When does a claim for $50,000 against your business end up costing you two or three times that amount? When you lose the case you’re litigating, in full or in part, and you end up owing years of interest and attorneys’ fees to the other party on top of the underlying claim amount – while also paying your own attorney to defend the claims.

Let’s walk through a real-life example

A new unpublished New Jersey Appellate Division case readily illustrates this problem. R.M.R. Elevator Company, Inc. v. Broad Atlantic Associates, LLC (Docket No. A-2406-20, June 6, 2022), began in arbitration, as required by the parties’ contract to resolve disputes.  The plaintiff elevator company claimed it was owed approximately $50,000 for work performed on several contracts with the defendant commercial building owner. The defendant claimed not only did it not owe the plaintiff any money, but it had been damaged by the plaintiff’s work, so the defendant filed a counterclaim against the plaintiff for $150,000.

About one-and-a-half years after filing its claims in arbitration, the plaintiff ultimately prevailed and was awarded $28,542.65 for its work performed (after a setoff for the defendant), PLUS an additional $16,559.68 in interest (presumably years of interest at a high contractual rate from the time the balance was due), AND $38,289 in attorneys’ fees (as permitted by the parties’ contract to the plaintiff when forced to take action to collect), for a total of $83,391.33. Added to that sum were the arbitration fees and arbitrator compensation allocated against the defendant that increased the total award to $99,566.33 (as an arbitrator in an arbitration is entitled to compensation in the form of an hourly fee).  The defendant’s counterclaim, meanwhile, was denied in its entirety.

Unfortunately, that was not the end of the defendant’s economic pain. When the plaintiff applied to the Superior Court to confirm the arbitration award, the defendant opposed the application and sought to vacate the award. The Court granted the plaintiff’s application, confirming the arbitration award while also ordering the defendant to pay the plaintiff an ADDITIONAL attorney’s fee award of nearly $10,000, thereby bringing the new total amount of the judgment on the award to $109,388.88.

So, a claim that started out at about $50,000 was more than doubled based on fairly standard interest and fee-award contract provisions as well as New Jersey’s arbitration statute (for the post-arbitration fee award). The Appellate Division affirmed the lower court’s award of attorneys’ fees and the arbitration award in full.  As noted, if you add the fees the defendant had to pay to its own counsel, it ultimately would have added up to a minimum of $150,000 – or three times the plaintiff’s original claim – and likely significantly more after factoring in the fees and costs of the appeal.

Lesson learned

“Be careful what you wish for” in litigating a dispute. Even if you feel strongly about the merits of your own defenses and counterclaims, you simply never know how a case will play out and the potential downside could be significant. Conversely, if you are seeking collection of a debt, even if it takes years, you could possibly hit a home run, leaving you fully compensated for all fees and costs incurred, as well as for the loss of the use of your money – in the form of substantial interest – but, even assuming you fully prevail, it may take years to obtain any award or judgment, all while you are spending substantial out-of-pocket litigation costs as you go.  And, of course, actually collecting on any award and judgment you obtain may present a whole other complicated set of issues and challenges.

The bottom line

Settlement should always be an option to consider both before and after a litigation has been commenced – whether in arbitration or in court – for both sides of a dispute.  And the earlier you attempt to come to a resolution, the less you will have spent in litigation and the more likely you may end up with a settlement you can live with to put the dispute behind you (and without risking the nightmare scenario discussed above).  Ultimately, the decision to settle a dispute or litigate it to a final resolution is a business decision best made thoughtfully, dispassionately, and in the best interests of the business, in consultation with your attorney.

When looking at real estate trends, and especially the demographic-based fundamentals that underpin real estate values, we have seen a lot of change in very little time. The pandemic has shifted the labor market expectations of homeowners and renters alike, adjusting where developers are focused and, because no two jurisdictions are alike, impacting the way investments are underwritten and loans are made available. Whether that shift will be permanent is an open question, but there are a few things we can note.

What do the economics tell us?

