Effective Allocation and Management of Performance Risk in Building Envelope Design & Construction – 2

About The Everything Building Envelope Podcast: Everything Building Envelope℠ is a dedicated podcast and video forum for understanding the building envelope. Our podcast series discusses current trends and issues that contractors, developers and building owners have to deal with related to pre and post construction. Our series touches on various topics related to water infiltration, litigation and construction methods related to the building envelope.

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The Everything Building Envelope Episode Transcript:

Paul: Welcome back everyone, to the “Building Envelope” podcast. We’re bringing back Tom Madigan today. He was with us in the last episode. It was really interesting, and we had a lot more to talk about. So, Tom, thank you very much for coming back today.

Tom: My pleasure.

Paul: And, I just want to remind everybody before we get into today’s discussion that we have a “Everything Building Envelope” newsletter, and to subscribe to that, all you need to do is text the word, “building envelope” to 22828. Again, that’s “building envelope,” text it to 22828. We’ll get you signed up, and if you’re in the Building Envelope community, there’ll be items of interest to you, technically and otherwise. So, “building envelope” to 22828. So, just to remind everybody from last time, in case you didn’t listen last time, He is the Chairman of the Construction Practice Group at Buchanan Ingersoll & Rooney. Buchannon is a national law firm and has six offices in Florida. So, Tom, today we’re going to discuss, talk, go into creative and cost-effective strategies to resolve building envelope performance disputes. And, in our last podcast, we talked about risk allocation and risk management tools. So now, even if our listeners have employed all those measures, there’s performance issues with the building envelope that can lead to litigation. And if that happens, how can parties resolve their dispute quickly and cost-effectively?

Tom: So, the first thing to recognize is that there isn’t any one size fits all strategy for getting out of lawsuits. If there was, you wouldn’t need lawyers who brought any value to the engagement, right? There’d be a playbook and everybody would follow it. That’s just not the case. Each dispute is unique, and each exit strategy has to be fashioned to the unique details of the litigation. Personalities involved, their historical approach to litigation, how the lawsuit’s being funded, all of those things can impact the ability to resolve the litigation effectively.

However, in general terms, the earlier you can focus on a resolution strategy, and the earlier you can resolve the dispute, the better. That is almost without exception. Lawsuits don’t get better over time. They get more expensive. They get messier. They become a bigger distraction to your business. When a lawsuit first gets filed, you know, everybody’s emotions are high. You’ve likely had, you know, discussions with the parties prior to the lawsuit. There was some effort to determine responsibility and resolve it. Those might have been very heated, very nasty. They were unsuccessful by definition, because now there’s a lawsuit.

At the start of the litigation, everybody’s in their own network chamber. They’re only talking to the people in their business and their lawyers. And everybody’s convinced that they’ve done absolutely nothing wrong. And their objective in the lawsuit is to be completely vindicated. That’s when you hear people say things like, “It’s a matter of principle.” That attitude erodes quickly as the legal bills start to come in every month. What you need to focus on early is the net cost of the litigation or, if you’re the owner, the net recovery. You measure success in a lawsuit by, if you’re a defendant, it’s the net cost. That’s the litigation cost, the lawyer’s fees, the expert fees, the cost of actually litigating the case plus the settlement cost. If you’re owner or other plaintiff, you measure success by the settlement amount minus the litigation cost, right? It’s your net recovery.

So, early on, start thinking about a resolution strategy, look at an opportunity to engage the parties in an effort of resolution as early as it’s practical, and focus on the net cost, or the net recovery, when you’re making bottom line decisions.

Paul: Yeah, so, you know, something that I always say, and, you know, this could be in a dispute or a real estate transaction or whatever, is that it’s good to try to make a business decision, not an emotional decision, because emotional decisions usually aren’t good decisions.

Tom: They’re almost never good decisions.

Paul: Yeah, and it’s tough. It’s tough. So, what are some of the strategies to resolve building envelope performance disputes and litigation early and cost-effectively?

