Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

This is a very interesting case for the business and construction litigator. One of the things I really like about construction litigation is the fact that a single case can involve multiple ares of the law. Many cases are like law school exams, where the attorney must find all the issues.

Scott Wolfe at the Construction Law Monitor has posted a very interesting piece on the multiple areas of the law and multiple issues arising from claims for defective drywall installation. There is even a Chinese Drywall Blog that focuses exclusively on this issue.

Is there any argument that the builder who unknowingly installed defective drywall is off the hook? Innocence is not a normal defense to breach of contract or warranty claims. What about the suppliers? When the builders purchase goods for use in construction, the transaction is governed by the applicable states Uniform Commercial Code (Art. 2 Sales.)

The Uniform Commercial is not uniform in all aspects between the various states. But in general terms, Article 2, Sales, gives the buyer all the power to reject non-conforming goods when delivered. Clearly the drywall was not rejected because it was installed. But, once the buyer accepts the goods, or exercises control over the goods that is inconsistent with any interest of the seller, the goods will be deemed accepted. Once the goods are accepted, the seller is usually off the hook for any defects that could have been discovered with a normal inspection. But, again, there is an exception. If the defects are latent, (not readily discoverable in an inspection,) and the defect is material, the buyer can revoke the acceptance. I realize that I am greatly simplifying the code sections, but I am doing so on purpose to explain the broad structure of Article 2.

If the builder installed defective drywall, and did not now about the defect, what responsibility does the drywall supplier have to the builder? If I am representing the builder, I would immediately initiate a claim against the drywall supplier.

What about Insurance? What duty does the builder have to notify the owners of a potential hazard in their home or building? These are great questions. What are the possible remedies for the home owner? Are class actions the way to go? Some have been started. I suspect that class actions will be difficult because of the breadth and depth of the problem. There will be too many different fact situations to reasonably handle in a class action in many cases.

Another aspect of construction law is the fact that many times a builder - supplier contract will have an arbitration clause, yet there is no arbitration clause in the builders - owner contract, or vice versa.

This is problem that is worth watching. Many state courts are facing a fiscal crises, and they will be ill equipped to handle hundreds of dry wall cases. Don't be surprised to see some legislation proposed to deal with these problems.

Ultimately the injured party is the home or business owner that constructed a home or office. How the owners will be compensated - or receive relief - is going to be a challenge. Are homeowner insurance policy going to cover the damages? There are some real problems with this approach, including any pollution exclusion. Home owners need also be aware of any applicable statute of limitations. 

Will builders be willing to reconstruct buildings - which is what would be required in many cases. Will suppliers be willing to provide defect free drywall at no cost? Will the Chinese be willing to compensate the injured parties - or at least return the money to the original buyers?

This problem is just beginning.

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A recent case from the 8th Circuit reinforces what happens when the parties conduct business without considering the contract. According to the court in Physical Distribution Services, Inc. v. R.R. Donnelley, Physical Distribution (PDS) entered into a contract with Parcel Shippers, a subsidiary of R. R. Donnelley & Sons in 2003. PDS was to provide drivers for Parcel Shippers. Parcel Shippers provided a draft contract to PDS. However, in the end no agreement was ever executed.

The draft contract had a term that provided that neither party could assign the agreement without the written consent of the other party. This is a fairly standard contract provision. Despite the lack of an executed agreement, PDS began supplying drivers to Parcel Shippers, and the payments for the services were made by Donnelley.

In October 2004, Donnelley sold Parcel Shippers to American Package Express. Parcel Shippers notified PDS. In November 2004, American Package began paying the PDS invoices. In February 2005, PDS began addressing the invoices to American Package.

You can guess what happened next. In January 2006, American Package stopped making payments, and in March, 2006 it filed for bankruptcy protection. PDS wanted to find someone to pay the $695,000 in unpaid invoices. PDS looks at the draft, unsigned contract, and finds the anti-assignment clause. So PDS sues Donnelley claiming that Donnelley had violated the contract, and therefore Donnelley owed PDS for the unpaid invoices.

