The rapid growth of construction arbitration over the last 20 years is a testament to its advantages over traditional litigation: speed, cost and flexibility. But as parties submit larger and more sophisticated disputes, they are looking for ways to ensure the process can still provide those advantages. The good news is that arbitrators and counsel can agree on procedures to structure the presentation of evidence that both suit complex construction cases and enhance efficiency. At a recent roundtable discussion, JAMS neutrals and construction heavyweights discussed using the following techniques to reduce the time and cost to resolve construction disputes:
Written Witness Statements
Submitting direct testimony through written witness statements—a practice common in international arbitration—can dramatically reduce both the time and cost of construction arbitration. It eliminates the need for depositions, since the parties know what testimony the other parties will introduce, and allows them to prepare better, targeted cross-examination. It also significantly cuts down the length of the hearing, as time is only spent on cross-examination and re-direct. Arbitrators also welcome it because it provides the opportunity for a better understanding and appreciation of the parties’ positions in advance of the hearing.
Expert Reports
Submitting expert reports to the arbitrators in advance as their direct testimony, and then allowing them to then make a short (30-to-90 minute) visual presentation (PowerPoint or other format) at the hearing can improve the efficiency and efficacy of expert testimony.
Joint Expert Meeting Without Lawyers
At the request of a party, or on their own initiative, the arbitrator can order the parties’ respective experts to meet outside the presence of lawyers to explore where they agree and disagree, and then produce a report listing the agreed-upon and disputed issues. This allows the parties and the arbitrators to understand what area(s) and points of disagreement between the experts exist and to limit the examination to those points, significantly cutting down preparation and hearing time.
“Hot Tubbing” of Experts
Either as an alternative to the experts meeting outside the presence of counsel and issuing a joint report, or in addition to them, the parties can agree, or the arbitrator(s) can order, that the parties’ respective experts on any given topic appear together for questioning by the tribunal. This technique, which is also more common in international arbitration (and often referred to as “hot tubbing”) can uncover why the experts disagree, thus helping the arbitrator focus his or her questioning and reducing hearing time. This process can be particularly helpful for technical issues.
Arbitration of construction disputes must continue to meet the parties’ needs. If counsel and arbitrators continue to ensure that the process is fast, cost-effective and flexible, it will.
The California Court of Appeal recently reversed a trial court’s dismissal of a lawsuit, concluding that because there was a dispute over when a homeowner’s claim “occurred” for purposes of an insurance policy, that dispute must be resolved by a jury.
Case Background
Guastello v. AIG Specialty Insurance Co.1 involved a dispute over whether a claim was covered by an insurance policy. The events in question began in 2003 and 2004, when a subcontractor built retaining walls in a housing development. Several years later, the plaintiff purchased a home in the development. Fast forward to 2010, when one of the retaining walls close to the plaintiff’s lot failed and caused significant damage to the plaintiff’s backyard perimeter wall, among other things.
The plaintiff obtained a default judgment of over $700,000 against the subcontractor. The plaintiff then filed a lawsuit against the subcontractor’s insurer, seeking payment on the judgment. The insurer filed a motion for summary judgment, seeking dismissal on the ground that the subcontractor only had a policy with the insurer in 2003 and 2004, but the property damage occurred in 2010.
In response to the motion, the plaintiff filed a declaration in which a geotechnical engineer stated that the retaining wall failed due to the subcontractor’s negligent construction. Significantly, the engineer stated that the damage to the retaining wall and surrounding area began within months of the construction’s completion, including through “continuous and progressive destabilization” of the area. The insurer, on the other hand, submitted evidence that no damage occurred until the retaining wall failed in 2010.
Ultimately, the trial court sided with the insurer, and the plaintiff subsequently filed an appeal.
Occurrence vs. Claims-Made
The appeals court noted that the subcontractor had an occurrence policy, which “provides coverage for damages that occur during the policy period, even if the claim is made after the policy has expired,” as opposed to a “claims-made” policy—which “provides coverage only if the claim is made during the policy period.” Accordingly, the key question was whether the damage that the plaintiff suffered occurred during the 2003-2004 policy period.
