Surviving the Construction Law Backlog: Nontraditional Approaches to Resolution

Jeffrey Kozek | Construction Executive

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. 

You Can Litigate a Dispute. Just Don’t LITIGATE a Dispute.

Garret Murai | California Construction Law Blog

Wild E. Coyote

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.

Public-Private Partnerships: Opportunities & Challenges for the Construction Industry

Brian R. Gaudet | Kilpatrick Townsend

A group of industry leaders recently came together as a panel to discuss “Public-Private Partnerships: Opportunities & Challenges for the Construction Industry.” This event, presented by the Construction Litigation Committee of the ABA Section of Litigation, reviewed public-private partnerships, distinctions between public and private construction projects, risks associated with the procurement process, and common contractual requirements relating to performance bonds, workforce requirements, public record laws, and reporting and audit rights. Panelists included Brian Gaudet, a Kilpatrick Townsend partner in Houston; Felix Rodriguez, a Bilzin Sumberg partner in Miami; Adrian Felix, a Bilzin Sumberg partner in Miami; and Brian Kirby, General Counsel (U.S. and Canada) for Sacyr in Washington, DC.

Key takeaways from the discussion, include:

  1. P3’s are used as a way to provide private financing sources to public entities, and help get projects accomplished that might not ordinarily be accomplished because they are either too large or economically unattractive without both private and government involvement.
  2. Toll road projects are what many people visualize when thinking of a P3 project, but P3’s are not limited to toll road projects. You may find other projects with a public purpose being delivered with the P3 model, such as passenger rail, seaport, courthouse, and mixed-use projects.
  3. For the private participants, P3 projects are typically more risky, but provide a potentially greater financial upside. The private participants in the P3 typically take on more risk than in other types of public projects (i.e. expect less relief for weather impacts, environmental impacts, etc.).
  4. For the public participants, in addition to tapping into different funding, the P3 process may facilitate more innovation and a holistic long term balancing of cost of construction versus cost to maintain over the expected life span of the asset.
  5. Expect additional layers and sources of financial security such as irrevocable letters of credit, parent guarantees, payment and performance bonds, and supply bonds. These financial security instruments need to be carefully crafted to be appropriately limited in scope.
  6. Due to the length of time to get a proposed P3 from concept to approval, it is important that the private participants understand that there may be limited ability to pass on price increases during this period; therefore, private participants should factor in price increase risk into their financial model.
  7. Expect P3 projects to be the source of case law development, including as to whether private entities working at the direction of a public entity enjoy the benefits of the public entities’ sovereign immunity. Expect that the nature of a P3 project will add additional layers of complexity to the analysis than that of a public project.
  8. P3 projects are unlike other public projects which are either construction projects or design build projects. P3 projects may involve financing, designing, building, and postconstruction operation and maintenance. Those roles may be shared between various project participants in different ways depending on the particular set up of the P3 project.

Seven Trends That Impact Commercial Construction Litigation in 2021

Jeffrey Kozek and E. Mitchell Swann | Construction Executive

2021 stands to bring sizeable change to the commercial construction industry as trends that had been on the horizon meet the impact of the pandemic. That means it will be even more important for architects, engineers, contractors and owners to prioritize revisiting their project plans as the industry adapts so that they can better reduce their likelihood of facing litigation down the line.

While many in the industry will struggle to react to the ongoing environment, building stronger contractual understanding and preparedness to adapt could be the difference in being able to complete the work and move onto the next project in a timely manner. Meanwhile, contractors are using a wider usage of technologies for improved project communication and efficiency. 

In the coming year, there are seven trends will have the greatest impact on commercial construction 

1. SAFETY MEASURES ON SITE

The continuing challenges of COVID-19 may seem familiar after all these months, but continuing to navigate safety measures on site will remain a necessity in 2021. Although the execution of parameters such as distancing, staggered shifts and proper PPE, is likely to impact projects’ cost and schedule, these measures are critical for the protection of all workers on site, and ignoring them could result in fines, shutdowns or even litigation. 

