Ditching Defect Drama: Keeping Construction Claims Objective

presented by:

Mitchell H. Frumkin, PE, RS, CGP

President

Kipcon Inc.

800.828.4118

MFrumkin@Kipcon.com

Ditching Defect Drama : Keeping Construction Claims

Objective

Mitchell H. Frumkin, PE, RS, CGP

Past President CAI National CAI National Research Foundation NJ Chapter CAI

Chair Joint CAI/NAHB Task Force during… Development of the Best Practices Report on “Transition”

Instructor, CAI M-370 advanced level course, “Managing Developing Communities” Chair CAI National Reserve Professionals Committee during…

Development of “National Reserve Study Standards of the Community Associations Institute” Development of “Reserve Specialist (R.S.) Designation

Author: Reserve Funds: How and Why Community Associations Invest Assets (CAI) Certified Neutral : American Arbitration Association Kipcon.com mfrumkin@kipcon.com

© Community Associations Institute

What Will I Be Talking About ?

• What is a Construction Defect ?

• Types of Claims

• The importance of cost estimates and how to use them

• How to make sure the claim is presented objectively

• Alternatives to litigation

© Community Associations Institute

What is a Construction Defect ?

© Community Associations Institute

“ a deficiency in the design or construction of a building or structure resulting from a failure to design or construct in a reasonable workmanlike manner, and /or in accordance with a buyers reasonable expectation. “

Ref : International Risk Management Institute

There are Two Types of Defects

© Community Associations Institute

• Patent defects are defects detectable through reasonable inspection.

• Latent defects are defects that are not detectable through reasonable inspection and are manifested over a period of time.

What are the Typical Causes For Construction Defects ?

• Problematic Materials

• Not following the plans

• Poor Contract Agreements with Subcontractors

• Poor supervision

The Most Prevalent Defects

Water Infiltration !

Roofing

Water Infiltration !

Facades

Water Infiltration !

Concealed Membrane Systems

Drainage

Pavement

Soundproofing

Mechanical Systems

Indoor Pools

Lack of Adequate Detailing

© Community Associations Institute

As Built Construction Does Not Match Design Drawings

© Community Associations Institute

Unclear Detailing of Critical Areas

© Community Associations Institute

Poor Workmanship

© Community Associations Institute

As Built Construction Does Not Match Design Drawings and Code

Violation

© Community Associations Institute

Improperly Installed Flashing

© Community Associations Institute

Improperly Installed Materials

© Community Associations Institute

Improper Design

© Community Associations Institute

What are the Standards

© Community Associations Institute

• Construction • Not in conformance with the

design documents • Architectural and

Engineering Plans • Specifications • Governing documents

• Not in conformance with good workmanship

What are the Standards

© Community Associations Institute

Building codes IBC, IRC, etc.

Performance Standards Regulations Governing New Home Warranties and Builders Registration

Manufacturers literature

Causes: Problematic Materials

Causes: Not Following Plans

Causes: Poor Contract Agreements With

Subcontractors

Causes: Poor Supervision

Typical Solutions

• Correction of problems

• Money to have work completed correctly

Documentation of Defects Should Include

• List of all deficiencies and the applicable standard with specific references.

• Design drawing and detail

• Code and section

• Manufacturers detail

• Performance standard and section

• Location of deficiency

• A format which will easily allow an item by item response

• Agree and will correct

• Do not agree and reason

• Could not find

• Equivalency

Evaluate all claims for Strength

• Strong

• Deviation from code

• Deviation from design if not equivalent

• Safety

• Weak

• Deviation if equivalent

• Minor drainage even if it exceeds standard (what is the damage ?)

Cost Estimates

• Do not prepare a cost estimate until after response to the report is received

• Avoid setting unrealistic expectations

If you must litigate be prepared

• Cost estimates

• Expert reports

• Invasive testing

• Photographs

• Presentations

• Etc. etc.

Cutting edge strategies

• ADR, Mediation/Arbitration

• Third party reviews of reports

Cutting edge strategies

• Think about what is going on with a business view and DO NOT make it personal !