In answering that question, the appeals court relied on the “settled rule” that “when continuous or progressively deteriorating damage or injury first manifests itself, the insurer remains obligated to indemnify the insured for the entirety of the ensuing damage or injury.”
Ultimately, the court concluded that—based on the expert declaration—there was evidence from which a jury could find that the damage began occurring shortly after the retaining wall’s completion in 2003. Therefore, the Court of Appeal held that the trial court erred in dismissing the plaintiff’s claim on summary judgment, and the case was sent back to the trial court so a jury could resolve the disputed issue of when the damage began to occur.
Lessons in Insurance
As this case illustrates, both owners and contractors should be aware of the types of insurance policies that they and those with whom they contract have. Whether it is a claims-made or occurrence policy can sometimes make the difference between whether a claim is covered or not.
Across the construction industry, COVID-19’s impact has caused a range of problems for contractors and projects—prolonged or intermittent work shutdowns, supply chain delays, pricing increases on materials and funding shortfalls. It has also led to court closures. The legal backlog for claims and disputes means that owners and contractors are facing the option of waiting until the courts are functioning the way they were previously or utilizing alternative approaches to resolution to keep projects and businesses running.
Though courts across the country reopened to some extent in the latter half of 2020, many state and federal facilities were shut down or working with a limited capability for weeks or months. The closures not only froze the progress of numerous disputes already underway, but caused new schedule, cost and COVID-19-related claims to also be held up in the same backlog that is slowly being addressed under current restricted operations. New safety measures to reduce viral transmission, including reduced usage of courtrooms, restrictions on personnel and increased cleaning and sanitizing measures, have limited the number of cases courts can handle on a daily basis and lengthened legal timelines in ways many parties had not anticipated and cannot afford.
That many small businesses have continued to struggle financially through the pandemic period further complicates payments and work completions on projects that have been disrupted. Before filing or proceeding with a claim, contractors and construction owners will have to take a harder look at the significance of the claim they’re filing, the likelihood of success and potential for recovery, and the added risks of prolonged litigation. These deliberations are certainly familiar, but their potential outcomes take on a greater significance now. Having to wait longer for discovery and a trial to occur, for a judge to rule on motions or to decide a case, could ultimately determine whether moving forward with litigation should even be considered versus reaching an alternative settlement.
With parties on all sides looking to recoup the lost time and cost from the pandemic, as well as resolving their prolonged matters in dispute, some parties may opt to instead settle more quickly and for less money. Though nonbinding, dispute resolution options like mediation can offer the chance to reach an agreement without going through arbitration or litigation. After both sides select a neutral mediator or review board, schedule time and prepare statements, they may be able to come to an agreement based on the mediator’s determination. On the other hand, if not satisfied with the nonbinding decision, the matter can still be re-mediated and/or litigated. It’s important to note that while this process is typically quicker than legally binding routes, it is not an overnight answer to resolution either.
The best option to resolve each project’s disputes will vary as there’s still a lot of uncertainty in the pandemic environment, including how it is impacting options for construction litigation. For better or worse, these delays have already altered how contractors and owners approach contracts and cases. No one yet knows what the new normal looks like, what expectations should be about legal timelines and costs due to the limited operations of the court system, but parties should expect to face similar extended circumstances regarding claims and disputes for the foreseeable future and be prepared to adapt.
Litigation can get personal. But when you’re an attorney as well as the litigant, things can get both personal as well as nasty, and this can come back to bite you as was the case in Karton v. Ari Design & Construction, Inc., Case No. B298003 (March 9, 2021), 2nd District Court of Appeals.
The Karton Case
It started out, as many a case does, pretty straightforwardly. Attorney David Karton and his wife hired a contractor, Ari Design & Construction, Inc., to do some work on their house. After the Kartons had paid Ari $92,651 a dispute arose. Actually, two disputes arose. The Kartons believed that Ari was performing work without workers’ compensation insurance although it had it had two to four people working on the project. The Kartons also believed that Ari had overbilled for work completed, which they contended was to the tune of $35,096, and while Ari didn’t disagree, contended that it was only $13,000, a difference of $22,096. And it was over this, that the parties litigated the matter, resulting in attorneys’ fees and sanction requests of $543,307.
