The Designated Neutral. The term jumped out at me: mysterious, bold, and somehow radiating power, like a character out of Star Trek or Star Wars.
The Designated Neutral. What does it mean? The phrase came up when my colleague, Bill Morris, and I were talking to Rob Braverman and Scott Greenspun, partners at their eponymous law firm. We were chatting about trends and issues facing the co-op and condo worlds when Rob said, “Have you ever heard of a designated neutral?”’ Needless to say, we hadn’t.
Rob explained: “Boards in newly constructed or rehabilitated buildings often find themselves in protracted and expensive litigation with the sponsor/developer over construction defects. This type of litigation not only costs the unit-owners or shareholders thousands of dollars in assessments for legal and other professional fees, but also casts a pall over the building and negatively affects values and the ability to finance. “Ideally, these cases are settled by way of a payment by the sponsor to the co-op or condo in exchange for a release. However, for various reasons, some sponsors would often rather come back and perform corrective work.”
Why is that?
“First,” explained Rob, “the sponsor might also be a builder, so it is less of an economic burden for him to perform corrective work himself. Second, even if the sponsor is not a builder, he will certainly have contacts in the construction business and can have the work performed ‘wholesale.’ Third, the sponsor may put pressure on a contractor or subcontractor who is responsible for the defect and require that party to come back and do the work correctly. The board cannot do this as it has no legal relationship with the contractor.”
But why should the board trust the people who did such poor work in the first place?
“There are settlement structures that can assuage some of these concerns,” Scott replied. “All plans or drawings for remedial work are approved by the board’s design professional and made part of the settlement agreement. The board’s design professional oversees the implementation of the remedial work. An allowance can be included in the agreement for the sponsor to pay for such oversight.” What happens if, during the course of the remedial work, the board’s design professional believes that the work is not being done in accordance with the agreed-upon plans, and the sponsor/contractor disputes the notion? Does work stop?
“That’s where the Designated Neutral comes in,” Rob said. “This is an architect or engineer chosen by the board and the sponsor who is called upon to make a quick determination. If the Designated Neutral agrees that the work is not being performed properly, it must be corrected. Likewise, if the work is being performed correctly, it can proceed. The stakes can be increased by requiring the non-prevailing party to pay all costs of the dispute, including legal fees and the fees of the Designated Neutral. The remedial work also carries a warranty so that if it fails within the warranty period, it gets repaired again under the same terms and conditions of the original remedial work.”
Will it really work?
“The devil is always in the details,” said Rob. “However, with a properly documented agreement and two parties that are willing to act in good faith and put aside the emotion that so often accompanies these types of disputes, this can – and has – worked for a number of our clients. It’s a ‘win-win’ for both the building and the sponsor, with both sides potentially saving hundreds of thousands of dollars in legal expenses and avoiding the unpleasantness of litigation.”