The Beachfront Condominiums

Christopher Miers

General Information

The Beachfront Condominiums is a new development of 65 apartments on Isle de Granola in the Caribbean. The apartments are generously sized, with two and three bedrooms, and each has a large terrace with wonderful views over the ocean.

The project construction was fraught with difficulties, mostly driven by downward cost pressure from Granola Beach Ltd. (“GBL”) — a local long-established, three-generation family development company, by poor time management from the building contractor, and by difficulties in obtaining the required quality of materials and workmanship on the island.

Forty-eight apartments were sold “off plan” during construction to a number of buyers from different jurisdictions, with a completion date set out in each sale contract for the new owner to take over the apartment. Seven apartments are retained by the older generation of GBL family members. The remaining 10 apartments currently remain unsold.

Project completion was delayed seven months, and three purchasers who had sold their other houses or apartments to coincide with the first agreed completion date of the Beachfront Condominiums development were left homeless and had to find temporary rented accommodation. Furthermore, the majority of the new owners rapidly formed an action group and lobbied GBL for improvements to what they saw being constructed. GBL responded partly by turning to the designers, One Stop Design, and the building contractor, DDL, to achieve these improvements, and partly by explaining to the new owners what was and what was not provided for within the sale contracts.

Formal disputes have developed since the owners moved into their properties; 40 of the owners (“Owners”) have united in their negotiations with GBL and, since each sale contract contained an arbitration clause, each one of these 40 owners has commenced arbitration proceedings against GBL for breaches of contract. A sole arbitrator has been appointed in each case, and the 40 cases are shared equally between four different arbitrators — one Caribbean arbitrator, one European, one Russian and one Chilean. The disputes are not consolidated nor are they running to identical timetables.

The Owners’ claims in essence are for:

  1. Specific performance requiring GBL to change the design of the external sliding door and window system. The sliding door and window system allows rainwater in during heavy storms and appears too lightweight to withstand a Category 3 hurricane. Isle de Granola lies within a risk area for tropical storms and hurricanes. Although there has never been a Category 3 hurricane on the island, with the greater extremes of weather events being experienced worldwide the Owners consider that a Category 3 hurricane is a foreseeable risk and they say that the GBL sales representatives assured them during pre-purchase discussions that the building “would withstand all foreseeable weather conditions”. Damage in the event of such a hurricane will not be covered by insurance. The Owners request a higher specification system than that which has been installed; they want a system that keeps out water under all regular conditions and is tested to withstand a Category 3 hurricane.
  2. Specific performance requiring GBL to undertake improvements to the construction, or for damages in the alternative, to be assessed by the arbitrator. The Owners are concerned about cracking to the external paving, where the terracotta paving tiles are cracking in large areas of hard landscaping. This is unsightly and makes a poor impression when arriving at the properties. Weeds are starting to grow up from the cracks. The replacement of the paving is estimated to cost US$32,500.
  3. For five years from the project completion date, GBL to indemnify all Owners for maintenance costs exceeding a “cap” of US$1,000 per apartment per year, such that any maintenance costs above that cap will be met by GBL. The Owners say this cap is necessary because the poor standard of construction throughout the development would otherwise leave them at risk of higher than normal building maintenance costs. US$1,000 per[Page122:]apartment per year is generally considered normal on the island for properly constructed apartments.
  4. Compensation for rental costs of alternative accommodation for the delay of seven months. This claim is brought by only three owners, seeking a total of US$54,000.
  5. Compensation for loss of rental income due to delay in completion. This claim is brought by 20 owners, who claim they purchased apartments as investments to be rented out. They each say that the GBL sales representatives were aware that the apartment was being purchased for investment. Between them they seek compensation for average rental losses of US$4,000 per month at 75% occupancy for the seven months per apartment, being US$420,000.
  6. General damages for distress and inconvenience, the amount at the discretion of the arbitrator.
  7. Costs and interest.

GBL has also commenced arbitration proceedings against One Stop Design for failing to ensure that DDL properly constructed the apartments. GBL did not commence action against DDL — it negotiated for DDL to undertake repair work and improvements by agreement. This work is in hand but not yet complete. DDL has undertaken improvements and repairs to the private terraces and to the roofing. However work on the terracotta paving, which GBL is seeking to get DDL to remove and replace it in its entirety, has not been commenced.

GBL and the Owners have agreed to attempt to settle all of their disputes by mediation under the ICC Mediation Rules. The 40 arbitrations, which are all at early stages, have been stayed by agreement for three months while the parties attempt to settle the disputes. The mediation will be attended by the Chairman of GBL who is also one of the senior family members who has retained an apartment in the development, and by the representative of the Owners who has authority to settle on behalf of each owner. The Owners are the Requesting Party. The parties will be accompanied by their legal representatives and have full settlement authority.