In the lawsuit filed by the Kartons they sued Ari, three of its principals, Shahar Toledano, Jonathan Guttman and Ilan Messika, and Ari’s license bond surety Wesco Insurance Company, alleging five causes of action for breach of contract, money had and received, violation of Business and Professions Code section 7031, claim against license bond, and unfair competition.
After a three-and-a-half-day bench trial the Kartons prevailed, with the trial court finding that Ari overbilled the Kartons the amount they claimed of $35,096, but awarding the Kartons all of the $92,651 they had paid to Ari, because the court found that Ari was subject to Business and Professions Code section 7031 by failing to have workers’ compensation insurance although it had employees. The trial court also awarded the Kartons an additional $10,000 under Code of Civil Procedure section 1029.8 which provides for treble damages, capped at $10,000, and attorneys’ fees against “[a]ny unlicensed person” whose work injures another person. And, finally, the trial court awarded the Kartons $2,850 for storage fees, for a total award of $109,501. The trial court also awarded the Kartons $12,500 against Ari’s license bond surety Wesco.
Following the trial, the Kartons filed a post-trial motion for attorneys’ fees. At the time of the motion the trial court judge had been reassigned and a new judge assigned to the case. In their motion, the Kartons requested $271,530 in attorneys’ fees, $52,021 in discovery sanctions, and $203,646 for proving matters at trial that had been denied in discovery for a total amount sought of $543,307. In its tentative ruling, the trial court determined that $450 per hour was a reasonable rate for the Kartons’ attorney but noted that Kartons’ motion lacked a breakdown of hours spent by counsel beyond a “bare-bones declaration” asserting that a total of 603.4 hours was spent on the case and an estimate of percentages devoted to different tasks. The trial court proposed to continue the hearing to allow the Kartons to supply the missing evidence to justify their request.
At the hearing, David Karton and his attorney appeared although Karton did most of the talking. Karton asked for 30 days to submit supplemental papers, which the court granted, and set a 10-page limit on the filing excluding exhibits. Thereafter, the Kartons filed 11 pages of text and 400 pages of supplemental briefing and updated their demand to add $16,110 to their fee request.
At the hearing, in which only David Karton appeared, the trial court expressed surprise that Karton had increased his fee request “beyond what had previously been requested.” The trial court also commenced on Karton’s lack of civility in his briefing, stating that it was “replete with attacks on defense counsel such as that defense counsel filed ‘knowingly false claims of witness tampering,’ ‘her comments were frivolous’ [and that] something was ‘typical of the improper tactics employed by defendant and their counsel’” “It was really offensive to me,” stated the trial court, “the attacks made in the case.”
While acknowledging that among the documents filed by the Kartons were billing records, although block billing records, the trial court noted that 300 of the 400 pages of supplemental briefing was “extraneous documentation . . . that I did not need and did not want in ruling on this motion.” “If this is reflective of the litigation that went on in this relatively simple-sounding case,” stated the court, “I understand how you may and your counsel may have spent the number of hours that you claim to have spent,” noting that the Kartons had gone “so far beyond what was necessary on this matter.”
Before taking the matter under submission, the trial court observed that Karton was “agitated about this case. This is your personal matter, and I understand that. I see that you have strong feelings about this case and strong feelings about the course of this litigation and how it has proceeded.” At one point, the court also told Karton, “can you not interrupt me. I would appreciate your letter me finish my sentence,” to which Karton apologized.
The following day, the trial court issued a minute order approving 200 hours at $450 per hour for a total fee award of $90,000. The minute order noted that the trial court had given Karton leave to file supplemental briefing of 10 pages but that Karton had filed hundreds of pages with 20 or more additional exhibits as well as Karton’s “inflammatory language.” The minute order also reviewed the law surrounding the lodestar method of determining reasonable attorneys’ fees and noted its broad discretion to adjust an award downward or to deny it completely if it determined a fee request was excessive. The trial court also ruled that there was no statutory or contractual basis to award attorneys’ fees against Wesco.
