue and we want another $46,000 for attorneys fees we spent trying to force you to pay us our defense costs. The Court held  Weather Shield had an immediate duty to assume the contractor's defense as soon as the case was tendered to it. The Court said:

By virtue of these statutory provisions, the case law has long confirmed that, unless the parties' agreement expressly provides otherwise, a contractual indemnitor has the obligation, upon proper tender by the indemnitee, to accept and assume the indemnitee's active defense against claims encompassed by the indemnity provision. Where the indemnitor has breached this obligation, an indemnitee who was thereby forced, against its wishes, to defend itself is entitled to reimbursement of the costs of doing so.

 

Here, the subcontract at issue not only failed to limit or exclude Weather Shield's duty "to defend" JMP, as otherwise provided by subdivision 4 of section 2778, it confirmed this duty. In language similar to that of the statute, the subcontract explicitly obligated Weather Shield both to indemnify JMP against certain claims, and "at [its] own expense to defend" JMP against "any suit or action ... founded upon" such claims. (Italics added.) The duty "to defend" expressly set forth in Weather Shield's subcontract thus clearly contemplated a duty that arose when such a claim was made, ⁸ and was not dependent on whether the very litigation to be defended later established Weather Shield's obligation to pay indemnity. 

LESSONS LEARNED

Most contracts will have at least two provisions in anticipation of third party claims. There will be an indemnity provision which covers losses caused by the subcontractor's negligence. There may also be a duty to defend provision which may or may not be triggered as soon as the third party claim is made, depending on the contract language. Both provisions deserve an "ounce of prevention" in the contracting phase of a project. These indemnity and defense provisions can be complicated, and they can vary in terms of what is required and when it is required. Don't assume what you see in your subcontracts is just "standard stuff". Words in a contract have meaning, and they may mean something you did not anticipate at the beginning of the project. In this case, the "pound of cure" for Weather Shield included the cost of paying for its own defense, the cost of reimbursing the general contractor for its defense of the window issue, and the cost of paying the attorneys fees incurred by the contractor to prosecute the duty to defend claim.

FINAL NOTE

California Civil Code 2782(c) provides that construction contracts for residential construction entered into after January 1, 2006, that include provisions that require subcontractors to indemnify builders and their agents against liability for claims for construction defects are unenforceable to the extent the claims arise out of the negligence of the builder or its agents.

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Settlement agreements are contracts.They are subject to the rules governing the formation and enforcement of contracts. Each settlement agreement should be drafted to respond to the particular law, facts, and risks of the case. This is not be a simple "cut and paste" job.

If a settlement agreement is breached, a lawsuit can be filed to enforce the terms of the settlement. While there are reasons not to have an attorney fee provision in some commercial contracts, settlement agreements should have attorney fee provisions, in my view. An attorney fee provision is a deterrent to any party who may want to rescind a settlement agreement, as the losing party would have to pay the other side's attorney fees.This increases the risk of trying to undo a settlement and helps the parties maintain what they bargained for: the resolution of a dispute.

A recent California Court of Appeals case addresses attorney fees and choice of law provisions in settlement agreements. (Click here to read the case.) In the Aronson v. Advanced Cell Technology, the settlement agreement memorialized  the settlement of a lawsuit that had been filed in Massachusetts and included a provision that stated it would be enforced according to Massachusetts law.  The attorney fee provision provided that the Plaintiffs in the Massachusetts action would be entitled to attorney fees in connection with the enforcement of the settlement agreement. The agreement did not provide for any reciprocal recovery for the defendant in the event of a dispute.

The Massachusetts law conflicts with California Civil Code section 1717 which provides attorney fees to the prevailing party, plaintiff or defendant, even though the contract may specify that only one of them is entitled to attorney fees.The Massachusetts law, on the other  hand, does not provide reciprocity to the left out party so that only the named party would be entitled to attorney fees in the event an enforcement action were taken.

