MEDIATING A COMPLEX CONSTRUCTION DEFECT CASE

1. MEDIATING A COMPLEX CONSTRUCTION DEFECT CASE Construction Defect Litigation George D. Calkins June 19, 2008 Session 1

2. Introductions • Panelists • Participants • Mediation Experience • Construction Defect/ Claim Experience • Expectations • Scheduling and Breaks • MCLE Credit, Class Certificate and Evaluation Forms

3. Explanation of the Goals - Conduct of the Program. • Goals • Overview of Construction Defect Litigation, Case Management and Mediation and related construction delay/claim matters • In-depth Examination of the Factual and Legal Problems encountered in these matters. • Explore Strategies for the effective handling of issues and problems

4. Explanation of the Goals and the Conduct of the Program (Con’t.) • Process • Interactive and Socratic (not individual problem solving-save for post session discussions) • Will not use the team and breakout session approach common here - Have found that utilizing classroom participation is more enjoyable and productive • The Pepperdine Summary Sheets • Use of the Fact Patterns and the Case Management Orders (familiarize)

5. The Unfortunate State of Current Construction Defect Mediation Practice in California • Need for Reform - steps taken by the legislature • Revalidation of the Basics of the Purpose of the Case Management Order and the Role of Mediation in the Construction Defect Arena

6. Definition of Terms and Acronyms Encountered at Construction Defect Mediations • Terms • Mediation: The resolution of a dispute through consensus and compromise utilizing a neutral party as a facilitator of agreements. • Mediator: A neutral party who assists in the resolution of a dispute by using facilitative and/or evaluative techniques.

7. Definition of Terms and Acronyms Encountered at Construction Defect Mediations (Cont’d) • Special Master: A term of art that has been developed over time in Construction Defect litigation and, although never formally defined in statute or case law, is often used to describe a mediator or a referee or both. It has evolved into a description of the party who assists the court in the management of a construction defect case under a case management . order and oversees the orderly preparation of the case for mediation and/or trial.

8. Definition of Terms and Acronyms Encountered at Construction Defect Mediations (Cont’d) • Referee: A party designated by the Court under California Code of Civil Procedure Section 639, to handle discovery disputes and to make recommendations to the Court for the resolution of those disputes. Cannot be a mediator and a referee pursuant to California Rules of Court.

9. Definition of Terms and Acronyms Encountered at Construction Defect Mediations (Cont’d) • Order: A document prepared by the parties to a Construction Defect Case and approved by the Court to facilitate discovery and the orderly management of the case.

10. Definition of Terms and Acronyms Encountered at Construction Defect Mediations (Cont’d) • Acronyms • AIE: Additional Insured Endorsement • CMO: Case Management Order • CORE: Cost of Repair Estimate • EIFS: External Insulation Finish System • HOA: Homeowners’ Association • MKP: Most Knowledgeable Person • PMK: Person Most Knowledgeable

11. Definition of Terms and Acronyms Encountered at Construction Defect Mediations (Cont’d) • MEP: Mechanical, Electrical & Plumbing • OCIP: Owner Controlled Insurance Policy • CCIP: Contractor Controlled Insurance Policy • RMO: Responsible Managing Owner • SIR: Self-Insured-Retention • TPA: Third Party Administrator

12. The Roles of the Mediator, Special Master & Discovery Referee • As a Mediator, one is the Facilitator between the Parties to a Dispute. • The goal is to facilitate an agreement between the parties by making certain that they are looking at the same facts, have an understanding and appreciation of the law that governs their dispute, and are realistically assessing strengths and weaknesses of both their position and that of their opponent.

13. The Roles of the Mediator, Special Master & Discovery Referee (Cont’d) • In addition to the foregoing, a Mediator needs to Surface Hidden Agendas and Subjective, Emotional Issues that may have a significant impact on the positions of the parties. • The Mediator needs to guide counsel and the parties into the appropriate frame of mind for mediation: a willingness to compromise. • Unfortunately, in construction defect mediations the atmosphere is not always conducive to conciliatory behavior, and the strong adversarial tone needs to be ameliorated.

14. The Roles of the Mediator, Special Master & Discovery Referee (Cont’d) • The term “Special Master’’ connotes a party that is service in a Quasi-Judicial Capacity and who is responsible for the administration of construction defect case under a CMO to insure that it is prepared for mediation or trial in an orderly fashion under the CMO. The term is not defined in the statutes and is only found in the code of civil procedure section 170 relating to peremptory challenges. • A Discovery Referee is appointed by the Court to resolve discovery disputes. This is a quasi-judicial role.

