Mediating Residential Construction Disputes

by John Tweedy, From Boulder County Bar Association Newsletter, 2014

            There are many variations on the stormy topic of residential contracting gone wrong.  But the common theme for lawyers, whether representing homeowners or construction professionals, is a case that is factually dense, procedurally complex, and emotionally charged.  As a result, these disputes can sometimes cost as much – or more – to litigate as the amount in controversy.    It’s the kind of case that lawyers and clients would love to see resolved in mediation, before the dispute sinks into a welter of fees and frustration. 

            And yet, early mediation often fails to resolve homeowner construction disputes – precisely because of that same mix of factual density, procedural complexity, and emotional voltage. Lawyers hoping to succeed in mediation can maximize their odds of getting to resolution by bringing five things to the mediation table: 1) a clear project accounting; 2) a reasonable expert report; 3) a handle on the relevant legal procedure; and 4) an aggressive approach to insurance; and 5) an appraisal of the client’s emotional needs.

            1.         Project Accounting.  Any well-run residential construction project involves a system for budgeting project costs and tracking expenditures.  Conversely, a common denominator for projects gone wrong is that the project accounting has either run off the rails or never existed to begin with.  Thus, the lawyer who assembles the clearest, most accurate project accounting will command the high ground in any mediation where project dollars are at stake.   Such an accounting will necessarily identify areas where owner and contractor disagree, where payments may have been misapplied, and where cost overruns occurred.  In essence, a good project accounting serves as a “reality principle” on which meaningful settlement conversations can be based.   Without it, the mediation will likely be frustrated by the parties’ inability to find a common financial frame of reference.

            In practice, however, this advice is easier given than taken, because the parties may lack sufficient information to compile such an accounting without access to the files of the adversary.  There are two ways to address this problem.  First, counsel can insist on an exchange of project information ten days prior to mediation.  Owner and Contractor can agree to exchange emails, bank statements, timecards, materials receipts and other job records that will allow the parties and counsel to create an accounting.  If a Contractor refuses, the Owner can point out that a Contractor is required to maintain a separate accounting for every construction project, pursuant to § 38-22-127(4), C.R.S.  If an Owner is the recalcitrant party, the Contractor can rely on provisions in the construction contract requiring the Owner to furnish project-related information on request (if the contract has such language).

            2.         Expert Reports.  The other basic “reality principle” in construction defect cases is the expert report.  Parties without experts are likely to disagree fundamentally over whether certain workmanship is defective at all.  Even with experts involved, there is likely to be disagreement over the extent, severity, and cost to repair a claimed defect.  However, the differences between the competing expert reports will at least provide a basis for identifying specific disagreements, and a dollar figure in dispute, as to the defects.  These parameters create the basis for a bargaining range, and for the evaluation of possible compromise.   

            In small disputes, it may not be cost-effective to obtain a full-blown expert report.  However, at a minimum, an estimate from an independent contractor, engineer, or other construction professional will nevertheless be important to substantiate any claims of defective construction – or to rebut such claims – and to provide evidence of costs.

            3.         Procedural Context.   Construction defects are subject to early notice and inspection requirements under the Construction Defect Action Reform Act (“CDARA”), § 13-20-801 et seq., C.R.S.[2]  Unpaid contractors and subcontractors’ lien and disburser rights are subject to early notice and recording requirements of the Mechanics Lien Law, § 38-22-101, et seq., C.R.S., and the Disburser’s Statute, § 38-22-126, C.R.S.  Claims against architects and other licensed professionals are subject to a Certificate of Review, pursuant to §13-20-602, C.R.S.  If these procedures and deadlines are not attended to before mediation, a party may find itself unable to bargain effectively, even if a case is well shy of any statute of limitation. 

            4.         Insurance Issues.  The law of insurance coverage for residential construction defects is contested and evolving.  See, e.g.,  TCD, Inc. v. American Family Mutual Insurance Co., 2012 WL 1231964 (Colo. App. 2012).  Both homeowners and contractors have an interest in making sure that insurers are notified, that adjusters have an opportunity to inspect claimed defects, and that policy periods and possible exclusions are identified before mediation occurs.   If these issues are not addressed in advance, the mediation is likely to be missing a key participant – the informed insurance adjuster.    

            5.         The Parties’ Emotional Needs.  Lawyers should be alert to common patterns of emotional distress in residential construction that can derail an otherwise reasonable settlement discussion.  Homeowners, especially those in remodel cases, are likely to have approached the original construction project with excitement and a deep emotional investment in beautifying their personal space.  Contractors, in turn, often invest a sense of craft – indeed, artistry -- in their work.  The initially-shared emotional bond between owner and contractor can cause them to neglect formal safeguards, such as complete contracts and other construction documents.   After the project goes awry, personal betrayal and distrust on both sides bites sharply; the Owner may experience shoddy construction as an almost bodily sense of violation, while the Contractor feels attacked in a way that can penetrate to his core sense of self.[3]   

            Some attorneys do not believe it is their job to venture into such emotional terrain, and some clients may be unable to admit or articulate such emotional needs.  However, an attorney who hopes for an early settlement should at least evaluate the likely role of emotions in the mediation process, and should be aware of a few common strategies to address them.   For example, some clients may have a strong need to “tell the story,” if not to a judge, then to an empathically-attuned mediator, during a separate caucus that is devoted largely to that activity.   Once unburdened of the need to “speak truth,” this person may be psychologically freed-up to focus on the economics of settlement.   Conversely, some parties may need to hear an explanation – if not an apology – from the other side, requiring a joint session in which the emotional need is to “understand how all this happened.”  If a client has this need, then coordination between counsel may be helpful in advance of the mediation, so that the party who is being asked to “explain” can prepare appropriately.  If the need for “explanation” becomes apparent during the mediation itself, the mediator can help the “explaining” party prepare in a caucus (complete with a rehearsal of what the person intends to say) before getting back together in joint session.  These steps can minimize the risk that the “explaining” party may admit too much, or deny too much, or attempt to say the right thing in the wrong way.   

            In sum, successfully mediating residential construction disputes draws on lawyers’ and mediators’ expertise in the areas of project accounting, building science, and procedural construction law, as well as their familiarity with insurance issues and their ability to attend to emotional issues.  Despite these challenges, clients can reap huge benefits when residential construction cases are settled fairly at an early stage -- before the costs of litigation on all sides mount to the point where every participant becomes a loser.

[2] For a fuller discussion of the CDARA requirements, see “Statutory Regulation of Construction Defects,” Boulder County Bar Newsletter (Nov. 2012).

[3] Attorneys often fail to appreciate litigation’s emotional toll on clients.   For an empirical view of “litigation stress” and its affects, see Picou, “When the Solution Becomes the Problem: The Impacts of Adversarial Litigation on Survivors of the Exxon-Valdez Oil Spill,” 7 U. St. Thomas L.J. 68 (2009).

John Tweedy has lectured on divorce mediation in cross-cultural contexts at the Colorado Statewide Alternative Dispute Resolution Conference.