In Aronson, the plaintiffs in the Massachusetts action filed suit in California to enforce the settlement agreement. The lawsuit was later dismissed without prejudice, and the defendant moved for an award of attorney fees in the sum of $645,000. The defendant claimed it was the prevailing party because the case was dismissed. The trial court denied the motion on the basis of Civil Code section 1717(b)(2) which says there is no prevailing party when there is a voluntary dismissal. The defendant argued that this exception under California law does not apply because the settlement agreement was to be governed by Massachusetts law. However, under Massachusetts law, the defendant was not entitled to attorney fees because the settlement agreement only specified the plaintiff as the party entitled to attorney fees. To that point, defendant argued that Civil Code section 1717 actually applied to that aspect of the case so that the attorney fee provision was reciprocal. In essence, the defendant wanted California law to apply to one aspect of the settlement agreement and Massachusetts law to apply to another aspect of the settlement agreement. The Court of Appeal affirmed the trial court's order denying the motion for attorney fees and ordered the defendant/appellant to pay the plaintiffs/respondents' cost of appeal.

Lessons Learned

• While the opinion is not earth shaking, it does illustrate, once again, that the drafting of settlement agreements should not be a simple "cut and paste" job.
• Caution must be used when agreeing to a choice of law provision. Each state has its own laws which could result in unanticipated consequences.
• Before agreeing to a choice of law provision outside of your jurisdiction you should attempt to learn how the other state's laws could affect critical terms in your settlement agreement.

Other Points of Interest

The scope of the release is also an important consideration. From the defense perspective, the release should be broad as possible to include any and all causes of actions and claims. The plaintiff, of course, will want the release to be drafted as narrowly as possible so that only those rights that are at issue in the litigation are released. In construction defect cases, the owner will only want to release patent or obvious defects and reserve rights with respect to unknown claims or conditions. Similarly, the owner will not want the release to include any warranties that would otherwise be available under the terms of the construction contract or purchase agreement..  

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If you win your lawsuit, you can make the loser pay your attorney's fees, right?  In California (and in most states) the answer to that questions depends on whether there is a statute or a contract provision that provides something like, "The prevailing party is entitled to an award of attorney's fees." "Good," you think to yourself, "My contract has such a provision, so if I win my lawsuit I can make the other side pay my attorney's fees." Not so fast, pal. It is usually not that simple. The question of who pays can be "a riddle wrapped in a mystery inside an enigma," to borrow a phrase from Winston Churchill. 

When it comes to "who pays," the California Appellate Courts often use the phrase "good news bad news" when addressing prevailing party law under Civil Code section 1717. As in, the good news is you won the case, the bad news is the loser does not have to pay your attorney's fees. Section 1717(a) provides:

In any action on a contract, where the contract specifically provides that attorney's fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing  on the contract...shall be entitled to reasonable attorney's fees in addition to other costs. 

But what does it mean to be the "prevailing party"? In cases where there is a "simple unqualified win, " as noted by the California Supreme Court in the Hsu case (1995), getting an award of attorney's fees is not that difficult. But what if there are mixed results? You win on some but not all of your causes of action. You defeat most but not all of the plaintiff's claims. Who is the prevailing party then? Unless you are absolutely certain of a simple unqualified win, you must be aware of the potential consequences of a trial with mixed results. 

This week the Court of Appeals published another "good news bad news" case (click here to read the case), pointing out that under Section 1717(b)  the rules for awarding fees are not rigid, there is no precise formula, and trial courts have discretion  to weigh the claims and defenses against the actual outcome to see if either party really prevailed over the other at trial. The case,  De La Cuesta v. Benham, involved a landlord/tenant dispute over unpaid rent. The tenant defended on the grounds the property was uninhabitable due to water leaks and sewer problems. The result was the landlord was awarded only 70% of his claimed damages and therefore, the trial court ruled that he was not the prevailing party and was not entitled to an award of attorney's fees. The Court of Appeals reversed the decision and ordered the case be remanded to the trial court for a hearing on the reasonableness of the attorney's fee request. 