15. California CD Litigation & Mediation: Past, Present and Future • The Past • Pre-1986/87 CD litigation in California was treated the same as any other civil lawsuit and because of the size of these cases and their complexity were generally not resolved until very near the end of the mandatory 5 year statute of limitations within which all civil litigation had to be resolved after the date of filing of a complaint. • There was no proactive case management by the Courts • Discovery was conducted per the California Code of Civil Procedure • The volume of CD litigation was relatively small

16. California CD Litigation & Mediation: Past, Present and Future (Cont’d) • In 1986 the Civil Discovery Act of California was revised • In 1987 the Trial Delay Reduction Act (Fast Track) became effective • The litigants and the Parties to CD litigation and other complex litigation matters along with the Courts determined that these cases could not be efficiently administer under the new discovery Act and effectively comply with the Fast Track requirements.

17. California CD Litigation & Mediation: Past, Present and Future • CMOs are developed to circumvent the provisions of the Discovery Act and to insure that complex cases can comply with the trial requirements of Fast Tract (18-24 months from filing) . • CMOs were intended to provide for informal, efficient and economical exchange of relevant evidence. • Private sector neutrals were utilized to handle the administration of these matters, their discovery issues and their mediation.

18. California CD Litigation & Mediation: Past, Present and Future • The Present • CMOs have grown from outlines to facilitate discovery, settlement and trial to tomes purporting to micro-manage every aspect of the case. (May Use Civility opposition) • The mediation process has become protracted and over-adversarial, exacting economic costs disproportionate to the benefits received and destroying time efficiency. • The system is no longer user-friendly

19. California CD Litigation & Mediation: Past, Present and Future • The Future • Indicative that the system is not working the guidelines for Fast Track trial time has been extended for complex cases • The Concept that originally led to the use of the CMO process needs to be recognized and the process returned to a focus on the expeditious and economical exchange of evidence, settlement and trial preparation and removed from the micro-management of all phases of the litigation process.

20. California CD Litigation & Mediation: Past, Present and Future • The Courts need to be more firm in the adherence to trial dates within Fast Tract guidelines • The mediation process must be improved through better mediator action insuring that cases are prepared and ready to mediate and the proper use of the parties and experts • The mediation process needs to be taken more seriously by the parties, the attorneys, the insurers and the experts and not treated as a pro occurrence that has been mandated by the Courts

21. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Selection of the Mediator, the Special Master and the Discovery Referee • Define the roles • provide for fee and cost allocations • Provide a timely mechanism for identifying and naming the necessary parties • Extend time to prepare the CMO until the necessary parties can participate • Attempt to involve the Special Master/ Mediator in the process

22. Key Components of the CMO (Refer to Sample forms developed in S.D.)(Cont’d) • Establish a process to expedite the filing of requisite pleadings • Deemed filed cross-complaints (controversy) • Notices

23. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Set up a procedure for the acquisition of the necessary documentary information (Plans, Specifications, Contracts, Insurance Policies, Certificates of Additional Insured Endorsements, Notices of Completion) • Document Depositories • Cost sharing

24. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Establish realistic time-lines for mediation sessions and for trial • Preliminary and final defect lists • Site Inspections • Destructive Testing • Define Destructive Testing • Define Participation • Establish method of cost sharing

25. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Plaintiffs preliminary and final costs of repair • Plaintiff’s Show and Tell Presentation • Developer/Builder cost of repair • Defendant’s Defect and Cure Presentation • Developer/ Builder demands to the Subcontractors

26. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Mediation Schedule • Scope of Work Mediation sessions • Insurance Day(s) • Expert mediation sessions • Peripheral Party mediations • Money mediations

27. Key Components of the CMO (Refer to Sample forms developed in S.D.) • Exchange of Experts and Discovery Schedule • Stays • PMKs • Parties • Experts (order-defect--trade) • Discovery and Motion Cut-off dates • Trial

28. GENERAL DISCUSSION

29. MEDIATING A COMPLEX CONSTRUCTION DEFECT CASE Construction Defect Litigation George D. Calkins June 19, 2008 Sessions 2 & 3

30. Organizing a Construction Defect Mediation • Determine the nature of the case and the types of claims that are being made and the nature of the legal issues that are involved • Identify Parties and relation to Claims • Prioritize and segregate claims • Determine the status of Defendant entities • Identify legal issues-statute of limitations-standing--etc

31. Organizing a Construction Defect Mediation (Cont’d) • Make certain that all contract (scope) information and insurance information is available (Depository) • Use of Insurance Day(s) and Scope sessions • Evaluate contract (indemnity) and insurance issues (AIEs and coverage)

32. Organizing a Construction Defect Mediation (Cont’d) • Attempt to identify peripheral parties at the earliest time possible and set up a protocol to remove them from the case as soon as possible • Use of dismissal without prejudice • Scope of work releases • Examine the basis for the claims • Use of expert mediation sessions • Protocol-with or without attorneys • Keep a record of the proceedings to avoid misunderstandings