Higher housing costs typically translate into longer average commuting distances, but with a clear distinction in their effects between those on homeowners and those on renters. Historically, the empirical evidence underscores that homeowners, and especially highly-leveraged homeowners, are more likely to seek new jobs in local labor markets than renters are, and that renters are less likely to accept long commutes and more likely to move nationwide than homeowners are. In other words, the labor mobility of renters – i.e., the ease and willingness with which renters can move from job to job within and across industries – tends to be greater than that of homeowners.

Is labor mobility changing?

We have seen an apparent increase in labor mobility over the last couple of years, but that increase has been across the board – for renters and homeowners alike – notwithstanding the more recent spike in interest rates and the greater impact such spikes have on homeowners versus renters.

What does this mean for commercial real estate?

Homeowners historically moved less than renters, meaning they also switched jobs less than renters did because homeowners generally had more of a commitment – financial, familial, social – to where they live. However, this dichotomy may no longer be as pronounced as it once was. With remote and hybrid work options seemingly here for the long run across a wide swathe of industries, and entrepreneurial at-home/local startups continuing to grow at least on pace with the surge in workers changing professions altogether, labor seems not only better able to move – but also actually moving – more and more to where workers want to live, not necessarily where their jobs take them. That could continue proving disruptive, and providing opportunities, in multifamily markets even after the current trend in residential rents begins to normalize along with real estate values.

As a result, lenders and developers, particularly in multifamily, have been forced to reevaluate where they are investing. They must position themselves to be where the renters are moving, of course, but in order to do so efficiently requires a solid understanding of why that is happening. For now, we continue to watch as the dust settles and our world moves toward a new equilibrium point for labor mobility and the demand for housing that is linked to it.

The COVID-19 pandemic has lasted two years, and while offices, projects, and the rest of life begin to return to pre-pandemic normal, the construction material supply chain and costs have not. In fact, it appears as though the impact on projects of material costs and delivery difficulties will be an issue going forward for the foreseeable future.

But do you know what will happen on your project if and when material prices increase? How are material delays dealt with? Even if these issues are specifically identified and accommodated for in the contract, the question remains to whether the contract is fair and reasonable or not –a reasonable contract will lead to a better project without delays, disruptions, and unwanted claims.

The standard form AIA contracts, which many in the construction industry use without second thought, fail to clearly and sufficiently account for these variables. For both price escalation and supply chain concerns, there is not a one-size-fits-all solution.

A good rule of thumb for allocating controllable risks is that the party that is in the best place to adjust and account for it should be the one to bear that risk. However, when dealing with supply chain disruptions and material price escalations, neither party is truly in a position to account for all of that risk. Therefore, the parties will need to determine before the project starts who can bear what risk, who can account for that risk, and what should the limit of that risk be.

When entering a construction contract now with a time horizon of more than a few months, and particularly one with long-lead deliverable materials, the parties need to ask themselves a number of questions, including:

  • Can the owner or contractor mitigate the risk of price escalation or material delays in some way?
  • What are the real costs of extended project duration?
  • If the risks are to be shared, how should that risk be capped?
  • Is there a reasonable assessment of the time and cost risks for material costs increases and supply chain delays? If so, can a fund be established with shared savings to incentivize timely and cost-effective completion?
  • Are there alternate materials that can be provided for to complete the project? If so, how willing is the owner/developer/end use to accept these alternates?

It is also important to remember that, as we are all aware of the ongoing impact of COVID and the interconnected nature of the global supply chain where a single ship running aground can delay delivery of goods worldwide for weeks or the Russian invasion of Ukraine can increase the costs of on-site heating for concrete formwork, these risks may no longer be “unforeseen.” It is, therefore, inappropriate to simply rely on a force majeure clause to provide the contractor with any relief for material costs or supply impacts it did not account for.

Finally, while the instinct is to protect yourself as much as possible, and place all risk on the other party, balance and fairness must be considered. A contract that places all the risk on either the owner or the contractor will likely lead to more claims, project interruptions, and a worse experience for all – if you can get the other side to sign the contract in the first place.

On February 3, 2022, New Jersey’s Appellate Division issued a decision for publication addressing the scope of the common law litigation privilege and, among other things, whether that privilege attaches to the filing of a notice of lis pendens. This article will explore the basic concepts of portions of this somewhat complicated case.