Tom: So, as we’ve identified right out of the box, the earlier, the better. That’s a judgement in itself. Too early, and if people don’t have enough information to make informed decisions, then the likelihood of reaching a resolution is diminished. Too late, and you’ve got a lot of money invested in the lawsuit, and that influences peoples’ decisions. And it affects the net recovery or the net cost, and you miss the opportunity to maximize either. So, identifying the right time, but early, to try to get everybody working towards a joint resolution effort. And the most typical mechanism for that is mediation.

With building envelope performance disputes, because they often, you know, center on questions of, is the problem a design problem? Is it a construction problem? If it’s a construction problem, which element of the construction? Is there a product element? You know, was the right product used? Was there a manufacturing issue with the product? All those things are kind of swirling around, and being able to resolve a case starts with trying to come up with some answers to those questions. But, you got a lot of people with differing interests, right? So, but they also have common interest. And the common interest that you can work on is that idea of the net cost and the net recovery.

And, what I have employed effectively in some of these cases is a mediation involving a technical advisor and the parties’ experts. If you can get the parties to initially try to reach agreement or at least narrow the dispute as to the root cause and extent of the problem, then that allows you to start trying to develop a remedial plan. And it’s the remedial plan that can then be the focal point around which a settlement is constructed.

Paul: Can I ask a question? Is there a difference between a technical advisor and an expert?

Tom: Yeah, so, what I mean by that term is, in this context, everybody typically gets an expert, right? Every party goes out and obtains an expert, but it’s their expert. So, that expert in a litigation is working for a party. It is viewing the dispute from that party’s perspective, and it is independent, moniker notwithstanding. It’s working for that party and the goal is to assist that party reach its objective, which is either recovering the most amount of money or avoiding liability. So, yeah, there are experts involved in almost every case, but they all are aligned with a party. I’m talking, in this context, of going into a mediation and employing an independent expert to try to facilitate agreement among the various party experts. Or to be a sounding board for the various party experts’ opinions as to causation, opinions as to responsibility, opinions as to the appropriate fix.

Paul: How do you get to figuring out what the appropriate fix is?

Tom: Well, Paul, it’s what you do, right, when you’re called in to try to deal with a building that’s got a performance problem. You need to examine the documents. You need to potentially do some testing and forensic examination. All of the stuff that people are going to do or may do, during the course of the litigation in preparation for going to trial, to prove why they’re not responsible or somebody else is responsible. The same exercise, but here it’s being done with the goal of trying to reach some consensus or, again, at least narrow the dispute as to what is the root cause of the problem and how can we go about trying to fix it.

Paul: So, is there any merit in having everybody use a single, independent expert?

Tom: That’s just not feasible, and nobody’s gonna agree to that because you don’t know if the case is gonna settle. And if it doesn’t settle, you still got to gear up for litigation. So, everybody’s gonna have their own experts, but involving an expert in kind of a mediation role, typically that expert is retained by an actual mediator, although paid for by the parties. And that expert advises the mediator who then tries to work with the parties. But it’s key that it’s somebody who’s well respected, that the independent party, the party experts, will take seriously, will respect his or her opinions and recommendations. They’re a facilitator. They’re not an arbitrator. We’re not talking about bringing in somebody that everybody’s gonna agree to abide their decisions.

Paul: So, everybody has independent experts, and with not necessarily, or not usually, I guess I would say, the same opinions. There may be some agreement on some issues and there may be not so much on others. So, how do you bring that all together to basically try to make progress?

Tom: The format of mediation is very important in this regard, because the mediation process is confidential in the sense that the things that are said, the information that is exchanged, the offers and responses, can’t be used as evidence in the litigation. So, there isn’t concern that if I concede a point in my discussion or I conceptually agree to a particular aspect of a repair plan, that that’s gonna be used against me at trial as evidence that I’ve admitted to wrongdoing. So, the form of mediation is key to allowing everybody to come together to cooperate and try to reach a compromise resolution that brings an end to the litigation.