33. Organizing a Construction Defect Mediation (Cont’d) • Set up a protocol to insure that all things necessary for a productive Money Mediation have been done • Phone Calls • Readiness conference • Certificate of readiness • Require an agenda for each mediation session • Avoid Cattle Calls • Set up sessions by discipline or defect • Stick to the agenda/schedule • Avoid “overtime” sessions

34. Organizing a Construction Defect Mediation (Cont’d) • Insure that all of the necessary parties with authority are at the Money Mediations • Letters-phone calls • Caveat the mandatory settlement conference-destroys the mediation Privilege

35. It is vitally important to establish all insurance coverage issues • Need to set up a matrix of liability and indemnity/additional insured coverage • Information obtained through the form interrogatories and by defending carriers not always accurate • Must have an accurate picture of coverage before mediation • Use of Insurance Day mediation session

36. It is vitally important to establish all insurance coverage issues (Cont’d) • Important to know indemnity and additional insured information (1) AI as important if not more so than liability • Must keep AI on separate track from liability mediation (conflict of interest)

37. What a Mediator should Expect from the Attorneys for the parties in a CD Mediation • Preparation • Familiarity with the facts and the law and a knowledge of the clients role in the construction of the project • Possession of a Game Plan for the resolution of the client’s issues • Courtesy and Professionalism • Absolute Candor • A willingness to participate in the mediation process (voluntary v. involuntary)

38. What Counsel and the Parties should expect from a Mediator in a CD Mediation • General knowledge of the construction field and the law that applies to construction defect litigation. • General knowledge of the law of indemnity and insurance issues peculiar to construction defect litigation. • Familiarity with the overall facts of the case being mediated.

39. What Counsel and the Parties should expect from a Mediator in a CD Mediation (Cont’d) • A willingness to listen and withhold evaluative positions until fully in possessions of all of the facts, • An ability to administer a complex matter and manage numerous issues parties. • Skills to facilitate agreements • Ingenuity of thought regarding potential resolution of disputes

40. What Counsel and the Parties should expect from a Mediator in a CD Mediation (Cont’d) • Sufficient experience in the field to be effectively evaluative when such is required • Willing to observe the requisite confidentiality of information received when required

41. GENERAL DISCUSSION

42. Assignment Review the Written Material and to be Familiar with the Fact Patterns

43. MEDIATING A COMPLEX CONSTRUCTION DEFECT CASE Construction Defect Litigation George D. Calkins June 20, 2008 Sessions 4 & 5

44. The Changing Face of Construction Defect Litigation and Mediation • Mold and Personal Injury Cases and Concrete Sulphate Issues • “Junk” science issues-expert intensive • Need for different construct when dealing with personal injury issues • High-rise commercial and condominium cases • Different approach-difficult to separate issues • Very paper intensive

45. The Changing Face of Construction Defect Litigation and Mediation (Cont’d) • Legislative action impacting CD litigation and mediation • Comprehensive legislation directed at CD claims • Pending attempts to significantly modify the law of indemnity • Use of Modified Insurance Policies • “Burning Tree” • WRAP -- OSIP - CSIP

46. What should a Mediator do to set up a successful Construction Defect Mediation? • Review the plaintiff’s and the defendant’s costs of repair • Prioritize the defects by magnitude and/or cost • Perform an “Aas” evaluation of the defects • Show and Tell • Review the expert reports . • Determine areas of agreement and disagreement • Utilize an expert mediation with or without counsel

47. What should a Mediator do to set up a successful Construction Defect Mediation? (Cont’d) • Review the cast of characters • Determine that all of the players are at the table • Determine the status of the players-viable-bankrupt, etc • Determine if there is an agreement on the scopes of work • Determine the status of indemnity agreements, if any • Utilize a scope of work mediation

48. What should a Mediator do to set up a successful Construction Defect Mediation? (Cont’d) • Review the insurance. picture • Determine whether all triggered policies are on notice • Determine the nature of the existing policies-primary-excess • Determine the coverage positions • Determine whether any of the carriers are in receivership (stay orders) • Determine whether there are aggregate problems • Determine if the policies are “Burning Tree” • Determine the existence and status of the AIEs • Utilize an Insurance Day session

49. What should a Mediator do to set up a successful Construction Defect Mediation? (Cont’d) • Insure that all of the necessary parties will be in attendance (carriers, coverage counsel, AI carriers and principals) • Devise method of insuring attendance • Court-ordered mandatory settlement conference (at courthouse) • Personal letter or phone call

50. What should a Mediator do to set up a successful Construction Defect Mediation? (Cont’d) • Organization of “Money Mediation” • Utilize priority of defects in setting appearances (small to large-large to small) • Organize by category of defect (architectural, structural, etc) • Set reasonable time lines for appearances in the agenda