Tuesday, September 30, 2014

Guided Choice: A New Approach to Mediation

As you may have seen posted here at the Dispute Resolver late last week, our Division Lunch in Chicago will be discussing Guided Choice. Speaker Paul M. Lurie from Schiff Hardin LLP in Chicago and I will be discussing this approach to mediation that has attracted major users of litigation services, AGC and AAA. This post is intended to give a brief introduction to the concepts underpinning Guided Choice dispute resolution, and it will also raise some questions to consider for the presentation.

The information below has been distilled from articles and additional resources located at the Guided Choice Dispute Resolution blog, located at this link.

The Context: The Current Lay of the Land

As most of us know, construction trials in any forum – whether in an arbitration, in a bench trial, or before a jury – are becoming rarer and rarer. More than 10 years ago, the American Bar Association Section of Litigation featured a story by the then-chair of the Section Patricia Lee Refo discussing what she called “The Vanishing Trial.” As the statistics from Professor Marc Galanter cited in the article mentioned, nearly every type of civil case has seen a marked decline in the number of cases that go to trial.

What happened to these cases? There are a few possibilities. First, with the changes in law related to being successful at the summary-judgment stage, perhaps there are more factually lacking cases that are filtered out before they reach a trial. Second, judges and court systems encourage – some would say pressure – parties to explore settlement options and mediation more frequently and earlier in the process. Third, the ever-increasing costs for trying cases has pushed parties to settle cases. Finally, there often is a business reason to settle a case before trial – risks of outcome,  business distraction and use of resources, relationship preservation and business ethics.

As construction litigators, we encounter pressures from our clients to settle cases to avoid the potential downside at trial. Yet, even when we file a lawsuit in which two parties appear to hate each other more than any two business entities should, we end up settling the case anyway. At that point, we hear complaints from our clients and the other side about how much money they spent getting to what was always the most likely resolution.

This is where Guided Choice comes into the discussion.

What Is Guided Choice?

Since a settlement is almost always the most likely scenario, Guided Choice encourages a faster, earlier resolution of a dispute that also reduces expense Because it is based on standard mediation clauses the Guided Choice  procedures for resolution are incorporated into most  construction contracts without additional language.

The main purpose of Guided Choice is to have a more active, involved mediator who is working to confidentially diagnose the basis for the dispute and suggest  an effective  settlement process before any negotiations begin. Parties should not be required to negotiate until they believe they are ready. Guided Choice helps get them ready.  The mediator is brought into the process very early in the dispute, and he or she is engaged to review the existing problems and identify ways to resolve the case before discovery rumbles onward for years.

For example, the mediator begins talking in confidence to the parties and the attorneys early in the process. This helps the mediator to identify potential areas for impasse before the parties have spent thousands of dollars on mediation statements, experts, depositions, document exchanges, and the like. By identifying these problems early, the mediator can help the parties to engage in limited information exchanges. The amount of information that enables parties to make the business decision to settle is less than the amount needed for a lawyer to prepare for trial. Guided Choice helps the parties recognize the distinction.

Even if an impasse occurs, the mediator may be involved to assist the parties to craft a limited or modified  process for the parties focusing on the impasse issues where positions need to re-evaluated. This may involve the use of experts, Dispute Review Boards and binding or non-binding opinions from arbitrators or judges.. This assistance allows the parties – again, confidentially through the mediator – to design a dispute-resolution process that is appropriate for the size, importance, and complexity of the dispute.

What Are the Questions About this Approach?

As we will discuss in Chicago, this approach raises a number of questions in the minds of litigators. Since much of our presentation in Chicago will focus on these questions, I am only going to raise them here for folks to consider before the presentation.

1.         It sounds like the mediator being involved more in the process is just another layer of expense for our clients. Why would we pay a mediator in this way in addition to all of the other costs in litigating a case?

2.         With the mediator being so involved in the process and the process including deeper investigation than most mediations, it sounds like Guided Choice will delay the process of getting a case to arbitration/trial. Is this true?

3.         Look, all this touchy-feely stuff sounds great, but I know that the other side in this dispute is entirely irrational and unreasonable. Why would I waste my time and the client’s money engaging in a mediation that we know won’t work?

4.         My clients understand mediation is important. That is why we have written step-negotiation clauses into their contracts. Isn't that enough? Shouldn't those executives meet to work things out before we get a mediator involved?