And that word, compromise, is the key. You can’t go into it with the mind that I’m gonna be proven right, that the mediator’s gonna agree with me, and he’s gonna tell everybody else that I shouldn’t be in the lawsuit. People go into the mediation with that mindset, there’s no chance of reaching a resolution. Everybody has to go into the mediation with the understanding that the purpose is not to determine who’s right and wrong, who’s liable or not liable, but to come up with a resolution that ends the litigation, stops the bleeding in terms of the cost, and, for the owner, starts them down the path towards getting the problem that gave rise to the lawsuit fixed, so they’ve got a properly performing building.

Paul: One of my favorite sayings that I’ve heard, you know, which I think probably many of the listeners have heard as well, is that a good settlement is one that none of the parties are completely happy with, which means that they made a compromise.

Tom: That’s right. But having said that, there are settlements that can leave everybody almost happy.

Paul: Well, getting out of the lawsuit would be one of the things that makes people really happy. Particularly, sophisticated folks who’ve been down that path before and have, like, another one of my favorite expressions is, “have felt the pain.”

Tom: Right. I mean if you’re…to think about it, I mean, litigation is a distraction for everybody, right? If you’re a building owner, you spent a lot of money to build the building that you, you know, expect to generate revenues for you, in terms of rent if it’s a commercial building, or to produce goods for you if it’s a manufacturing facility. And it’s not performing and it’s affecting your business. And now you’ve got the distraction of this lawsuit. If you’re a contractor, you wanna be building things, right? You don’t wanna be sitting in a courtroom with a bunch of lawyers instead of pursuing jobs, and you certainly don’t wanna be writing checks every month to a law firm.

Paul: So, with this, with the idea to have mediation as early as possible, and I know I’ve been involved in disputes where there’s reluctance to do that, then how do you overcome that reluctance?

Tom: It can be tricky, and you can’t do it in every case. That goes back to my initial comment that, you know, there isn’t a one size fits all strategy. But in my experience, the key above all else, is that somebody needs to take control. There needs to be one of the parties who takes control of the situation and gets everybody starting to think about working towards a resolution. And in construction litigation, particularly multi-party defect litigation of the kind you get with building envelope problems, you know, there’s a couple of obvious candidates.

One is the plaintiff, typically the owner. If the owner takes control of the situation, demonstrates a willingness to cooperate, demonstrate an interest in solving the problem as opposed to simply getting the largest dollar recovery. But if the owner communicates to the GC and the architect and the other parties that, “Look, my interest in here is fixing the problem so we can move on,” that, you know, goes a long way towards getting the defendants to think the same way. On the defense side, it’s the general contractor and the architect, right? General contractor in particular because he’s responsible for the entire building. But the work was actually performed by his subcontractors. The materials were provided by his suppliers. And, so he’s in a unique position to work with all of the various parties who have contributed to the problem, perhaps, but who also represent the potential for fixing it. So, you need one or a combination of those parties to really take control.

One of the biggest impediments to early resolution of this nature is, you know, the owner will sue the architect, say, “I’ve got all these things wrong with the building, and I think it’s a design problem.” The owner will also sue the general contractor, same lawsuit, but separate claims, “I’ve got all these problems with my building. It’s a construction problem.” And between the two of those, the owner’s position will be, “I know I didn’t do anything, I’m just the owner. It’s either a design problem or a construction problem. You two figure out which.” And the owner doesn’t make any effort to determine what the root cause is because from a legal stand point, it doesn’t have to, is its thinking.

Similarly, the general contractor brings every single subcontractor and supplier into the lawsuit as additional defendants. Those individual subcontractors and suppliers, their first reaction, too, is, “What did I do wrong? How is my scope of work implicated?” And the general contractor’s response is, “I don’t know because the owner doesn’t tell me. I just know, to the extent it’s a construction problem, I didn’t self-perform. It’s one of your all problem, not mine.” And that makes it very difficult to start working towards a resolution because you have no agreement or identification of what the actual problem is, whose work is implicated, who’s responsible, and what needs to be done to fix it. So, that’s why it’s so important that somebody take control of that process and start to work on figuring out what the root cause of the problem is, whose work is implicated. And, only once you do that can you start figuring out how to fix it, which is how you settle the case.