2. DISPUTES AND BANKRUPTCY

Not only will onsite work see the effects of the pandemic, but supply chain delays, pricing increases on materials and project funding shortfalls, to name a few, are likely to lead to claim and payment disputes. Yet, as a number of small businesses across the country have had to declare bankruptcy during this period, owners and contractors whose work has been disrupted need to be prepared for related complications to their payments and project completions. 

3. COURT BACKLOGS

The other side of that equation is that the pandemic has impacted the court system itself, with many state and federal facilities shutting down for weeks, if not months, beginning last March. This not only delayed the progress of numerous cases and projects, but created a legal backlog that has only slowly been addressed throughout the year. With parties on all sides looking to recoup the lost time and/or cost from the pandemic as well as their case, some will opt to settle to more quickly to resolve these matters. 

4. DESIGN OF AIR HANDLING STRUCTURES

In a last COVID-19-related trend, building and construction owners need to be aware of how the design of air handling structures will likely change as a result of this period. In facing an airborne virus, strong evidence shows the importance of ventilation air system effectiveness in reducing the transmission rate of infection in sort of a “dilution as a solution to pollution” approach with a finite indoor biological point source. Yet, increased ventilation air quantities will also increase equipment sizes and operating energy costs for heating and cooling. This should increase the attention to, and consideration of, dedicated outdoor air systems and demand-controlled ventilation so that the quantity of ventilation air supplied is responsive to the population being served. 

5. PREFABRICATED OR MODULAR CONSTRUCTION TECHNIQUES AND ASSEMBLIES

With eyes to the future, the implementation of new designs and materials will begin to have a greater impact on projects. Already, more than 80% of contractors report using prefabricated or modular construction techniques and assemblies on projects, and those numbers only stand to increase. As the technology advances, these materials can greatly improve efficiency and quality control, reduce construction safety risk and, in the age of COVID-19, offer better control over workforce virus exposure due to “social distancing” and related transmission risk.

6. BIM ADOPTION

The construction industry has often been slow to adopt technology, but one of the more impactful ways U.S. companies are beginning to change their approach to projects is with wider adoption of Building Information Modeling, a digital process to construct more detailed 3D models for new buildings. Properly developed and implemented BIM strategies can enhance team communication, coordination and “what if” collaboration during design and construction. All of these efficiency technologies can help nip potential problems in the bud. BIM tools software can also greatly help an owner with on-going maintenance and operations – both of which will have a heightened profile in the post-COVID world.

7.  GREEN BUILDING

Finally, among the new projects arising in 2021, many more will highlight continued increases in green building. LEED certifications have grown by more than 69,000 projects over the last 10 years, with nine design and building categories in which a project can earn points toward LEED recognition from the U.S. Green Building Council. Green buildings often focus on a better Indoor Environment and “wellness”’ of the occupants. In the COVID-19 context, that focus area is a natural fit for reducing potential paths of transmission. Verification of performance will take on an even more significant presence on the green building stage.

Although every project faces a unique set of circumstances, the impacts of these seven areas are likely to be felt across the board. Stronger preparedness and flexibility can go a long way in helping mitigate the risk of litigation and find greater success in the coming year.

Best Practices for ESI Collection in Construction Litigation

Kelley J. Halliburton | Construction Executive

The construction business has always been heavy on records and data but now more than ever much of that information is stored electronically. Gone are the days of just a trailer full of drawings and paper documents.

Construction projects now have huge amounts of electronically stored information (ESI) including contract documents; drawings in both CAD, PDF and other formats; schedule files such as Primavera; spreadsheets; photos; job cost control software files; formal correspondence; and an ever-expanding amount of email communications. Successful collection of this ESI can be critical to the success of litigation in construction cases, where often very complex facts will need to be gathered to support a claim or defense.

The best first step to a successful ESI collection is to build a solid foundation before trouble arises with prepared policies and procedures in place. Implementing and enforcing a document management plan on a project basis will make sure documents are kept in an organized fashion so that materials can be accessed quickly and easily. Document management is important for types of ESI that are not handled well by word-searches, including Primavera schedules, photos and videos.