This falls into the, "Nice try, but no cigar," department. The court ignored the question of whether the anti-assignment clause was even part of the contract. After all, the language was only in a draft contract that was never executed. Courts tend to find the simplest issue and use that to affirm or overturn a decision. In this case, the terms of the contract didn't matter. Even assuming that the Plaintiff was correct, and the anti-assignment clause was part of the verbal contract, it still loses. Why? Because the Plaintiff knew about the business sale to American Package, never objected, and continued to do business with the purchasing company. That is called a waiver.

In the law you can almost always waive your own rights. (There are some statutory exceptions, but they don't apply here.) In this case, the court impliedly said that even if the draft contract had been executed, the plaintiff's would lose because they waived their right to enforce the provision.

The lesson from this case is clear. Know what is in your contracts. Anti-Assignment clauses are a prudent provision to place into most contracts. Then, if there is a sale of a contracting party, it is prudent to at least consider whether you want to do business with the successor company. You can't fail to decide, continue to conduct business as usual with the new company, and later decide that you want to look to the old company for recovery.

Most businesses never even look at their contracts until there is problem. In the long term this is not a wise course of action. Just ask PDS.

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 Norm Coleman is now declaring that he will appeal to the Minnesota Supreme Court in his never-ending quest to retain his seat as Minnesota’s senator.  He lost – that much is clear.  The court has rejected his attorney’s arguments of some massive unfairness in the system: Minnesota has a very good election system that has worked well over the years.  Coleman has been arguing that it is somehow unfair that if one county accidentally allowed a vote by an ineligible voter, then not withstanding the law making these persons ineligible, all the counties must do the same.  That nutty argument, and his total lack of any creditable evidence to support many of his charges, makes his case a losing proposition. 

Kevin Duchschere from the Star Tribune has written a good piece about the Coleman election case.  Coleman is currently trying to convince the public that he is continuing this fight for some higher purpose.  In other words, it is the Principle that he is fighting for. 

Any attorney who has litigated a case has probably heard a client declare that it is not the money – it is the principle.  I think these are universally the worst clients.  When we tell a potential client that their case might be good – or not, but either way it is not economically a good decision, they don’t necessarily listen.  When that same client wants to bring the action anyway, (or defend instead of settling the matter) because it is the principle of the matter that counts most, this should be a real danger sign to the attorney.  These clients almost always eventually decide that it really is the money, and not the principle that matters most.

It is easy for Coleman to take this position because he is not paying for the legal fees.  If Coleman really believes that he is fighting for some high principle and he is right, (and I doubt both of these assertions) then he should be willing to fund the entire cost of the litigation.  If he is not prepared to do that, I don’t think his representations are creditable.  “Put your money where your mouth is.”

 It is always easy to fight on other people’s money. 

The same principle applies to litigation between emotional ex-business partners, or any other business litigation for that matter.  When the fight becomes over “principle,” it is usually time to suggest that the potential client find another lawyer.     

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Agreements to arbitrate disputes are either set forth in original agreements between parties, union agreements that bind parties, (from Employerslawyer) or after a dispute arises the parties elect to take their case to arbitration. In my experience it is hard to get litigating parties to agree about anything, so an agreement to arbitrate after the parties are already in litigation is less common.

The Employee Rights Post Blog posted an interesting article about whether a party is bound by an arbitration agreement in a related agreement never seen by one party. The answer was no! Both the Employers Lawyer and the Employee Rights blogs are worth reading.

Arbitration questions and issues cover much more than labor agreements.  But the decisions in the Employer/Employee area are helpful in understanding some of the arbitration issues.   

In my practice I see two major issues relation to arbitration. The first is that many form agreements contain arbitration provisions that neither party knows or cares about when they execute the agreements. The arbitration provision is just there, and the drafter either borrowed it from another contract years ago and never updated it, or the famous, "It's always been in the contract."