Let’s start with the basics.

  • Litigation Privilege – protects a party engaged in a legal proceeding from claims of defamation based on communications or submissions to a court relating to that legal proceeding.
  • A Notice of Lis Pendens – an official notice to the public filed with the county land records that a lawsuit involving a claim to real estate has been filed.
  • When a litigation is filed that may affect the ownership or other rights in real property, the party filing such action must also file a notice of lis pendens with the county clerk of the county in which that real property is located.

Why? The notice of lis pendens puts the public on notice that the filing party is seeking to “enforce a lien upon real estate or to affect the title to real estate or a lien or encumbrance thereon.”  A party acquiring an interest in that real property after the filing of a lis pendens notice takes its interest subject to the outcome of the litigation named and described in the lis pendens notice.

Now to discuss the recent Appellate Division decision…

The decision in Brown v. Brown, Docket No. A-0384-21 (February 3, 2022), is rooted in a probate litigation.  The decedent owned real property in Asbury Park that was leased to a Burger King.  Under a settlement agreement, the decedent’s wife was to receive payments for life out of the rental income from the property and decedent’s children took ownership of the property.  Many years later, while the children were attempting to sell the property, the wife filed a lawsuit to enforce the settlement, along with a notice of lis pendens – a red flag for a property for sale.

The court dismissed the wife’s case and the associated lis pendens was discharged. The children later sold the property – then turned around and sued the wife for, among other things, tortious interference with contractual relationship, claiming her lawsuit and lis pendens notice caused the ultimate sale price to decrease substantially.

After the wife applied to the court to dismiss the children’s claims against her, the trial court held, among other things, that the litigation privilege did not apply at all to her notice of lis pendens and allowed the tortious interference claims to stand.

On appeal, however, the Appellate Division explained that the common law litigation privilege does in fact apply to statements contained within a notice of lis pendens, which merely recite the basic allegations of the complaint in the underlying litigation (which are protected by the privilege). But that privilege does not apply to the act of filing the notice of lis pendens. Thus, the filing party is not protected by privilege from claims of an unauthorized, inaccurate or false filing of a notice of lis pendens.

In reviewing the facts of the case, however, the Appellate Division determined that the wife did have the right to file her notice of lis pendens.  The court found that the filing was proper – and not tortious – because the wife, although seeking money damages for breach of a settlement agreement (not an appropriate basis to file a lis pendens), also sought to impose a constructive trust or equitable lien on the property’s sale proceeds and she had an interest in the lease encumbering the real property.

Then the court’s decision took a twist.

In a footnote, the court recognized other possible arguments, not raised on appeal, that could possibly be made to defend completely against a subsequent action for damages resulting from the filing of a lis pendens notice:

(1) the lis pendens statutory scheme presupposes that a challenge to the filing of a lis pendens notice occur in the action identified in the notice, so the entire controversy doctrine may bar a subsequent lawsuit relating to the lis pendens notice filing; and

(2) because the filing of a notice of lis pendens is governed by statute, and the mechanism by which a party may seek to discharge the notice is contained within the statutory scheme, which does not provide for the recovery of damages, common law claims for damages may be preempted by the statutes.  It should be noted that construction lien claims in New Jersey, also filed with the county clerk against the real property land records, are also governed by a specific statutory scheme, and, unlike the lis pendens statutes, that scheme specifically provides for the possible recovery of damages and attorneys’ fees to an aggrieved party if the lien was improperly filed, as more particularly set forth in the Construction Lien Law. Thus, the legislature could provide for such remedies in the lis pendens statutes, but as yet, has not.

Why is this footnote interesting?  If the arguments in the footnote were to be adopted by the courts, then you may never be liable for damages for the wrongful filing of a lis pendens notice unless the statute is amended. If the statutory scheme does actually preempt all common law claims relating to the filing of a lis pendens notice, then there seemingly would be no situation in which the wrongful filing of a notice of lis pendens may result in liability for damages – despite there being no litigation privilege protecting the filing of a lis pendens notice.  However, as the court did not decide that issue, parties filing notices of lis pendens should proceed with caution where there is an issue as to whether such a filing is appropriate in connection with the underlying litigation.

