A Case Study Demonstrating the Benefits of Phased Construction Litigation or What to Do When Cabinets Start Falling Off the Walls by Thomas S. Salinger

Initially, this lawsuit started when the general contractor sued our client, the owner of a 184-unit luxury apartment complex. The owner had, in fact, not paid the general contractor all of the construction fees that the contractor claimed it was owed under the construction contract. The contractor was claiming close to 2 1/2 million dollars in fees. The owner had not paid the general contractor because the general contractor’s work was not timely, was substantially over budget, and most importantly, the owner was starting to notice that there were construction defects. It was clear after our initial investigation and evaluation that the general contractor had a legitimate claim for payment of certain of its fees. In working with the general counsel for the owner, a strategy was developed to negotiate with the general contractor and pay a percentage of the fees claimed in return for a complete release of all of the general contractor’s claims. This was strategically important because there was an attorneys’ fees clause in the AIA construction contract between the owner and the general contractor and if there was a significant recovery by the general contractor, then it very likely would have also been entitled to a substantial award of attorneys’ fees and costs. This phase of the litigation was successfully concluded through negotiations resulting in the general contractor receiving approximately 50% of the fees that it was claiming. Then the case moved on to Phase 2. Although the apartment complex had just recently been completed, certain defects started to become apparent right away. The principal defects discovered initially were: Leaking decks, Rotting foundations, The deck leaks were the first defects that were discovered. Even prior to completion, it was obvious that there were numerous leaks in the second floor decks throughout the project. As for the foundation problems, sheet metal was improperly used to protect the foundation from water infiltration. Within a few months of completion of construction, that sheet metal was so severely rusted that in certain places, it had almost rusted away. These defects proved to be minor in comparison to the problems with the cabinets. Consistent with the owners’ desire to build luxury apartments, rather than standard kitchen cabinets, the owners selected a cabinet manufacturer, with a good reputation and who came highly recommended, to construct high quality kitchen cabinets with maple doors and a maple veneer finish on the inside of the cabinets. The first defect that was noticed with the cabinets was that many of the cabinets started to yellow in an uneven fashion, a condition called “tiger striping.” The result was a look akin to “tagging” on freeway signs. Then, a year or so after the tenants started moving into the apartments, many of the kitchen cabinets, full of tenants’ belongings, started pulling away from the walls. Astoundingly, a few even crashed to the floor. All told, prior to the time remedial steps were taken by the owners to prevent anyone getting injured, five cabinets had fallen off the walls resulting in substantial damage to tenants’ property and the apartments where these incidents occurred. Fortunately, no one was injured. When cabinets started pulling away from the walls and even in some instances falling off the walls, the case quickly turned from one involving aesthetics and water damage to one involving serious safety concerns. This put a lot of pressure on the owners to take remedial action – which they did – and on the defendants to settle. As this issue grew more serious, the supplier of the paint and varnishes for the cabinets and the installer of the cabinets joined the cabinet manufacturer as parties in this case. After numerous mediation sessions before Ross Hart, Esq., the construction defect portion of the case settled for approximately $3.5 million. What was initially a contract claim by the general contractor for its fees turned into, as a result of the phase approach to this litigation and the poor construction of the cabinets, into a significant construction defect case. Because of the strategic decision to resolve this case in phases, both portions of the case were resolved very favorably for our client.