Defense Digest

If You Built It, They Will Sue: Construction Defect Litigation In The Garden State And The Trend Of Alternative Dispute Resolution

There has been an unprecedented construction boom in New Jersey over the past ten years, as there has in much of the United States. Much of this construction has been residential in areas which were once rural in character but are now quasi-suburban, accommodating homebuyers who cannot afford homes in older, established communities closer to New York and Philadelphia. Exposure to substantial construction defect claims related to this boom is probable for at least the next five to seven years.

Going forward, many construction defect ("CD") claims, some of which are already emerging, will be in counties where there traditionally has been little industry, smaller populations, and fewer judges. Since people are commuting further to work, there are now growing residential communities in areas that have historically been lightly populated. This large scale residential construction inevitably brings with it construction defect litigation. The ability of the rural county courthouses to efficiently manage these type of cases is dubious. Seating jurors in large and complex CD cases is increasingly difficult given the unavoidable time commitment. These practical issues, and the trepidation with which such large matters are understandably viewed by construction industry clients and their insurance carriers, often lead the parties to alternate methods of dispute resolution.

In New Jersey, there is a strong public policy in favor of alternate dispute resolution. For example, bodily injury claims are subject to automatic non-binding arbitration in the hope that many will resolve without further intervention of the court. In certain counties, other civil matters are subject to mandatory mediation. This court-ordered program is a process that is generally ill-suited for large CD claims, although success has been had in small disputes with modest exposures.

On the opposite end of the spectrum, court-sponsored mediation on consent of the parties is an entirely different process and has gained wide acceptance by judges and attorneys. This process, whereby the parties retain a private mediator who oversees the mediation pursuant to an order entered by the trial judge setting forth the parameters of the process, is now virtually required in CD litigation. This type of mediation, almost always utilized in our experience, results in a very high percentage of settlements in CD suits.

While mediation often results in resolution, it rarely results in vindication for defendants. That is to say that a culture of expectation of payment has been created - plaintiffs never walking away empty-handed and defendants always paying something. The idea of mediation as a certain pay-day for plaintiffs, albeit not technically guaranteed, is an impression that carriers and the defense bar should strive to change. Though parties to construction agreements often agree to arbitrate their disputes, all sides are frequently dissuaded from arbitrating, thus forgoing any economic benefit, for fear of a final, non-appealable result. Insurance carriers are often loathe to arbitrate high-exposure claims for that very reason. Though litigation costs can be minimized by arbitration, the downside of getting stuck with an unfavorable result often operates to encourage parties to waive their arbitration rights and to mediate instead, preserving their rights to litigate the dispute. Pre-arbitration mediation is a less common tactic but is a standard and required practice of the American Arbitration Association.

Mediation is undoubtedly a worthwhile tool and should neither be abandoned nor taken less seriously. However, mediation should be engaged in from a realistic perspective with a clearly communicated liability position and with the insurance carrier being heard regarding potential coverage exclusions. The importance of this last point cannot be overstated, especially when the defendant's only source of settlement funds will be an insurance policy.

Mediation will quickly disassemble and result in little more than a bill for your client if the mediator is unskilled. One's status as a retired judge or trial attorney is hardly enough. The mediator should be well-versed in CD and related coverage issues and have an appreciation for detail. Mediators should be capable of communicating to the plaintiff that not every defendant in the case should have to buy its way out. Mediators must be able to articulate to carriers, insureds, and their counsel why contribution toward settlement should be made for reasons other than saving the transactional costs of litigation.

Often, discovery is insufficient at the time of mediation. This inchoate state of the litigation, with all the attendant spared costs, may seem an appealing time to mediate and resolve the claims. From a purely dollars-and-cents perspective, this may be true. However, from a genuine-liability and breadth-of-exposure perspective, such barely developed facts may not be the best basis on which to proceed to mediation.

By revolving the entire case around pure litigation-cost considerations (an understandable and defensible business practice), the culture of expectation is inadvertently furthered by the very parties whose institutional interests run contrary to such expectations. Until such time that mediation is realized to be more than a mere conduit to compensation by the claimants, and even the mediators and judiciary in certain respects, current mediation practices will understandably continue to be perceived as a claims driver.

As construction continues and as the insurance coverage landscape evolves, so, too, will the manner in which CD claims are prosecuted, defended, and resolved. These changes require a near constant monitoring so that practitioners keep abreast of developments that enhance or impair the interests of their clients. By focusing on the CD realm and related areas, attorneys can ensure consistent results and the availability of expertise sufficient to address the complicated needs of their clients in CD cases.

This short article barely scratches the surface of a practice area that is nothing if not dense. Space constraints prohibit a robust exposition of the plethora of factors driving and affecting CD litigation in New Jersey. In future articles, we hope to address some of these issues.

*Stephen is a shareholder in our Roseland, NJ office and can be reached at (973) 618-4102 or spetrillo@mdwcg.com. Sunny is an associate in the Roseland office, and she can be reached at (973) 618-4105 or ssparano@mdwcg.com.