The Kartons appealed.
The Appeal
On appeal, the 2nd District Court of Appeal noted that “[c]ourts have developed two ways to define a reasonable fee”:
The first method is the lodestar approach. This method traces back at least to the famous Lindy case: Lindy Bros. Builders, Inc. of Philadelphia v. American Radiator & Standard Sanitary Corp. (3d Cir. 1973) 487 F.2d 161, 168. The lodestar is the multiplicand of a reasonable hourly rate and a reasonable number of hours. The court then may adjust the lodestar based on a variety of factors. Germane factors include the nature, difficulty, and extent of the litigation, the skill it required, the attention given, and the success or failure of the enterprise, as well as other factors. Whether the attorney worked on a contingency is relevant. A trial court is not required to state each charge it finds reasonable or unreasonable. A reduced award might be fully justified by a general observation that an attorney over-litigated a case.
The second method is the percentage-of-recovery approach. The percentage approach arose in the class action context and predated the lodestar method, but has always shared the lodestar method’s fundamental goal of defining “reasonableness” in a given case.
Over the decades, there has been a nationwide tug-of-war about which method is superior: lodestar versus percentage. Each approach has advantages and disadvantages. The lodestar method better accounts for the amount of work done, while the percentage approach more accurately reflects the results achieved.
In 2010, the American Law Institute concluded “`most courts and commentators now believe that the percentage method is superior. Critics of the lodestar method note, for example, the difficulty in applying the method and cite the undesirable incentives created by that approach—i.e., a financial incentive to extend the litigation so that the attorneys can accrue additional hours (and thus, additional fees).’”
The Court of Appeal then went on to state, in a number of must-quote passages, why it was “reject[ing] the Karton’s complaint that the $90,000 attorney fee award is too small”:
On the Difficulty of the Case: “Difficult issues require more attorney hours. Simpler questions require fewer. Here the issues were pedestrian: whether a contractor had insurance and a license.”
On the Equities: “[T]he Kartons over-litigated this matter. They had about a $23,000 dispute with their contractor . . . but it does not justify lounging a disproportionate litigation offensive. The Kartons’ strategy netted them windfall gains: the harshness of contractor licensing laws allowed them to recoup all their construction monies, plus $10,000, and to retain the benefit of months of free construction work.”
On Proportionality: “Weighing cost and benefit, this trial court concluded a fee three times the judgment was not reasonable. This was logical: rational investors or buyers would not spend $3 to get something worth $1.”
On Civility: “Excellent lawyers deserve higher fees, and excellent lawyers are civil. . . . [T]he Kartons [came] out swinging, apparently believing the best defense is a good offense. This approach demonstrates the trial court was within its discretion to conclude the Kartons conducted litigation that was less than civil.”
Ouch.
The Kartons didn’t lose on every count, however. The Court of Appeals held that, contrary to the ruling of the trial court, the license bond surety Wesco was liable for the Kartons’ attorneys’ fee award despite the bond being capped at $12,500:
Wesco says it cannot be liable for more than the $12,500 sum of its bond. Yet it voluntarily wrote the Kartons a check for $38,768.49, which was the sum of the $12,500, plus post judgment interest, and plus costs. When a surety decides to fight a lawsuit, it can make itself liable for the costs of the litigation in excess of the face of its bond, as Weco’s own actions demonstrate. . . . Instead, Wesco decided to gamble that it and Ari could avoid liability altogether on the merits. ‘Having lost that gamble, [Wesco] is not in a position to complain about liability for court costs.’
Whew. Do. Not. Trifle. With. This. Court.
Conclusion
While Karton is primarily a case about about over-litigating a case there’s a couple of construction gems in there as well. First, in a disgorgement action against an unlicensed contractor you may be able to recover your attorneys’ fees, as well as treble damages up to $10,000, under Code of Civil Procedure section 1029.8. Second, if attorneys’ fees are recoverable under contract or statue, they are also recoverable as costs against a license bond surety even through the current cap on liability against a license bond surety is $12,500, because a surety’s liability is commensurate with its principal.