Paul: So, the party that takes control, how do they go about figuring out what the problem is and how to fix it?

Tom: Well, there’s…you know, in the litigation and the adversarial, I mean, that’s part of the adversarial litigation, right? That’s the purpose of the trial. Everybody gets their expert, they go in, they testify as to their theory about what the problem is and who’s responsible, and then the jury sorts it out. You know, 12 people who they pulled off the street who don’t know anything about building envelopes. That’s one way to resolve it.

Paul: And nobody wants to get there.

Tom: So, the other way to resolve it is for everybody to agree to go to mediation, where they bring their experts and their experts give their input. And the mediator, with the help of a technical advisor, listens to everybody’s input and then starts to try to craft some consensus on things. And, you know, the mediation doesn’t have to take place in one day. You can have an initial mediation where everyone gets their input, and you identify, “Well, we seem to have this agreement on this issue.” And the, you know, the experts or the independent consultant, if there is one, can look at that and say, “Okay, is there a way for us to answer that question? Can we go out and do some testing on the building to determine if it is in fact a problem with the sill, the sills, or if it’s a perimeter sealant problem? Where exactly is the source of the water infiltration?”

And if, you know, if the parties are working towards trying to resolve the dispute, short of going to court, they can agree on that testing, collectively fund it, get the results, factor that in to their negotiations and decision making. Hopefully, they can reach some agreement that, “Okay, we’ve eliminated the sealant. So, the sealant supplier is not somebody who we’re gonna expect to participate further.” It’s that sort of, you know, investigative process and consensus building as to what exactly is the problem, who’s potentially responsible, that that’s there before we can start talking about fixing it to resolve the dispute.

Paul: So, you do the testing and forensic examination, and you get to some degree of consensus amongst the parties as to what the extent that caused the problem is. What do you do next?

Tom: Well, if you’ve made it that far, you’re a long way because there’s usually a lot of bumps in the road to get to that point. And if you have actually gotten to consensus as to what the problem is, you have achieved a lot already, and I think the chances of your being able to resolve the dispute are very good. So now, the next step is we have agreement or some sense of agreement on what the problem is or what the likely cause of the problem is. Now we got to agree on how to fix it. What’s the most cost-effective, reasonable way to address the problem? And here, again, we’re talking compromise. So, you know, you’re not gonna get a resolution if the owner’s unrelenting position is, “I will accept nothing less than ripping the entire envelope off of the building and reinstalling the envelope with all new upgraded componentry, and I expect you to pay for it.” That’s not gonna get you a settlement.

Paul: No, and we’ve all been there, done that in that respect. And it’s funny because, you know, when they start out like that, they don’t always end up like that, obviously. And I can think of situations where, where I’ve been involved, where that would actually be the right fix. But even then, there’s no money to pay for it. And the owner ultimately accepted a reasonable settlement that was within the…within the resources that were available, I guess I would say.

Tom: And that, you’re right, Paul. And that’s why I made the comment up front about every situation is different. There are some cases where that is the right fix. But there’s probably a many more cases where it’s not necessary, there is an effective fix short of that, that will allow the building to perform adequately. It may not be…granted, it may not be what the owner had paid for, but again, we’re talking about trying to resolve the dispute and compromise that avoids the expense of the litigation, avoids the risk of pushing this decision in the hands of 12 people who don’t know anything about buildings, and increases the net bottom line for everybody.

Paul: And that’s managing risk, too, isn’t it?

Tom: Yes.

Paul: Yeah. So, let’s say that, you know, all this, everything’s go well. And by the way, this can be years in the making. Hopefully not, but it can be. And you fashion a remediation plan that everybody’s buying in on, how do you build a settlement around it?