5.         This does not sound like anything new to me. Isn't this the same process we have already in mediation?

6.         Why would I keep a mediator involved after an impasse is reached? That sounds like a waste of time and money and it sounds like it could cause me to have to disclosure trial strategies.

7.         Hold on a second – this sounds interesting and all, but it feels like that my clients and I are ceding control over the negotiations to the mediator. Why should I do that?

8.         Okay, you have me convinced that this is a great idea and will save my clients money, time, and effort. But, hey, I am a businessman too and this sounds like you are taking money out of my pocket. I mean, I want the best for my clients and all, but isn’t this set up going to cost my law firm and me money?

Monday, September 29, 2014

The Forum's Searchable Knowledgebase

Information, Please!

Everyone who has attended a Forum meeting knows that the Forum and its speakers produce high quality presentations and written materials. Not everyone knows that they can access all of these presentations and papers dating back to 2002 simply by accessing the Forum’s Searchable Knowledgebase.

The Knowledgebase is more targeted than a Google search and provides well over a decade of information written by experts in the field. Whether it is research on the economic loss rule, a primer on waivers of subrogation, or an explanation of an AIA or ConsensusDocs provision, it is all in the Knowledgebase and waiting for you to use it.

Take a test run by clicking here or by going to the Forum homepage and clicking on the link there. It will change the way you research tough issues in construction law!

Friday, September 26, 2014

Division 1 Activities at the Forum Meeting in Chicago

The Fall Meeting of the Forum is only a little over two weeks away now. As always, Division 1 is ready to provide our members with both a top-notch lunch presentation and a fun night out on Thursday evening.  Here's a little information about both of those events. 

Division Lunch: Guided Choice Dispute Resolution
Despite the advent of ADR, clients continue to complain about the high cost of resolving disputes -- especially since most construction disputes eventually settle before trial or arbitration. While mediation has increased in popularity, too often it is deferred until late in the adversarial process and after the parties have incurred the expense of legal and expert fees, discovery, and other pretrial activity. 

Guided Choice is intended to help the parties use mediation and other dispute resolution tools more intelligently to achieve earlier settlements at less expense and with greater client satisfaction in the outcome. A brief introduction will be posted here on the blog early next week.

Our main speaker for our lunch is Paul M. Lurie. Mr. Lurie has served as business and legal counsel for major owners, developers, design firms, and contractors for over 40 years. He has written several articles regarding mediation and arbitration generally and about Guided Choice in particular. Several introductory articles are available at a Wordpress blog called Guided Choice Dispute Resolution System.

Division 1 Social Event: Buddy Guy's Legends Blues Club

Join Division 1 for a fun night out in Chicago! We'll meet at 7:30 PM for beverages, conversation, and casual dining at Bar Louie at 47 W. Polk Street in the Printers Row neighborhood in the landmark Dearborn Station Building.

Dearborn Station

From there, we'll head around the corner to Buddy Guy's Legends at 700 South Wabash, one of Chicago's renowned blues venues, for the 9:30 PM show featuring blues diva Nellie "Tiger" Travis. Tickets for the Blues show are $10.

To RSVP, please e-mail Rob Ruesch by October 10 to ensure a seat. Tickets for the show may also be purchased at the door subject to availability. Both spots are a short walk from the Chicago Hilton. 

Don't miss out, or you will be the one singing the blues! 

Friday, September 19, 2014

California Allows Condo Association to Sue Architects for Design Defects Required by Developer

In a decision which was issued in July, the California Supreme Court in Beacon Residential Community Assn. v. Skidmore, Owings & Merrill LLP (July 3, 2014, Case No. S208173) upheld a decision by the California Court of Appeal to allow the subsequent condominium owners to sue the design professionals for their condominium for a construction defect caused specifically by a materials choice approved by the developer for the project.  How did the Court reach its decision?

Factual Background
Skidmore and HKS, Inc. served as the architects of record for The Beacon residential condominiums, a property located in San Francisco. The Beacon was designed for eventual sale as condominiums, though the entire community started as rental units for two years prior to the sale. As the opinion points out, the condo association was formed and all the covenants, conditions, and restrictions were recorded before construction on the project ever began. 