Bart Smith is the Senior Project Manager for Simply Best, a general contracting firm. He has been assigned to serve as the liaison with outside counsel in a lawsuit against Holly’s Harleys, a project owner who contracted with Best for the construction of a motorcycle showroom. Best filed suit in federal court for additional project costs it incurred, which it contends were caused by the specification of incompatible materials by Holly’s design firm.
The coronavirus pandemic is still raging as the trial date approaches. Courthouse facilities are closed so civil trials are conducted using remote technology, if they occur at all. Bart negotiated the prime contract with Holly’s, and he regrettably allowed Best’s binding arbitration and jury trial waiver clauses in the prime contract to be deleted. Bart worries about how the intricacies of Best’s case can be adequately explained to a jury in a remote trial. His concern approaches panic when Best’s trial counsel explains how the trial will be conducted with none of the parties—their attorneys, the judge, the witnesses or the jury—present in the same location.
Best’s trial attorney explains to Bart that the trial presentation will require a true marriage of the right and left sides of the brain. The right side will help formulate creative ways to illustrate how the specified materials were incompatible and how that financially impacted Best. The left side will help fine tune such things as the audio quality and the location and lighting for the cameras that will capture the trial participants. The sheer volume and complexity of the information shared by Best’s trial counsel was simply too much for Bart to competently convey to his superiors, so he asked Best’s trial attorney to prepare a question-and-answer paper that covered many of the key aspects of a remote jury trial. Excerpts from that paper are found below.
SELECTION AND PARTICIPATION OF JURORS
Q: Will the potential jurors travel to the courthouse to be questioned by the judge and attorneys for potential service in the case?
A: No. They will participate in the voir dire process through a secure remote video platform. The potential jurors, the judge and attorneys will see each other through cameras on their laptops or other video devices.
Q: What if potential jurors don’t have the technology required to participate remotely or don’t have the technical proficiency to operate the remote platform?
A: These potential jurors will be excused from service through a screening process designed to identify such impediments prior to the beginning of voir dire.
Q: Will the jurors who are chosen to serve be allowed to have other people listen to the evidence and can they record the trial?
A: The Court will likely order the jurors to be alone in a quiet room and will not allow the trial to be recorded.
PRESENTATION OF THE EVIDENCE
Q: Will Best’s trial representative be on camera the entire trial?
A: The Court will be asked to only require the lead trial attorneys, the judge, the witnesses (during testimony) and the jurors to be within camera view.
Q: How will the physical evidence be stored before and after it is formally offered into evidence?
A: The Court will likely require the use of an electronic document repository platform to store all potential exhibits at the beginning of the trial. A separate folder within that platform will be created to host only the admitted exhibits for use by the jury during deliberations.
Q: Best needs the jury to fully understand the incompatibility of the construction materials mandated by the specifications. Is it possible for Best to deliver representative samples of the materials to the jury so they can touch and feel them?
A: Probably not. Alternatives to this may be to perform a demonstration during testimony or an animation showing how the materials were to be installed and the problems caused by their incompatibility.
Q: Best plans to present the testimony of potentially uncooperative non-party witnesses it will have to subpoena for trial. How can Best know the location from which the witnesses will testify and how can Best ensure they’ll have the technology to convey sound and video during their testimony?
A: This is possibly the most difficult aspect of the trial to control. Best needs to provide in the trial subpoenas as much detail as it can about the witnesses’ remote testimony, including trial counsel’s contact information so the witnesses can contact counsel to help them prepare.
JURY DELIBERATIONS
Q: How will the jury be able to view the admitted exhibits?
A: The Court will provide access to the evidence in the electronic document repository. The attorneys will work with the Court to prepare a neutral exhibit description index so the jurors can access the exhibits of interest.
Q: How will the jury deliberate when they are not together?
A: The remote participation platform chosen by the Court for the trial will have a private group feature which allows the jurors to deliberate without being seen or heard by others.
Equipped with the foregoing details, Bart knew that a remote jury trial wouldn’t be easy, but with the left and right sides of the brain at work, a winning case could be presented.