Tom: That’s… If you’re that far, you’ve probably solved some of those issues. You know, so for example… And that can be the benefit of an early mediation, too, is identifying what the hurdles are, what the possibilities are. You know, if the owners got the case, if the owner, excuse me, if the plaintiff’s attorney has the case on a pure contingency, or if the owner’s interest really is in just in money, that’s gonna come out in the mediation. If the defendants are trying to work towards a fix, a settlement resolved around a fix, that’s gonna come out. But that’s important information to know, because now, now you know what you’re dealing with. You know where your efforts are best spent.

But we’re assuming that it’s not one of those cases. We have an owner whose interest really is in getting the problem fixed. We have a plaintiff’s lawyer who is amenable to a resolution that is not just a payment of which he gets a piece. And so then, the settlement resolves around that, the implementation of that fix. And, there’s a lot of variations on that depending on the individual facts. You know, A, you need the consultants to have some degree of comfort in both the reasonableness of the fix, that it’s not overkill, but that it’s also effective. You need to get the owner’s buy-in, obviously, that the fix, whatever it is, gives them a building that performs to its expectations or as near to those expectations as possible under the circumstances. That often requires some margin of error in the remediation plan that gives the owner the benefit of the doubt on some of the issues in the dispute. You know, you may not reach agreement that there’s a problem with a particular detail, but you can address it and compensate for it or fix it at a relatively small cost if you take that issue off the table.

You don’t reach agreement, then it’s a problem. But your fix addresses it so that if it is a problem, the owner can be comfortable that it’s addressed. That’s a key, is taking into account that there may not be agreement on what all the contributing causes are. So, you got to come up with a remedial plan that has developed some suspenders, to some degree. And not only fixes what you may think is the problem, but compensates for other potential problems. Getting the designer and the contractor’s buy-in is reasonableness and proportionality. It can’t be an economically wasteful remediation plan. It has to be cost-efficient, and it can’t represent a betterment at the contractor’s expense. If there’s gonna be a betterment element to this, the owner’s gonna end up with a better system that any contractor then paid for, then that ought to be recognized in the settlement, from a financial perspective.

Paul: And how do you make all that happen?

Tom: Magic. And a really good lawyer.

Paul: Seems like it, seems like it. But you’re the magician, right?

Tom: Yeah, I mean, I’ve actually, you know, been involved in cases that have settled this way on a number of occasions. The most advantageous way to do this, if you can, and you can’t in every case, is if the parties, the contractors, the suppliers, the architect, are actually able to provide their goods and services and materials as an in-kind settlement. Because that’s a much lower net cost to them, right? If I’m a manufacturer, the cost for me to supply replacement product is my cost, right? It’s much lower than if I have to write a check to pay for another manufacturer to make replacement materials because there’s gonna be markup and profit margin. It’s gonna be way above cost. Similarly, if you’re a contractor contributing labor, there’s a cost associated, yeah, but it’s, again, less than writing a check for somebody else to do it and make a profit on it. So, whenever it’s possible, having the parties participate in the fix is the most economical resolution.

Paul: So, is there a circumstance where remediating the problem isn’t necessarily the best solution, and if so, what are some of the obstacles that get in the way?

Tom: Yeah, I mean, there’s some initial obstacles that make it not a realistic possibility that we mentioned, where the owner isn’t interested in getting it fixed, right? They’re just looking for money because maybe they don’t own the building anymore. Maybe they sold it, and what they’re seeking to recover is the perceived diminution in the value of the building that they got less for it when they sold it. Or, there’s a plaintiff’s lawyer on a contingency fee arrangement, and it’s difficult, you know, for somebody to take 35% of the value of a fix. And that becomes, not impossible to deal with, but it can be very, very difficult to figure out how the lawyer is going to get his share of the settlement.