Final Thoughts

• You do not want to litigate

• Be Objective

• Review claims in a business like manner

© Community Associations Institute

Please e-mail any follow-up questions or

for a copy of this presentation to:

Mitch Frumkin mfrumkin@kipcon.com

Ditching Defect Drama : Keeping Construction Claims

Objective

Alternatives to

Litigation TIMOTHY J. DEHAUT, ESQ., LEEP AP

Construction Defects:

How to Evaluate if Your Claims Are Objective

39

Timothy J. DeHaut, Esq.,

LEED AP

Construction and Real Estate Attorney –

focused practice on construction, land

use, development, community

associations, and sustainability.

Represent owners, developers,

associations, design professionals,

contractors, and subcontractors.

International construction dispute

resolution experience – few thousand to

hundreds of millions.

40

Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often the real looser – in fees, expenses, and waste of time. As a peacemaker, the lawyer has superior opportunity of being a good man. There will still be business enough.

Abraham Lincoln

41

Alternative Dispute

Resolution (ADR)

Alternative Dispute Resolution (“ADR”) is the process of resolving disputes outside of the litigation and court process.

ADR includes, inter alia:

Negotiation

Early Neutral Evaluation

Mediation

Conciliation & Med-Rec

Arbitration

BATNA & Decision Analysis Tools

42

Negotiation

Parties attempt to negotiate the claim or dispute

between themselves, unassisted by a third party

neutral.

Possible contract clause: “As a condition

precedent to any other dispute resolution

procedures, within fifteen (15) days after a

dispute arises between the Parties, the Parties’

representatives with authority to settle the

dispute shall meet to attempt to settle the

claim.”

43

Early Neutral Evaluation

Expert evaluation of the strength and

weaknesses of the technical and legal

case.

No binding effect.

Confidential.

Best and worst case alternatives to

facilitate a negotiated agreement.

44

Mediation

Mediation is defined as a non-binding

negotiation carried out with the

assistance of a neutral third party who

helps bring about agreement.

Agreement to mediation; selection of

the mediator; pre-mediation

conference; submissions/exchange;

mediation.

45

Benefits of Mediation

When un-assisted negotiations fail, bringing in an

expert facilitator often yields a settlement.

Quick and cost effective.

Allows for creative solutions, including non-legal

solutions.

Non-binding. Retaining control over the outcome.

Confidential.

Forum for emotional venting.

If mediation fails, the dispute may proceed to

arbitration or litigation. Very little is lost from an

attempt to mediate beyond a relatively small

amount of time and money and regardless, the

preparations for mediation often save valuable

time when preparing to arbitrate or litigate.

46

Conciliation & Med-Rec

Conciliation - a process whereby parties attempt to settle their dispute with the assistances of a facilitative third-party neutral; if the parties fail to resolve their disputes after such facilitated negotiation, the parties submit the dispute for evaluation by the conciliator for a “recommendation.” Under most conciliation rules, the recommendation is binding on the parties, unless rejected by either party within a specified time-period. If the recommendation is rejected by either party, no binding contract is formed and the parties can resort to arbitration or litigation.

Med-Rec – similar to conciliation except it is the parties’ decision as to whether the recommendation has the potential to bind the parties. Often in Med-Rec, parties choose that the recommendation only serve to help the parties evaluate the case themselves. In these cases the recommendation has no contractual status and only serves as a reality check for the parties.

47

Arbitration

“Court without the wigs.”

Benefits of Arbitration over Litigation:

Cheaper.*

Faster.*

Reduced discovery.

More knowledgeable decision-maker. Choose experts in the construction field.

*in theory

48

Evaluating Your Claims

Information, information, information – gather

what really happened from the people that

know. Abandoning the institutional knowledge.

Documentation of the claims.

Evaluating your Best Alternative to a Negotiated

Settlement (“BATNA”) – private and public.

Legal, Expert, and Time Costs.

Evaluating risk – liquidity, “Two in the hand,” etc.

49

Decision Tree Analysis

Lawyers and mediators can use a

decision tree as a framework to provide

reality checks on the clients with

proposed hypothetical scenarios.

