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Error & Omission Dispute Mediation

A litigation support team was assembled to successfully address resolution of a lawsuit turned mediation involving a major Chicago based engineering contractor and its client, the builder/operator of a gas fired power plant.

Background. The Chicago law firm Mechler, Bulger & Tilson, LLP engaged Robert James, PE, now director of Accumyn’s capital project management practice, to provide dispute resolution support in a mediation arising out of an error and omissions lawsuit.

Expert witness services including reports and mediation testimony were provided by a team of specialists in support of a dispute involving more than 40 unresolved error & omission (“E&O”) claims. The claims were raised against Chicago based engineering and construction contractor Sargent & Lundy, L.L.C. and Security Insurance Company of Hartford (“Defendants”), by the contractor’s client, Columbia Energy, L.L.C., the builder/operator of a 630 MW cogeneration facility in South Carolina (“Plaintiff”). The mediation arose out of litigation originally filed by the Plaintiff in the US District Court, Northern District of California Case No. C04-04436.

Co-defendant Security Insurance Company of Hartford had issued a $10 million project specific professional liability insurance policy providing coverage of Sargent & Lundy’s work on the project.

The Plaintiffs lawsuit claimed the full value of the insurance policy as compensation for alleged breach of a professional services contract, negligence, and failure to indemnify.   After a period of discovery and submittal of the Plaintiff’s expert reports detailing specifics of 43 alleged E&O issues, the parties agreed to settle the dispute in a mediation to be held in San Francisco. The Plaintiff’s claims had been categorized by design disciplines; civil/structural, mechanical, and electrical & instrumentation (“E&I”). After initial review of case documents Mr. James arranged for discipline specialists to be engaged for provision of independent and objective opinion of each claim, and to report and testify separately on findings observed after review of claims in their field of expertise. Mr. Frank Fronek of Fronek Power Systems was engaged to address piping and mechanical issues. Mr. Fred Hassid, an independent electrical engineer, was engaged to address electrical and instrumentation issues. Mr. James addressed civil/structural issues and managed coordination with counsel.

The Plaintiff had engaged an ex-employee as an expert witness who managed preparation by project participants to prepare E&O Issue Summary documents that included alleged Problem, Solution, Cause, and Cost sections for each claim. This expert’s report presented these documents along with selected support documentation without significant additional commentary. In addition, two engineering firms were engaged by the Plaintiff to comment on findings of its expert.

Defendant Expert’s Methodology. Along with the three expert reports prepared by the Plaintiff’s expert and consultants, more than 30,000 documents representing the project’s contracts, subcontracts, design documents, meeting notes and correspondence were provided by counsel in electronic format. This data was divided by design discipline for review. Research was manual, conducted without benefit of search software.

It was agreed with counsel that E&O Issue Summaries having a Plaintiff’s estimated cost over $40,000 would be addressed in individual detailed “Response to Claim” documents. In this manner 23 of the largest alleged E&O errors were fully addressed. Each response document contained the respective expert’s opinion, plus sections addressing Background and Relevant Facts discovered within the documents, Comments, and a Cost Analysis. Other than the Response to Claim documents no separate reports opining on the Plaintiff’s three reports were prepared.

Nature of the E&O Issues. The majority of the Plaintiff’s 43 alleged E&O issues were within the mechanical discipline (53%). The remaining issues were split almost equally between civil/structural, (26%) and E&I disciplines, (21%).

·      Of the 23 largest claims, the mechanical issues involved alleged piping interferences with access to equipment; over sizing of cooling water piping and pipe supports; steam vents in unsafe locations; missing vents and drains; improperly sized tankage; and inefficient routing of fuel lines.

·      Civil/structural issues involved alleged omission of run-off design to adjacent wetlands; overdesign of pipe rack foundations and rack steel; errant placement of piping and electrical stub-ups in floors and foundations; omission of a water treatment lab; incorrect elevation of a fuel tank foundation; misallocated lube oil skid foundations; and incorrectly located rail spur trackage.

·      Significant E&I issues involved installation of both undersized and oversized cables; interference of a transformer blast wall with equipment; overdesign and omission of underground electrical duct banks; undersized fuel gas regulators; switchgear location design errors; and missing key one-line diagrams and instrument index calibration data.

The Mediation. A two day mediation was conducted by a JAMS appointed neutral at the JAMS Arbitration, Mediation and Alternate Dispute Resolution Services in San Francisco. Attendees included each party’s representatives, their counsel, the insurance carrier, and certain experts. The neutral had read the three reports by the Plaintiffs experts and the detailed Response to Claim documents prepared by the Defendant’s experts to get a full understanding of each party’s position.

A joint session was first conducted with initial presentations by each party, including opinions requested of the Defendants experts in attendance. The Plaintiff had decided to exclude its three experts from the hearing. On day one the Plaintiff’s counsel repeated its demands for the full amount of the $10 million professional liability policy. The Defendant’s initial proposal recognized certain errors or omissions estimated to amount to under $500,000. Individual Neutral/Defendant and Neutral/Plaintiff sessions in separate rooms continued to a second day, with the Neutral conveying demands, observations, concession suggestions and the party’s proposed settlement amounts between the parties. Focus quickly became directed on the ultimate settlement rather than technical issues. A second joint session on day two managed to achieve basic agreement on a settlement amount. Final settlement believed fair and just by each party, amounted to less than third of the claimed full value of the Defendants professional liability insurance policy.

Lessons Learned.
·         Attendance by experts at a mediation hearing adds value. In this case failure of the Plaintiff to allow expert presence obviously worked in the Defendant’s favor.

·         Use of ex-employees to provide litigation support risks a conflict of interest challenge. As one of the Plaintiff’s witness statements was prepared by an ex-employee bias was evident.

·         Decisions on research tactics need to be resolved soon after engaging expert services. A relatively small investment in commercial search software would likely have improved productivity.

·         Finally, it was observed that the main focus of a mediations proceedings can quickly transform from technical details to a financial bottom line.