Preparing document retention procedures outlining such things as where data is stored, how long to keep it and who has access to it will help when it comes time to implement a litigation hold and prepare for document collection. Policies and procedures for data from departing employees is especially important to have in place, as there may not be another chance to capture data once the employee has moved on. This is critical if collection of mobile devices is necessary. With the proliferation of smart devices and text messaging, collection of data from mobile devices is more and more likely to be required. Documented and enforced policies regarding the use of work-issued mobile devices such as phones, tablets or laptops and Bring Your Own Device policies for employees authorized to use personal devices for work will help with identifying, retaining and collecting data later.

Once potential litigation arises, a litigation hold must be put in place. Automated deletion of data that is part of a document retention policy must be stopped once the litigation hold is in place. Because the duty to preserve data begins once litigation is reasonably anticipated, that duty could arise as early in a project as the first change order request, an on-site accident or a differing site condition but would certainly arise once served with a complaint.

At this time, analyzing the project data can help confirm whether the litigation hold has reached all the necessary people. Does the project use a cloud-based document management system to store project documents and disseminate correspondence between participants? If so, is the document management system hosted by the organization or by someone else, such as the project engineer? A litigation hold may need to be communicated to the host of the document management system to make sure data is preserved at the completion of the construction project.

Understanding what types of communications may have been used in the field beyond formal correspondence (submittals and letters) and emails is also important. Was a communications platform such as FieldChat or Slack in use? These platforms have data separate from email systems that will also need to be collected in coordination with the IT department or the organization that hosted the platform if they were outside of the company. Was text messaging used? Mobile collection will likely be necessary in that case.

Once a litigation hold is in place and confirmed, analysis of both the ESI and the people with the data must continue. Are project files such as submittals, correspondence, schedules, etc., stored and organized on a shared company server? Who are the employees who have relevant information? Develop a comprehensive list of everyone who may have information relevant to the project, and then work with counsel to try to prioritize the list. 

The employees with relevant information, known as data custodians, should then be interviewed with counsel to determine their personal data management practices and help decide where and how to collect their data. These interviews should cover the use of any shared network servers or EDM systems, work devices, personal devices and removable media, and can assist in limiting redundant or unnecessary data collection while capturing as much relevant information as possible. 

At the same time, the interview can help counsel gain information regarding time periods and project background from the custodians that can assist with further tailoring the data collection. Assisting counsel with access to this information prior to the development and negotiation of ESI protocols in the litigation will help in tailoring the protocols to the data.

Once these steps are taken, a document collection plan can be created and implemented. A data map of the different sources of relevant data should be created and procedures developed and documented step by step to collect the data. Determine if forensic collection is necessary – unless there have already been claims of data spoliation where a forensic collection may be necessary, a logical copy will suffice. Self-collection by the actual data custodians by simply copying their files is highly disfavored due to issues such as unintentional alteration of document dates and inadequate searching. Generally, the data collection should be done with the supervision of counsel using either in-house IT resources (if available and sufficiently robust) or with assistance from an outside vendor. Outside vendors may even be able to accomplish most of the data collection by remote means.

Email and data stored on in-house shared servers and workstations is relatively straightforward to collect. Data stored with cloud providers may have different policies and protocols for collection, but most e-discovery technology solutions and vendors can integrate with these providers to collect data. Mobile device collection may also require specialized expertise from an outside vendor unless the company has already prepared its IT department in advance to do this type of collection regularly (for example, when an employee separates from the company). Backup tapes or disaster recovery systems are difficult and expensive to collect and generally counsel will negotiate the ESI protocol so that use of these systems will only be as a last resort.

By putting document management and retention procedures in place in advance, understanding the ESI involved in a construction project, developing a data map and collection plan, and utilizing and documenting defensible collection methods, construction companies can make sure that the information necessary for supporting legal claims or defenses is available to counsel and increase the chance of a successful result in the litigation. At the same time, these steps will help hold costs down by cutting down on collection of irrelevant or duplicative data.