If there is one commandment carved in stone about construction projects in New York City, it surely is this: thou shalt expect the unexpected. And since surprises frequently lead to disagreements, you should also expect that the unexpected will lead your co-op or condo board into battle. Before you engage the “enemy” – your contractor, engineer, or architect – you need to decide which strategy is most likely to result in victory.
Basically, you’ve got five options: negotiation, mediation, arbitration, litigation, or some artful combination of one or more of the above.
The board of a 39-unit co-op in Yonkers recently locked horns with its engineer and contractor over a disputed $1.2 million exterior repair job. Loath to spend time and money on a lawsuit, the seven directors opted to pursue mediation and then arbitration. This board’s story has some agonizing moments – and some valuable lessons along the way.
Leaks and Finances
John Kolenda moved into 293 North Broadway in 1999 and realized, before long, that the place had problems. The brick-and-masonry building, with its Tudor detailing and a crenellated parapet, was built in 1929 and converted to a co-op in 1971. Kolenda, a real estate attorney, became aware that there were persistent leaks in at least half of the apartments, and that the co-op’s finances were in bad shape as well. The root of the problem, as he saw it, was that the board was unwilling or unable to raise the necessary money for overdue repairs. At the time, the association was dominated by a president who had been in power for nine terms. Kolenda thought of him as “the king of the co-op” and decided things had to change.
So Kolenda mustered a team of shareholders who shared his concerns, and in the summer of 2007, the group mounted a campaign to wrest control of the board. They won a majority of the nine seats available at the time, though the former president retained a spot. Kolenda became president.
Now came the hard part. The board hired an engineer to do a building-wide survey, and he found many errors in the previous engineer’s report, as well as some disturbing infrastructure problems. The roof was leaking; shoddy repair work on many window lintels was causing additional leaks; masonry needed repairs; and sections of the parapet were crumbling. The estimated cost of the work was $1.2 million. But the co-op had no capital reserves. One obvious source of fresh funds – refinancing the mortgage – was not on the table because the co-op was locked into a long-term mortgage that had a $250,000 prepayment penalty. The board was painted into a corner.
“An assessment would have been prohibitive, so we had to pay that penalty in order to be able to refinance the mortgage and move ahead,” Kolenda says. The board swallowed hard and did it – while raising maintenance by 30 percent.
Bids were solicited, five contractors responded, and the board decided to go with an outfit from Brooklyn. Work began in 2008 on a job that was projected to take one year. When the job stretched into 2010 and the costs kept going up, the directors grew alarmed. As usual, there were some unpleasant surprises, such as the discovery that the entire parapet had to be replaced instead of certain sections of it. Other deterioration was uncovered as the work progressed. The board called in its engineer to assess the contractor’s performance.
“The contractor is based in Brooklyn, and we’re in Yonkers,” says Kolenda. “It’s an hour or more each way. In my opinion, the supervisor assigned to the building was not here often enough. There just wasn’t enough oversight.”
It got worse. “In the spring of 2010, we discovered they’d been overcharging us for work they did do and charging us for work they didn’t do,” Kolenda says. So the board had its engineer do a complete audit. All the errors found were in the contractor’s favor. “There was a definite pattern,” Kolenda adds.
After firing the contractor, the directors brought in a replacement to finish the job. The original contractor promptly put a mechanic’s lien on the property to collect money he claimed he was owed. The board countered that the contractor owed the co-op. It was war.
The Battle Joined
Construction contracts typically follow a template supplied by the American Institute of Architects, which includes “dispute resolution” provisions. Based on the advice of a board’s attorney – who takes into account factors such as the cost and complexity of the job – these provisions will guide a board as it works to resolve disputes.
The Yonkers co-op’s contract called for a three-step process to be run by the American Arbitration Association (AAA), a New York-based, not-for-profit company that has been working to sort out conflicts since 1926. The first step was an informal attempt to have the engineer resolve the dispute with the contractor. That failed. The second step was a non-binding mediation between the co-op and the contractor with an AAA mediator. But the contractor proved uncooperative, and the contractual 60-day time limit on the mediation elapsed without a resolution.
Next came binding arbitration, which is usually less expensive and time-consuming than litigation. In a typical case, after paying a non-refundable fee (ranging from $750 to $2,000, depending on the number of arbitrators), the parties work together to agree on the parameters of the process. Both sides fill out forms specifying their desired level of service, preferred areas of arbitrator’s expertise, and any firms or individuals that might compromise an arbitrator’s impartiality. The AAA then produces a list of up to 15 potential arbitrators, complete with short biographies. If the two parties can’t agree on an arbitrator, the AAA can appoint one. The parties must share their evidence with each other and present copies to the arbitrator prior to a formal hearing.
