Category Archives: Damages

Arbitrators are not King Solomon?

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whoa signAfter my recent post on the pros and cons of court vs. arbitration, I was contacted by the American Arbitration Association (AAA).    They told me that, contrary to what is a widely held belief about panels “splitting the baby,” their internal studies actually show that is not, in fact, the case.   The summary of their findings is worth reading.

Now, I don’t know the particulars of their study protocol, and AAA is certainly not a disinterested party, but the numbers are impressive.  Perhaps AAA arbitration panels, at least, are not King Solomon.

Do you have a AAA arbitration experience?  Share it in the comments below.

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Photo “whoa” by stgermh via Flickr/Creative Commons license.

Should I stay or should I go now? (Court vs. Arbitration)- Updated

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gavelShould I stay or should I go now?
If I go there will be trouble
And if I stay it will be double
So come on and let me know!

Are you wondering whether Court or Arbitration should be made a standard part of your construction contracts?  With apologies in advance to The Clash, there is “trouble” to be found in either venue.

Some companies, and their lawyers, insist that American Aribtration Association (AAA) Arbitration is the only way to go.  Others prefer to take their chances in a local state court.  Who is right?  Neither, and both.  As with anything, there is a cost-benefit analysis that you should go through prior to making either a standard part of your construction contract.

Pluses and Minuses of Going to Court

If a dispute is brought in court, there is a standard, fully vetted set of statutes, case law, court rules, and procedures already in place.  A judge, unlike the typical arbitration panel, is generally more willing to consider defenses based on statue, such as the statute of limitations or the statute of repose.  Summary Judgment, in which a judge will (on occasion) grant a judgment for or against  a party without the necessity of the full blown jury trial, is possible.  Such dispositive, procedural rulings are extremely unlikely to be granted by an arbitration panel.

On the other hand, a court trial means a jury verdict.  Unless the parties agree to waive their right to a jury trial, your case will be decided by true laymen who may have never set foot on a construction site before, and who will not understand the RFI, change order, and pay app process.  Terms like “substantial completion,” “critical path,” and “standard of care” will be foreign to them.

I’ve seen some juries get it right, and I’ve seen some get it wrong.  Most jurors take their responsibilities extremely seriously and will try to apply the law as the judge instructs them.  But at the end of the day, you have people unfamiliar with industry standards determining your case.

Pluses and Minuses of Arbitration

Many standard construction contracts contain arbitration provisions, generally AAA Arbitration.  The typical arbitration includes a three member panel of experts (construction professionals, designers, construction attorneys) who hear the evidence and make a ruling.  That ruling has the full force of law.The reasoning behind such arbitration clauses is that industry professionals better understand the construction process, standards of care, and interrelationships on a complex construction project.  Theoretically, therefore, they are better able to determine the true root cause of damages or delay.

Arbitration is sometimes considered to be less expensive and less time consuming than a court trial.  The arbitration panel generally sets fairly loose procedural and evidentiary boundaries, and tends to allow into evidence things that might not meet the strict Rules of Evidence that a court would apply.  Some of these generalities, however, have not proven to be true in practice.  AAA Arbitration can be costly– the filing of a claim alone is costlier than typical court fees.  Case managers add a layer of bureaucracy to the process.   Arbitration panels also generally are more prone to “split the baby” in a close case.

Which is Better?

The answer to that question is a clear and concise, “it depends.”  It depends on the facts of your particular case, the jurisdiction you are in, the type of panel you may get, and numerous other things completely out of your control.  Consult with a lawyer in your jurisdiction to discuss the pros and cons of each, and which may be right for your particular situation.

Do you have experience with court or arbitration?  Personal preference?  I’d love to hear your thoughts on the subject in the comment section below.

UPDATE 10/13/2010:  The AAA responded to this article citing their internal studies showing arbitration panels do not often “split the baby”.  See more here. 

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Photo “Courtroom One Gavel” by Joe Gratz via Flickr/Creative Commons license.

Liquidated Damages: what, when, & why

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water dropWhat are Liquidated Damages?

Liquidated Damages are a sum which a party to a contract agrees to pay or a deposit he agrees to forfeit, if he breaks some promise.  In the construction realm, liquidated damages (or “LDs”) usually involve money damages for time delays on a construction project.    Typically, a contract will state that time is “of the essence” and that for every day past the scheduled completion date (as modified by change orders & directives) a set amount is due from the contractor to the owner.

When can you get liquidated damages? (or, when must you pay liquidated damages?)

Liquidated damages must be specified in the contract up front.  They should reflect the reasonable estimate of likely damages that will be incurred if the contractor fails to complete the project timely.

To be enforceable, the amount must have been arrived at by a good-faith effort to estimate in advance the actual damage that would likely ensue from the breach, and they cannot be deemed “penalties.”  Eastern Carolina Internal Medicine, P.A. v. Faidas,  149 N.C.App. 940,  564 S.E.2d 53 (2002).

Why?