Provides a framework for straightforward

communication regarding the realities of

paths taken.

50

51

Questions & Comments

Feel free to email or call with any questions:

tdehaut@ghclaw.com

Direct Dial: (732) 219-5488

52

By: Damon M. Kress, Esq.

Copyright 2015 McGovern Legal Services, LLC

Most board members and developers understand that nothing is perfect.

Most board members and developers have reasonable expectations about the transition process. ◦ Result: The overwhelming majority of transitions are resolved

without a lawsuit ever being filed.

Copyright 2015 McGovern Legal Services, LLC

It happens for many reasons:

◦ A completely unresponsive developer.

Very rare, but it can be a real problem.

◦ An issue that is “too big to settle.”

◦ A looming statute of limitations or repose.

A growing concern.

Limitations may be “tolled” in certain instances.

Repose cannot be “tolled.”

Copyright 2015 McGovern Legal Services, LLC

Litigation is more common when working with certain materials.

EIFS, Stucco, and MSV.

Difficulty performing well anywhere other than the driest of environments.

Can create problems that are “too big to settle.”

Often cause the types of damages that are currently covered by insurance.

Defects in certain systems are more likely to result in litigation.

Life-safe systems and assemblies.

Quality of life systems.

Copyright 2015 McGovern Legal Services, LLC

Litigation takes a significant amount of time.

Litigation costs a significant amount of money.

You need to be reasonably certain the case is “worth it”

before you decide to file your complaint.

Otherwise, “only the lawyers will make money.”

Copyright 2015 McGovern Legal Services, LLC

Approach transition like every other business decision.

◦ The first step is to perform your basic “due diligence.”

Obtain your initial “transition reports.”

Engineering assessment of the physical property.

Engineer’s initial “cost to cure.”

Engineer’s evaluation of the POS Reserve Schedule.

Accountant’s “Benefits Derived Analysis.”

Copyright 2015 McGovern Legal Services, LLC

Determine which issues the association will pursue through litigation.

Determine what additional investigation will be necessary to develop each issue.

Determine whether the association will perform the additional investigation before or after filing the complaint.

Determine who to sue.

◦ Who is the developer?

A large national homebuilder?

Reasonably good records for the project.

Reasonably good records regarding the sub-contractor’s insurance carriers.

A “one off, fly by night” developer?

May have very little “paperwork.”

It is amazing how much is still done on only a “handshake.”

Determine how the Association will most likely get paid.

◦ There needs to be a “pot of gold” at the end of the rainbow. Otherwise the association’s litigation will quickly devolve into an “intellectual exercise.”

Assess the availability of insurance coverage for each claim.

Assess the developer’s ability to contribute toward settlement because it may turn out to be the only source of money.

The more money coming from insurance carriers generally translates into a higher probability of negotiated settlement.

Evaluate opportunities for recovering your attorney fees and litigation expenses (i.e. expert fees) through your litigation.

◦ We operate under the “American Rule.”

Each side pays its own attorney fees and litigation expenses unless an

exception applies.

◦ The most common exception is a contract.

Developers almost always include this provision in their contract with their sub-contractors.

Associations never enjoy this luxury.

Without a contract you will need to fall under one of the other exceptions (i.e. a statute or a Court Rule).

◦ Can be difficult to come by.

◦ However, if one is found they can provide significant leverage during settlement negotiations.

Challenge your counsel to come up with options!

Keep an open mind.

◦ The overwhelming majority of litigations are resolved through negotiated settlement.

◦ If handled correctly litigation is just another aspect of the negotiation process.

Negotiation should not stop for a lawsuit.

• Webinars

• Transition

• Wednesday March 18th (Register)

• Causes and Solutions of Water Infiltration in Your Building

• Wednesday April 15 (Register)

• Third Wednesday of Every Month

• Seminars

• Condominium and HOA Insurance Issues

• March 25th 5 PM

• Metuchen Country Club

• In House at your office. You give us the topic and we will be happy to bring lunch

Upcoming Events