Once the condominiums were sold, residents began to complain about "solar heat gain" when the sun was on their particular side of the building. The association alleged in its complaint that Skidmore and HKS approved the use of less expansive, substandard windows that failed to meet local and state building codes. These windows led to the solar heat gain. The Association also alleged that Skidmore and HKS designed a building that lacked adequate ventilation, had excessive water infiltration, inadequate fire separation, structural cracks, and other safety problems.

Procedural Background
The trial court was not impressed with the allegations against the architects and, after the plaintiff's four attempts to plead causes of action with sufficient factual and legal support, the trial court dismissed the complaint. In so doing, the trial court agreed with the architects on two key points. First, the architects argued that they did not owe a duty of care to the Association or its members under the facts as alleged. Second, the trial court placed the onus for the problems on the fact that the architect looked to and relied on the building developer's approvals for the materials used.

The Association appealed this decision to the Court of Appeal, which reversed. The Court of Appeal held that, at the motion to dismiss/demurrer stage and as a matter of law, the architects have a duty of care toward the Association even without privity. The Architects appealed.

The Supreme Court Decision
The California Supreme Court affirmed the Court of Appeal opinion. While citing to a number of products-liability and contractor-negligence cases, the Supreme Court relied heavily on the same case on which the Court of Appeal relied -- Biakanja v. Irving, 49 Cal. 2d 647 (1958). Biakanja was a notary case relating to the witnessing of a will and whether that notary had any duties to third parties in the performance of that duty. The California Supreme Court held that the answer to that question was "yes" and set forth a number of factors to determine whether a professional has a duty to third parties.

That holding in Biakanja served as the main underpinning for this case. The Supreme Court applied the factors from Biakanja as follows:
  1. The architects' work was intended to benefit homeowners living in the building that the architect designed;
  2. It was foreseeable that the homeowners would be part of a limited class of persons harmed by a negligent design;
  3. The Association's members have been damaged because their homes are unsafe and, at times, uninhabitable;
  4. Because Skidmore and HKS were the sole architects, there is a close connection between their conduct and the injury suffered;
  5. Because the architects played a unique and "well-compensated role" on the project (having been paid over $5 million for their work) and because the architects knew that future homeowners would rely on their specialized expertise, "significant moral blame attaches" to the architects' conduct; and, 
  6. Preventing future harm to homeowners reliant on architects' specialized skills is a sufficient policy to recognize a duty of care.
This decision rests in large part on the fact that this case was at the pleading stage and not at summary judgment. However, it provides a roadmap to those seeking to impose a duty of care on an architect for a subsequent purchaser of a property. 

The California Supreme Court refused to allow the architects to avoid potential liability on the basis that the developer of the property had been advised fully regarding decisions to be made during design. Put another way, the court is saying that the architect of record on a project cannot avoid responsibility for design defects by pointing to owner choices. The architect always must design the project properly.  

Tuesday, September 16, 2014

Texas Supreme Court Reinforces that Subcontractors May be Liable to Property Owners

by Kat Statman and Eddy De Los Santos

On August 22, 2014, the Texas Supreme Court ruled that both the trial court and the court of appeals improperly dismissed a property owner's claim for negligence against a subcontractor for improper plumbing installation in Chapman Custom Homes, Inc. v. Dallas Plumbing Company. The Court reiterated that a subcontractor has an implied duty to perform with both care and skill and that breach of this duty may result in liability to property owners. The Court's ruling in this case makes it clear that a subcontractor may be directly liable to a property owner even when the property owner and subcontractor do not have a contractual relationship.
In Chapman, Chapman Custom Homes was hired as a general contractor to build a home in Frisco, Texas. Chapman hired Dallas Plumbing Company to install the plumbing in the new house. The plumbing was allegedly installed improperly, and leaks from the plumbing significantly damaged the structure. The property owner sued Dallas Plumbing alleging breach of contract, breach of warranty, and negligence.
The trial court granted summary judgment for Dallas Plumbing because the property owner did not have a contract with Dallas Plumbing. Additionally, the trial court found the property owner did not allege a violation of a duty owed to it by Dallas Plumbing, independent of the contract.
Looking to a case from 1947, the Texas Supreme Court reversed the decision of the court of appeals. The Court found that, even though Dallas Plumbing and the property owner did not have a contractual relationship, Dallas Plumbing still had a duty to perform the contract with both care and skill. Therefore, the property owner's suit alleging that Dallas Plumbing had performed work negligently was sufficient to raise an implied duty by Dallas Plumbing to perform its work with care and skill.
The Court further rejected Dallas Plumbing's argument that the property owner was barred from recovery under the economic loss rule. The economic loss rule states that a party may not recover damages for failure to perform under a contract when the only damages are losing what the party expected to receive under the terms of the contract. The Court specifically noted that, when the tort duty is independent of the contract itself, the economic loss rule will not preclude recovery. In this case, the Court found that Dallas Plumbing had an independent duty to perform with care and skill. Because this duty was independent of the contract between Dallas Plumbing and Chapman Custom Homes, the economic loss rule did not preclude recovery.
There are a number of cases that state a subcontractor cannot be sued by a property owner for defective work because the property owner does not have a contract with the subcontractor, only with the general contractor. This case makes it clear that, while a property owner may not have a contract suit against a subcontractor with whom they do not have a contract, they may have a negligence claim. Importantly, this potential liability is independent of any contract with the subcontractor.