In the co-op’s case, the contractor failed to show at the hearing, while the board’s engineer spent five hours laying out the evidence.
“There are two big advantages to arbitration,” Kolenda says. “When you do litigation, you spend a tremendous amount of time in discovery, producing documents and evidence. In litigation, that would have taken us a year, minimum. And second, in every litigation, the judge who handles the discovery may or may not handle the trial. It’s a crapshoot. Some judges are great, some are terrible. With AAA, you get a list of potential arbitrators and you get to choose one, or three, based on their area of expertise. And they must disclose if they have any connections to either party.”
But there’s no cut-and-dried “right” way to pursue these disputes, cautions Dan Rice, the attorney retained by the Yonkers co-op. While he didn’t want to talk about specifics in this board’s dispute with the original contractor, Rice was willing to discuss the pros and cons of the various ways to resolve such disputes.
In large projects, the decision whether to arbitrate or litigate can be complicated, according to Rice, who has been practicing construction law for 30 years. “In a smaller project, arbitration is useful because it limits expense and brings rapid resolution. Having said that, some lawyers feel arbitration doesn’t bring about a just result.” Kenneth Block, a partner in the law firm of Tannenbaum Helpern Syracuse & Hirschtritt, explains that “when there are more players involved and the disputes are more complex, arbitration can be just as time-consuming and costly as litigation. You have to pay fees, pay up to three arbitrators, sometimes as much as $500 an hour. And it can drag out. If you go to trial, you continue until it’s done. And in court, you have the right to appeal.”
That said, Block still regards litigation as a last resort. “I want to resolve disputes without litigation or arbitration,” he says. “If there is an issue and the parties don’t resolve it, I bring up the cost of lawyers and court costs – and I find that the desire to avoid those is an incentive to resolve the matter. Sometimes when we’re already in litigation, in the discovery process, I might suggest bringing in a mediator and trying to resolve it. If that fails, we might go into arbitration, or back to litigation.” In other words, arbitration is a fluid, imprecise art. Adaptability to changing circumstances is crucial.
The Yonkers co-op wound up carrying the day – sort of. In the summer of 2011, two years after the repair job was supposed to be completed, the AAA arbitrator awarded the co-op $230,000, about two-thirds of what it had sought. It wasn’t everything, but it was better than nothing. Now came the last hurdle: collecting the money.
Which brings us to another advantage of litigation. In court, a judge’s decision produces a judgment – a legally binding document specifying who owes what to whom. A marshal or sheriff is legally empowered to take the money from the losing party’s account and transfer it to the winner’s – if there is any money. In arbitration, the arbitrator produces an “award,” which has no binding legal power. When confronted with the demand to pay $230,000, the contractor at the Yonkers building simply refused to pay. So the co-op had to go to court, after all.
“Now we get to the downside of arbitration,” Kolenda says. “You end up in court anyway because you can’t enforce an award without a court’s confirmation. We had to file a lawsuit in state supreme court to get confirmation of the arbitrator’s award.”
Getting an award converted into a legally binding judgment is “a fairly quick process,” according to one lawyer. Even so, the contractor argued that the award was invalid because the mediation process had been mishandled – a baldly technical ploy. In a 12-page decision, a supreme court judge ruled in the co-op’s favor. The contractor then appealed the ruling, and the appellate court ruled in favor of the co-op. Nearly two years after firing the contractor, the cooperative finally collected its money (the repair job itself was completed in spring of 2011).
“You have to think about the endgame,” says Rice, the board’s lawyer. “At the end of the day the question becomes: how do we get the money? Every lawyer who does this kind of work has an eye on the endgame. Still, there’s no assurance that you’ll be able to collect the money. The party might file for bankruptcy, they might be broke. The attorney has to use his or her head. It’s an imperfect world and an imperfect system.”
Kolenda estimates the co-op spent between $10,000 and $15,000 on the arbitration – and estimates that the bill would have been three or four times higher if the board had gone to court at the outset. Despite the tortuous path the board had to travel to reach its destination, he isn’t bedeviled by second thoughts.
“If I had to do it again, I would do it this way again,” he says. “And I’m a lawyer.” His advice to other boards? “Watch your contractor. Also, get a good lawyer and hire competent professionals.”
And, of course, expect the unexpected.