The purpose of liquidated damages is to reasonably compensate the non-breaching party (typically, the owner for construction delays) which it will likely incur as a result of the breach (e.g., the extended completion date results in lost rent and increase finance charges).  Without the liquidated damages provision, the parties would be forced to argue about each alleged cost the owner incurred because of the delay.  With liquidated damages, the amount is known ahead of time which should (theoretically) lead to fewer arguments later.

When doesn’t the provision work?

Two words—concurrent delay.  If the owner is delaying the project (through, for example, failure to deliver/install owner-provided equipment), but the contractor is also behind on completion, the two delays may run at the same time—hence “concurrent delay”.  In such a situation it becomes difficult if not altogether impossible to separate delays and delay damages.  Of course, if the entire delay is owner-related, no liquidated damages can be assessed.

Take-away message

Liquidated damage provisions, if carefully and properly drafted, are enforced in North Carolina.  You should know your schedule requirements prior to signing on the dotted line and, if necessary, accelerate your work to complete on time.  If you are the owner, however, you also have responsibilities not to interfere with the schedule if you hope to have a chance at recovering liquidated damages from a contractor who delivers a project late.

Questions?  Comments?  Experience with the joys (and sorrows) of LDs?  Share in the comments below.

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Photo “Water drop bouncing off the water surface” by konradc via Picasa/Creative Commons License.

Review your Deed Before you Build (Tue Tip)

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(Or, Reason # 529 why you need a lawyer)

A recent North Carolina case shows why you really need to consult with a lawyer before you build.  Deed of TrustIn the swanky Myers Park section of Charlotte, setback requirements were contained within property deeds, a hold over from the pre-zoning days of the early 20th century.   A $500,000 addition to a residence was built that violated the setback, and the Court of Appeals held that the neighbors were not enjoined from suing to force compliance even though they waited over two months (during which construction was substantially completed) to bring suit.

 The case is Irby v. Freese.  Of note, the homeowners built the addition without benefit of an attorney or architect, so the deed restriction was not noticed.

The Court of Appeals was only addressing the issue of undue delay in bringing the lawsuit, because a two month delay occurred during which significant sums were spent by the homeowners to dry in the building.  The Court held that, under the specific facts of the case, a two month delay was not fatal to the claim.  Stay tuned for further details, as the case is far from over.  It has been remanded to the trial court for a full trial.

And, be glad that this isn’t you.  This could prove to be a very costly mistake, in which the entire addition may have to be demolished because of the violation of the setback requirement contained in the property deed.

Read your deed.  Read your covenants. When in doubt, hire real estate counsel before you pick up the shovel.

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Photo “February 5, 2010- Paperwork” via Caitlin Childs via Flickr- Creative Commons license.

Joint & Several Liability in NC (law note)

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British pennies & poundsIf a client has been sued, he wants to know how much is at risk if he loses at trial.  This is especially true where more than one person or company have been sued.  How is any damage award apportioned?

 The answer is not one clients generally like to hear:  your company can be on the hook for 100% of any damages.  This is true even if your company is really only liable for a tiny fraction of what caused the damages in the first place.  You can thank “joint and several liability” for that.

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For example, in a fairly typical construction dispute, an owner sues a contractor and the architect for construction defects. The contractor uses unsuitable substitutions, and the architect approves the unsuitable substitutes.   Both contractor and architect may be held liable for the resulting damages.  If a jury awards the owner $500,000, then both contractor and architect are liable for the entire $500,000 to owner.  That’s the “severability” part of the law.  As between the two, of course, they both share in the damages, and if the owner executes on the entire judgment against the architect (perhaps due to the architect’s insurance coverage), the architect can then go after the contractor for an equal share and get paid back $250,000 in “contribution.”  (That’s the “joint” nature of such an award).  This is, however, assuming the contractor has those funds.  Essentially, whoever has the funds when a judgment hits might end up paying for the entire award.  If the contractor doesn’t have $250,000 for the architect to be paid back, the architect is out of luck.

Does the result change if the jury finds the architect was only 5% liable for the damages and 95% were attributed to the contractor? Nope.  In North Carolina, where the parties’ actions together contribute to one indivisible injury, there is no apportionment.  “In for a penny, in for a pound” as the old saying goes.

Exceptions to the Rule?

Are there exceptions? But of course!  If the owner is also negligent, he can get no recovery at all since North Carolina is a pure contributory negligence state.  If one party is actively negligent and one passive, than the passively negligent party can seek indemnity from the active party.  If one party settles before trial, things become more complicated.  More on these subjects in future posts.  I’m also told that in other states apportionment is more the rule, so you may have better luck with your out of state projects in a similar situation.

As a general rule of thumb, however, for your North Carolina project, just assume that the entire amount of claimed damages may be presented to you for payment.  Unfair? Many times, yes.   That’s the nature of the beast.  It is also one of many, many good reasons to make sure you are doing business with people you trust and, more importantly, that other professionals are appropriately insured or bonded on any project you are working on.

If you have any questions about joint and several liability, drop me a line or a comment below.

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Photo “Shiny pennies” by David Pillbro (Flickr Creative Commons license)