Key Takeaways

  1. When to file a lis pendens, and when not to.
    1. When to file: When you have filed a legal action to “enforce a lien upon real estate or to affect the title to real estate or a lien or encumbrance thereon.” This language was read fairly broadly by the Appellate Division in Brown.
    2. When not to: When the underlying legal action does not seek relief that would implicate a legal or equitable interest in real property.
  2. Potential consequences to filing lis pendens that may ultimately be improper.
    1. Because the act of filing a lis pendens is not protected by the litigation privilege, if a lis pendens is wrongfully filed, it could subject the filing party to a claim for damages by a party that has been injured by the filing.
    2. However, in the Brown decision, the court noted that, although the issue was not argued in that appeal, it is possible that a court may find that an action or claim for damages was not permitted at all based on the wrongful filing of a lis pendens because the lis pendens statute provides a remedy for a party to seek an expedited discharge of the lis pendens – but does not provide for the recovery of damages.

A universal vaccine mandate comes to New York employers courtesy of New York City’s Department of Health and Mental Hygiene.

Compliance in Your Office

Effective this week, in accordance with the Commissioner of the New York City Department of Health and Mental Hygiene’s December 13, 2021 Order, all private employers with employees or workplaces in New York City may not permit any employee to come to a worksite in NYC unless that employee shows proof of at least their first COVID-19 vaccination. Proof of second vaccination must be provided within 45 days – February 10, 2022.

The Order does permit limited exceptions for either a disability under the Americans with Disabilities Act or for a sincerely held religious belief, observance, or practice under Title VII of the Civil Rights Act. If an employer can provide a reasonable accommodation without incurring undue hardship, it must do so if an employee requests an exemption on either of these permitted bases. Regular testing is not an available alternative.

Per the Order, vaccination and accommodation status records must be kept in writing but confidential and separated from the employee’s personnel file.

Compliance with the Order will be crucial for all employers in the city, as each must display an Affidavit of Compliance effective immediately.

The City may impose fines of $1,000.00 and up for violations related to failure to display the Affidavit of Compliance or maintain adequate records. However, the City recognizes that compliance may not be possible immediately, and so has stated that it is willing to work with employers who are working in good faith to comply. Accordingly, fines in the near future are unlikely in such events.

Managing Project Sites

While this applies to all employers, it is particularly troublesome for the construction industry where any particular jobsite will have multiple companies together at the same time and place, each with little to no real oversight over the internal machinations and workings of the others on site. Certainly, one trade contractor’s failure to have sufficient labor forces on site due to this new and speedily imposed requirement can negatively impact the project schedule.

The confidentiality obligation presents a problem for prime contractors, who may have difficulty verifying that any particular tradesman on a jobsite is, in fact, vaccinated. Rather, they would be forced to rely on an Affidavit of Compliance from each trade. While the Order does not require that prime contractors ensure their trades are in compliance with the Order, the prime contract may take steps to ensure that all trades are fully compliant with all laws. Accordingly, project owners, prime contractors, and trade unions may wish to impose their own vaccination requirements and verification programs independent of the City’s Order.

Conclusion

First, all employers should have already taken prompt action to establish vaccination requirements and appropriate accommodations where permitted. Even if, as is possible, the incoming administration amends or rescinds the Order in the coming weeks, such programs will help to ensure compliance in the interim.

Further, in the construction industry in particular, where reasonable accommodations that do not pose a hardship to the employer are limited, following the city’s requirements here presents the safest path to maintaining workforce efficiency and overall compliance. That does not mean, however, that no other options are available, and all employers should consider how their home office and field personnel can be accommodated.

Finally, any employer whose operations may be affected by the Order should consider the cost and time impact to the progress on each of their projects. To the extent a change request or claim should be presented to an owner or superior contractor, it should be presented in a timely manner to preserve all available rights.

For additional information on the ongoing changes we are seeing with COVID-related workplace mandates, click here.