Construction Mediation Presents Unique Challenges and Opportunities

William J. Cea | Daily Business Review | November 17, 2016

Construction mediation presents unique challenges and opportunities that can determine the outcome. Here is some practical guidance based on our experience.

Proper preparation and participation in mediations requires an understanding of the pyramid of parties, how the timing affects potential settlement options and whether experts will participate. Depending upon the number of issues presented, it also may be necessary to segregate the parties into submediations by trade or discipline. To facilitate a settlement, it is critical for the parties to recognize the legal and practical obstacles that a mediator will have to address. In the realm of construction cases, preparation by all parties is the key to success.

Unlike a typical lawsuit, a construction mediation routinely involves a large number of parties and participants. For example, in a construction defects case, there is usually one or more property owners on one side and a developer or general contractor on the other. The property owner may choose to bring direct claims against any surety, design professionals, subcontractors and suppliers, or the primary defendant or defendants may assert third-party claims.

Either way, the cast of characters can lead to what feels like a three-ring circus at mediation. The resulting pyramid of parties also means that the causes of action and theories of relief could include direct warranty or building code claims as well as claims for negligence and indemnification. Looking beyond the parties, there is the issue of whether any of the parties have defense and/or indemnity insurance coverage. If so, insurance adjusters for those parties with coverage will play a critical role at the mediation.

It also is worth noting that the parties, particularly the plaintiff, must fully explore insurance coverage and verify that adequate information is provided to the insurer well in advance of the mediation. The failure to do so will likely result in an adjuster coming to mediation without ample information and/or authority to settle the claim. Unlike individual parties or even corporations, insurance companies make decisions as to the value of a claim and settlement authority in advance.

A party, whether the plaintiff or the insured defendant, should not expect that an adjuster will come to mediation with the ability to evaluate a claim and have carte blanche authority to negotiate. Even if the mediator is armed with all of the plaintiff’s facts and arguments in support of its demand, if the insurer was not provided that information well in advance of the mediation, then the mediator may have little success in procuring an acceptable offer.

Scheduling

As to the timing of the mediation, several key questions should be asked before parties schedule the mediation. For example, has there been sufficient discovery and inspections of the property? Have repairs already been made? Are the defendant contractors still in business? The answers to these questions will impact whether the case is truly ripe for mediation and what the options for resolution may be.

For example, if repairs have not yet been made, there may be an opportunity for the mediator to bring the parties and their experts together in an effort to see if they can agree upon the extent of repairs and, if so, the scope and method of the repairs.

Considering that Florida provides for a mediation privilege, it is a fantastic opportunity to bring experts together to meaningfully discuss the issues. Alternatively, if they cannot agree because they dispute the conditions in the field, the parties could agree upon a test and inspection protocol as part of the mediation process and resume negotiations after the process has been completed.

On the other hand, if repairs have already been made or if the case is a pay dispute or lien foreclosure, there may not be as many options. In that case, the negotiations may focus on the reasonableness of the amounts incurred or value of work performed and whether there are any covered claims.

Generally speaking, liability insurance covers property damage or consequential loss and not the direct repair costs. While there are exceptional circumstances, the mediator will need to navigate through the pyramid of parties and determine who has coverage for what. Further, depending on the number of parties, the mechanics of such a negotiation can be complicated.

Thus, whether serving as a mediator or participating as a party, construction cases present unique issues. Identification of the role of the parties in the project, status of the project and insurance coverage issues all have a significant impact on the chances of success.

In order to aid the mediator and give the parties the greatest chance of success, it is imperative to adequately prepare and make sure opposing parties have sufficient information and time for their experts and insurance carriers to prepare. Failure to pay attention to all of the issues may lead to a premature impasse and frustration for the parties who have oftentimes waited for months for the mediation.

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