This case also reinforces an independent legal duty that subcontractors have to property owners when they are conducting work. At all times, they must perform the work with both care and skill. Failing to perform a contract with both care and skill may result in liability to the property owner in addition to potential contract liability to the general contractor.

Finally, because this duty and potential liability is independent of the contract between the subcontractor and general contractor, a subcontractor will not be able to escape liability under the economic loss rule. If a subcontractor breaches its duty to perform with care and skill, it will be liable for all damages caused by the breach. 

For your reference, the opinion is linked here.

A Contractor’s Remedies Under the Miller Act May Not Be Conditioned on State-Licensing Requirements.

In a matter of first impression, the United States Court of Appeals for the Ninth Circuit ruled that even though a contractor violated a state law requiring it to have a contractor’s license, the contractor was still eligible to make a claim under the Miller Act on a federal construction project. This decision brings the Ninth Circuit into a general agreement with other federal appellate courts that state law cannot abridge or condition a contractor’s rights and remedies under the Miller Act.

Plaintiff Technica was a subcontractor on a federal project in California. Technica provided almost $900,000 worth of labor and materials, but received less than $300,000 in payments. As a result, Technica filed suit under the Miller Act against the general contractor and its payment-bond surety.

Section 7031(a) of California’s Business and Professions Code precludes a contractor from maintaining an action to collect compensation for its services unless the contractor was licensed during the performance of the contract. Technica did not hold a California contractor’s license. The district court granted summary judgment in favor of the general contractor and the surety, holding that the state-licensing statute barred Technica from pursuing claims for nonpayment under the Miller Act.

In considering the appeal, the Ninth Circuit examined the Miller Act’s strong policy in favor of protecting subcontractors on public projects. Sovereign immunity prevents liens from being placed on public land, so Miller Act bonds are used to provide contractors an alternative means of securing payment on federal construction projects. Moreover, the Miller Act is considered highly remedial in nature and is liberally construed to protect entities that labor and/or provide material to public projects. The remedy provided by the Miller Act was federal in nature and the law that would prevent the unlicensed contractor from recovering was a state law. In addition, the court felt that enforcement of state-licensing requirements against Miller Act claims would “wreak havoc” on the uniform application of federal law, particularly in federal projects spanning multiple states.

The Ninth Circuit focused on the distinction between federal and state law as well as federal preemption in reversing the decision of the district court. It found that the state law could not abridge an entity’s right to pursue a Miller Act claim. The court conceded that while state contract law was sometimes used in evaluating a Miller Act claim, state contract law was not used to affect the rights established by the Miller Act.

This decision was one of first impression. It likely has broad applicability beyond the Ninth Circuit, as many states have contractor-licensing requirements.

Monday, September 15, 2014


The 4th Circuit Court of Appeals recently addressed whether the Davis Bacon Act, 40 U.S.C.A. §§ 3141 et seq., bestows a private right of action. In Quezada, et al. v. Clark Construction Group, LLC, et al., a Maryland federal district court granted a defendant contractor's motion to dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), finding the Davis Bacon Act does not give rise to a private right of action. The 4th Circuit affirmed, citing cases from various other jurisdictions, including the 2nd and 5th Circuits, which have concluded that neither the language, history nor structure of the Act support the implication of a private right of action. It remains to be seen whether this issue will make its way to the U.S. Supreme Court. However, the reasoning of the various Courts of Appeal appears sound.