Sometimes these agreements create a hardship on one or both parties, or the language forces the parties (if one wants to arbitrate) into a process that is expensive, and ill suited to help resolve the case. One good thing about an arbitration provision is that the parties can mutually agree to ignore it. Nothing forces arbitration to happen, unless one party forces the issue by demanding arbitration or if necessary, bring a motion to compel.

Arbitration has a place in the civil justice system. Many cases are better suited to arbitration before a knowledgeable arbitrator, then litigation before a judge or jury that knows nothing about the area under dispute. Construction is an area where arbitration is common and there are a number of excellent arbitrators in most areas that have the experience to give a thoughtful decision.

When the parties agree that arbitration is a good way to finally resolve disputes, it is time to be creative. Other than the standard language submitting any and all disputes to final and binding arbitration, there are a number of issues that should be considered. For example:

1.  How many arbitrators. Unless the amount in dispute is significant I would avoid appointing more than one arbitrator. They are hard to schedule, and the cost more than triples.

2.  Place of arbitration. Some agreements are silent on place, some require a place that is very inconvenient for one of the parties. Neither is a good idea. Select a location that makes logical sense considering the parties and the subject of the arbitration.

3.  Who will be the arbitrator. The parties can select an arbitrator long before any dispute. It is usually harder to agree on an arbitrator after the parties are fighting.

4.  Time for arbitration. To avoid an unnecessarily protracted process, set some limits. If the dispute is under some agreed amount, require the arbitrator to complete the arbitration within a day (or some other time period) an divide the time available for each party to present its case. This is easier in lower dollar value cases, and the lower dollar cases are where this provision makes the most sense.

5.  Limitations on authority of the arbitrator. Arbitrators have a lot of authority - more than judges as far as fashioning remedies. What about the power to make awards that are equitable in nature? There was a very interesting case in Minnesota where a contractor did a very poor job building a structure. There were lots of problems with the construction. The arbitrators order the contractor to purchase the property from the plaintiff at a certain price. This award was upheld by the court. It was also a perfect remedy in this case.

6.  Do you want the arbitrator to have the power to order discovery? This is usually a cost issue.

When parties are going to draft an arbitration provision, they need to think through what they are trying to do. An arbitrator only has the power granted in the arbitration agreement. If you don't limit the arbitrators power, it is pretty much unlimited - absent as showing of fraud. So draft carefully.
 

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 There are some recent blog posts about mediation, and those posts started me thinking about this common process.  One post discusses a mediator’s authority to excuse parties from participating.  This is a topic of great interest to any litigation attorney.  

I’ve had clients that were only in a case because their name was listed on property to which they no longer had an interest.  These clients were without any risk of a judgment against them, but a nominal party in the case notwithstanding.  I call the mediator and say, we don’t need to be here, my client does not need to incur the attorney fees, or the client does not have any interest in the outcome.  The mediator will almost always excuse the party because the party can’t affect the outcome or help move the process along.  In fact, a party like this can stall the process and prevent a settlement. 

However, the court has ordered the mediation.  Can the mediator excuse a party when the court has ordered mediation?  If the court cannot trust a mediator to make good judgments in the mediation process, then what good is the mediator?  Otherwise, the courts don’t need to supervise this closely.  After all, mediation is a contract negotiation, and it can get very complicated.  But in the end it is a contract like any other – with the added overlay of court involvement. 

Probably the only real difference is that once a mediated settlement is reached, and the parties dismiss their respective cases, usually with prejudice, the pressure of the original case is over.  However, the parties can still litigate a new cause of action – breach of the settlement agreement.

The courts decision in the Perry case is something that should be considered.  Does the fact that the mediator excused a party give another party with second thoughts about the settlement, a reason to challenge the settlement?  In most cases it should not – the parties can always waive their rights, so this practice should not interfere with an otherwise valid settlement.  The settlement agreement can also address this issue if necessary.

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