The De La Cuesta case is not ground breaking law but it should have an eye-opening effect on lawyers and their clients. The court's factual summaries of several published  Section 1717 cases  help to unwrap the riddle of the mysterious, enigmatic prevailing party law. Trial court's do have discretion; attorney fees are not automatic, even if your victory means you did somewhat better than the other side. The  Nasser case, for example, was a "mixed result" case where a tenant got what he wanted-staying in the premises-but he also got hit with a rent increase. The trial court ruled there was no prevailing party in the case, and the Court of Appeals affirmed. In the Kytasty case, a given "right" was validated, but its scope was curtailed. The trial court's ruling that there was no prevailing party was affirmed by the Court of Appeals. In the Hilltop case, a movie promoter was required to pay monetary damages but won on the alter ego theory. Same result as the others: the "result was a draw," neither side prevailed, no attorney's fees. Several other cases are mentioned in the opinion to illustrate the nuances of the so-called good news bad news cases.

LESSONS and APPLICATIONS

• The likelihood of absorbing your own attorney's fees or having to pay the other side's attorney's fees is a factor  that must be considered in your litigation risk analysis, and should be reflected in your expectations about the  reasonable settlement value of the case.
• It is better to consider the potential ramifications of a good news bad news case than react to the realities of one. 
• Clients should be informed of all the risks of trial, including the possibility that winning the case does not necessarily mean prevailing for purposes of attorney's fees awards. 

POST SCRIPT: In a recent mediation of mine, an attorney for one of the parties wanted to terminate our discussions about the attorney's fees and costs, and advised his client that it was not necessary to make any concessions with respect to the costs of litigation. He believed his client would be deemed the prevailing party even if the damage award was only $1. This post is dedicated to all lawyers who may have this belief. May your Pyrrhic victories be few and far between.

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It is an interesting paradox that construction professionals who devote their lives to building unique structures according to customized plans generally use "cookie cutter" form contracts to govern the duties and obligations of the parties. When a construction dispute arises, most construction professionals and their lawyers will spend many hours scrutinizing the contract documents to analyze their rights. Since so much time is spent evaluating the contract after the dispute, shouldn't there be at least an equal amount of time and thought put into it before the project begins? Instead of standard cookie cutter provisions, doesn't it make sense to think about the risks of the project and clearly define what will happen in the event of a dispute?  I have been preaching this sermon for many years, and recently posted an article on the subject called, Resolve Construction Disputes More Efficiently With Customized ADR Provisions.

A new case in California  (PDF) illustrates the benefit of customized contract provisions related to dispute resolution. The case involved the proposed development of a parcel of property and a contingent lease for a drug store build-out for Rite Aid. Here is the smart part of what happened: the lease agreement did not have the standard "prevailing party" language in the event of a dispute. Instead the lease stated that the prevailing party is entitled to "reasonable expenses," and then listed what the parties meant by that term: attorney fees, court costs, witness and expert fees.

The developer won the case and asked the court to award reasonable expenses including attorney fees and expert witness fees. Rite Aid challenged the developers request for $83,000 for expert witness fees in a motion to tax costs. The trial court denied the motion and Rite Aid appealed the judgment in favor of the developer, including the award of expert witness fees.

The California Court of Appeal affirmed the award of expert witness fees, holding that the the lease expressly called for them as an item of cost. The Court gave deference to the fact that this was a customized provision negotiated by sophisticated parties:

This does not mean-and we do not hold-that expert witness fees are recoverable in every case where "costs" are merely mentioned in a contract. A general cost provision should be interpreted according to the established statutory definition. But where sophisticated parties knowingly and intentionally negotiate a broader standard into their contract-and particularly where, as here, that standard specifically includes "witness and expert fees"-the intent of the parties should be upheld by the court. (Emphasis added.)

In most states, there are other ways to obtain an award of expert witness fees. I wrote about them in a post entitled, Settlement Negotiations: Don't Get Smacked By The Statutory Stick. But statutory awards of expert fees are discretionary awards made by the trial court after certain facts are established to the satisfaction of the judge. This Rite Aid case, on the other hand, provides a blue print for construction professionals who want to clearly define what will happen to the losing party in the event of a dispute rather than hoping for the favorable discretion of the trial court.