And then, you know, you have contractors and manufacturers who aren’t around anymore. They’re not viable, they’ve gone bankrupt, and they’re just not…they’re not available to perform the remedial work or to provide the replacement materials. You’re gonna have to come up with an alternative source of labor or materials. Where there’s really bad blood between the parties, where the discussions before the litigation got really nasty, people don’t trust each other and want nothing to do with each other anymore. That’s a particular problem for contractors and manufacturers. If they have an owner who they believe has been unreasonable, who they believe is simply looking to win the lottery in the litigation, that can be difficult to overcome even if they try to dispel that impression. And they don’t want to be involved with that owner anymore. They’d actually prefer to write a check and be done with them than to go in and provide replacement material or to do the remedial work, and then have to potentially be responsible for the replacement materials or the remedial work, right? Their concern is it’s never gonna end. They’re just gonna keep getting called back, and the owner’s gonna keep asking for more and more.

That is one of those things, that the parties have to work really hard to regain trust and to demonstrate good faith that no, you know, that the effort here is just to get it fixed and that they’re going to be reasonable to deal with going forward.

Paul: So, there are a lot of obstacles to a monetary settlement. Are there strategies for getting over those obstacles or getting around them?

Tom: There are. You need to be creative, and again, people need to be willing to compromise. And you have to maintain the trust between the lawyers, between the parties, between the consultants. You know, there’s some creative financing solutions where there is an element of payment that simply can’t be avoided as part of the settlement. You can look at the saved defense costs that you’re avoiding and that you may have reserved for or that your insurance carrier may have reserved for, and apply those reserved defense costs toward the early settlement, the financial component of it. You can explore cost sharing arrangements where, you know, the owner participates in the cost with the defendants. You can add value.

So, I said earlier that you have to avoid betterment at the contractor’s expense, but one very effective approach is to incorporate a betterment at a discount. The fix upgrades materials, enhances the design, gives the owner more value than he was actually entitled to under the contract, but at a discounted cost. So, the owner shares in the cost of the betterment as does the contractor or the supplier. They supply it at cost or at a steep discount. The owner covers that cost. It’s a win-win. The owner gets actually a better building or system than it originally contracted for, fixes its problem, and the cost to the defendants is either covered or mitigated.

Tom: Okay. The key, and I keep coming back to this, but the key to all of this, key to actually being able to achieve a resolution built around fixing the problem at an early stage of the litigation, is communication and trust. Lawyers need to be able to talk to each other. They need to row in the same direction, towards trying to resolve the litigation, not posture, not try to gain advantage. Because if they start doing that, the other lawyers are gonna see what’s going on. They’re gonna adapt similar approaches because there won’t be trust between the lawyers that they’re actually in good faith working to try to resolve the dispute, as opposed to just trying to better position themselves for the litigation as it heads towards trial.

Same with respect to the parties, to the extent that the parties communicate directly in the process. They need to convey a sincere desire to try to resolve this, to try to repair a business relationship, to try to repair or maintain a reputation in the marketplace, to maintain the trust between the parties that they’re actually trying to solve their problems as opposed to take advantage of the other side. Those two elements, open communication and trust, are the key because if you lose those, if people aren’t communicating, people don’t trust each other, then you’re not gonna be able to reach agreement. And the parties aren’t gonna be comfortable compromising because they’re gonna be fearful that they’ve just been taken advantage of. And nobody likes to feel like they’ve been taken advantage of. So, the default mechanism is to say, “Hold on. Slow down. I’m not gonna do this. I’m not comfortable.”

Paul: Tom, really great stuff. I know it’s of big interest to our listeners who obviously don’t want to be involved in litigation unless their lawyers or experts, maybe. And if they do get involved, you know, the exit strategy, the quick exit strategy’s really, really important. So, thank you very much for, you know, the time. We did two episodes which is really great. And thank you for sharing your wisdom with the listeners, with the really valuable information for them to consider and implement going forward.

Tom: Thanks for including me, Paul. I enjoyed it.

Paul: Yeah, it was great. So, I want to just remind everybody again that we have the “Everything Building Envelope” newsletter that I think that would be of real interest to our listeners. And, to subscribe to that, all you need to do is text the word, “building envelope” to 22828. Again, “building envelope” to 22828. I’d like to thank everybody for listening to the “Everything Building Envelope” podcast, and this is Paul Beers, saying, “So long ’til next time.”

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