4. Recovery of “damages”
Due to the complexity of construction defect matters, there are numerous components to a calculation of damages. Pursuant to NRS 40.655, once a “constructional defect” is found, the claimants may recover the following “damages:”
a) Attorneys’ fees and costs;
b) Cost of repairs already made, including the cost of temporary housing;
c) Reduction in market value;
d) Loss of use of any part of the “residence” (which is defined to include driveways and etc. that are not part of the actual dwelling unit.)
e) Reasonable value of any other property damaged by the “defect”
f) Expert fees and costs, including the cost of visual inspections, report preparation, destructive testing, evaluation of loss, and etc.; and
5. The Indemnification Factor
Additionally, a party may be liable pursuant to a written contract (subcontractor indemnity clause), even absent a finding of liability for the defect alleged. Following is a fairly typical indemnification provision, with emphasis added:
To the fullest extent permitted by law, Subcontractor shall indemnify, defend (at Subcontractor’s sole cost and expense and with legal counsel approved by Contractor, which approval shall not be unreasonably withheld), protect and hold harmless Contractor, all subsidiaries, divisions and affiliated companies of Contractor, and all of such parties’ representatives, partners, designees, officers, directors, shareholders, employees, consultants, agents, successors and assigns, and any lender of contractor with an interest in the Project (collectively, the “Indemnified Parties”), from and against any and all claims (including, without limitation, claims for bodily injury, death or damage to property), demands, obligations, damages, actions causes of actions, suits, losses, judgments, fines, penalties, liabilities, costs and expenses (including, without limitation, attorneys’ fees, disbursements and court costs and all other professional, expert or consultants’ fees and costs) of every kind and nature whatsoever(individually, a “Claim”, collectively “Claims”), which may arise from or in any manner relate (directly or indirectly) to any work performed or services provided under the Contract…. The duty of defense hereunder is wholly independent of and separate from the duty to indemnify and such duty to defend exists regardless of any ultimate liability of subcontractor. Such defense obligation shall arise immediately upon presentation of a Claim by any 3 person or entity party and written notice of such Claim being provided to Subcontractor. Payment to Subcontractor by any Indemnified Party shall not be a condition precedent to enforcing such Indemnified Party’s rights to indemnification hereunder. Subcontractor’s indemnification obligation hereunder shall survive the expiration or earlier termination of the Contract and shall be enforceable by Contractor until such time as an action against the Indemnified Parties for such matter indemnified hereunder is fully and finally barred by the applicable statute of limitations or repose. Subcontractor’s liability for indemnification hereunder is in addition to any liability Subcontractor may have to Contractor for a breach by Subcontractor of any of the provisions of this contract….
These typical indemnity clauses, such as the one above, which require the subcontractor to pay the fees and costs of the developer, are in addition to the Chapter 40 repair damages. Thus, a subcontractor’s exposure includes not only the cost to repair defects, but also the plaintiff’s fees and costs, the developer/general contractor’s fees and costs, prejudgment interest on the cost of repair, and prejudgment interest on the plaintiff’s and general’s fees and costs. Hence, if the client’s expert determines that the cost of repair for a certain defect is $20,000, the client needs to understand that if the case goes to trial and the jury agrees that repairs are needed, the final judgment could be more than $300,000 when the plaintiff’s and developer’s expert fees and costs are added to that cost of repair. This is why it is so dangerous for a contractor to claim that a particular job was 95% or 99% successful, and refuse to offer to repair or otherwise settle during mediation.
In at least two cases in Nevada that have gone to trial, the jury not only awarded more than the plaintiffs were asking for, the judgment more than doubled when fees and costs were included. For example, in the Albios v. Horizon case, the jury awarded $95,000 for defects, but when Chapter 40 fees, costs, and interest were added, the judgment swelled to in excess of $355,000. Clearly most experts agree that Chapter 40 severely penalizes a subcontractor who goes to trial against homeowners. As such, it is typically in the contractor’s best interest to settle multi-party, multi-unit cases before going to trial.
6. Why Mediate?
First and foremost, to stem the flow of these cases from clogging the courts (over 500 such cases are estimated to be now pending in Las Vegas) the statute mandates mediation during the Chapter 40 process, as will the Case Management Order as the matter enters litigation. Gaining a strong understanding of the facts of each matter is fundamental to successful negotiations. Thus, a primary purpose of the initial mediation conferences during the Chapter 40 process is for the parties to meet and confer regarding scope of work and insurance issues. This process may take several conferences, especially in instances where a party’s job file cannot be located.
Once the respective parties’ scopes of work are determined, the next step is to correlate the party’s scope of work with the individual defect allegations which may be applicable. The developer’s counsel will allocate a percentage of each alleged defect to all subcontractors who may have liability for that particular issue, even if the issue is not clearly within the subcontractor’s scope of work or responsibility. For example, it is common to include so-called “defects” which are arguably design issues, under the theory that the subcontractor should have noticed that the work was not being done pursuant to local code, ordinance, or standard of care within the industry (refer back to the definition of a “defect” above.)
A mediation conference is an opportunity for a subcontractor to point out the flaws in the developer’s logic with regard to such allocations, and to raise applicable defenses, with the goal of reducing the overall demand to the subcontractor. Thorough preparation for mediation is essential in part to identify these flaws from the start. Once the developer’s counsel prepares formal demands and allocates defects to a particular subcontractor, it is very difficult to convince him to make changes later, as that would require providing another subcontractor with higher demand and allocation of defects, which were initially allocated to you. Such activity would raise questions of credibility to the developer. Thus, it is critical to disclaim liability for certain allocated defects at the initial mediation conferences. A well-prepared expert is essential to this process (see below).
Mediating to a successful negotiated settlement is also a means to avoiding the high cost and uncertain outcome of complex CD litigation.