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The 800 pound gorilla in every room of contractors or architects contemplating a design-build project is this: how do you pursue a design-build contract that may require some form of joint enterprise with other professionals and protect  your proprietary information at the same time?  Patrick Miller of Baker & Daniels  answers this and other related questions in an outstanding post about  drafting "teaming agreement," which includes the following nine points

1. Choose the Right Business Relationship. The team must figure out – before pursuing a contract with the owner – how it is going to come together. There are three basic options: limited liability companies, joint ventures, and subcontracts. As a general rule, if the plan is to pursue work in a given geographical area (like the State of Illinois), then an LLC is probably best. If it is to pursue a single project, then a joint venture or subcontract will work.

2. Understand the Owner's Contracts. Design-build calls for two parties to sign one agreement. AIA's version of Integrated Project Delivery calls for three parties to sign one agreement. Still another integrated delivery method – CM-At Risk – requires at least three parties to sign at least two agreements. In order to choose the best contractual relationship, the owner will need to consider the sector (public bidding laws may make all three options impossible), the market (a Chicago high rise office building may not be suitable for design-build), and the talent pool (if there are not any qualified design-builders in the immediate area, then once again, design-build may not be best). The teaming agreement should anticipate the proper contractual framework and assign responsibilities accordingly.
3. Put it in Writing. The biggest mistake your company can make in participating on an integrated team is to do it on a handshake. There is too much at stake, and you cannot leave basic terms undefined and important information unprotected (see items 4 through 9, below).
4. Make it Exclusive. If your company is putting forth the time and effort to pursue a project with other firms, it probably doesn't want to find out – after losing the contract – that two of its core team participants are on the winning team. Eliminate this risk by adding an exclusivity provision to your teaming agreement.
5. Make it Confidential. Participating on an integrated team will undoubtedly involve exchanging proprietary design and pricing information. If your company hands this over without restricting its use in a written agreement, then it is likely gone for good. Eliminate this risk by clearly establishing the confidentiality of such information and the penalties for disclosing it to outsiders, especially other teams.
6. Call Your Insurance Broker. With integration comes: 1) an evolving standard of care for the design community; and 2) potential design responsibility for the contractor. Does being part of the team void the architect's errors and omissions coverage? Is the owner unprotected if he or she doesn't have a contract with the architect? The answers are no, so long as the agreements and insurance are updated to accommodate the integrated project delivery model. Contact your insurance broker to confirm that your new arrangement has the proper coverage, and update your teaming agreement accordingly.
7. Check Your Licensing Laws. All states have laws defining what it means to practice "architecture" and "engineering." They also impose harsh penalties for offering to perform these services without a license. And some courts will void contracts where a party offers to perform these services without a license. Check these statutes, contact your State's licensing officials, and include language in your teaming agreement requiring the licensed professionals to be responsible for offering these services.
8. Identify the Team in the Agreement. The agreement should identify each team member and state the member's role: a) in pursuing the contract; and b) after the contract is won. Each identified member must sign the agreement.
9. Spell out the Scope, Time, and Cost. Pursuing design-build and other integrated projects is much more time consuming and expensive than simply negotiating a design contract or bidding on a set of construction drawings. The teaming agreement should contemplate these concerns by explaining the team's objective, how long it will take to meet the objective, and how costs in getting there are to be allocated. It should also deal with distributing stipend proceeds if the owner is offering a stipend.

There has been much written about the legal ramifications and risks associated with design-build contracts. Patrick's practical advice on the benefits of a teaming agreement and his nine points to consider before signing one add valuable insights to the discussion. Teaming agreements should  include provisions to give you the peace of mind to aggressively pursue the work while protecting your proprietary interests, trade secrets, and other competitive advantages.

Carefully drafted agreements are at the core of risk avoidance strategies. Many construction disputes are the result of ambiguous contract provisions or incomplete and unclear  plans and specifications. Ideally,  the design-build project delivery method minimizes conflicts between owners and contractors  by pairing the construction and design professionals on the same team and making them responsible for the design and construction of the project. Teaming agreements, on the other hand, can minimize the disputes that could otherwise arise between the architect and contractor if the terms of the joint enterprise are left unclear. Go team!

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