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The Beachfront Condominiums

Christopher Miers

Confidential Information for the Owners

Requesting Party

As Owners, your biggest concern is to get the development finished in a way that does not leave you all with an unexpectedly large ongoing maintenance problem. The Owners would like to put this matter behind them and get on with enjoying life in this beautiful corner of Isle de Granola — including with the neighbouring family members of GBL. However you all feel that GBL has cut corners and not delivered on its promises for your dream homes.

How the Owners go about persuading GBL is a matter of extensive discussion between the different owners and while you have presented a united front to GBL, there are many differences of opinion between the owners as to the merits of the arguments, what relief you should be seeking, and how to go about achieving it. Several owners have said they cannot continue to fund arbitration proceedings, nor be at risk of the possibility of losing the arbitration with the possible consequence that they would have to pay GBL’s costs of the arbitration as well as their own.

The Owners now recognize that there were many uncertainties within the contracts for sale, where the wording was unclear. Perhaps the Owners were a little naive in not insisting that some oral assurances made by the sales representatives appeared in the contracts. On the island, however, many things proceed on the basis of trust. The Owners consider that what they now ask for is reasonable; however they are advised that their legal basis is weak on several matters of claim:

  • Where they refer to the assurances of the sales representatives made pre-contract, there is no documentary evidence to support their claim. The Owners are aware that local law will enforce oral representations of this kind, but they also realize that being dependent solely on witness evidence to persuade the four different arbitrators is a risky basis for pursuing the claim. However the sliding door and window system is a real worry, letting in rainwater as it does. If this can be solved, the Owners may not feel it essential to have a system that can withstand a possible future Category 3 hurricane. After all, if there is a Category 3 hurricane, there will be so much damage to the buildings and on the island that the windows may seem a rather minor issue.
  • The Owners are advised that they have no legal basis for demanding a cap on future maintenance costs, but they would like to negotiate this if possible. This is a major concern, because the quality of construction has fallen short of what they expected, so the Owners may find themselves burdened with higher annual maintenance costs in the future. However you have expert opinion that many parts of the construction work fall below a normal, reasonable standard, so higher than normal annual maintenance costs are to be expected, possibly US$2,000 per apartment per year and this you consider will give you leverage in this mediation.
  • Where DDL/GBL is currently remedying some problems to the private terraces and roofs which GBL accepts it is bound to do, the Owners realize these parts of the claim will most probably be resolved. You have not yet seen a satisfactory proposal for remedying the problems with the terracotta paving.

The Owners are seeking to reach a mediated agreement and would really like to avoid having to pursue these arbitrations. However they do not want to give a weak impression to GBL. The Owners have agreed that in relation to the main claims:

  1. They are prepared to compromise on the sliding door and window system providing that it is improved to keep out rainwater during storms.
  2. They want the terracotta paving to be replaced.
  3. The cap on maintenance is essential but they would accept a higher cap of US$1,250 per apartment per year provided this can be for six years, and would like to see a management committee formed with GBL and the Owners on the committee and with the task of drawing up a managed annual maintenance plan.[Page124:]
  4. The rental costs for alternative accommodation must be paid in part — the three owners would accept US$36,000 between them since they accept that there was a risk of delay.
  5. The 20 investors also accept there was a risk of delay and are prepared to accept a payment of US$12,500 to each of them.
  6. If you can settle the dispute at mediation, the Owners agree that they are prepared to forgo any recovery in respect of their final claims for general damages and costs and interest.

The Owners have each contributed into a “fighting fund” to pay for you to attend the mediation in Paris. While you are in Paris, you heard that the famous Blues band of Buddy Giselli is performing here, and — as an avid jazz trumpet player — you hoped to hear them play but all the tickets have been sold.

The 20 investor owners are also looking at other property purchases for further investment on the island. GBL has some further projects in hand and, were it not for this dispute, 10 investors have said these other GBL developments would seem quite attractive for them to buy apartments. You noted GBL’s Corals development, which is now well advanced on the most expensive part of the island, and it would be interesting to see what standards of sliding doors and windows have been used there.

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The Beachfront Condominiums

Christopher Miers

Confidential Information for GBL

Responding Party

For GBL, credibility in the island market is vital to your ongoing business interests on Isle de Granola. Through your series of family companies GBL is involved in property investment and development, property maintenance, and insurance, and you have a good reputation which brings clients in through the door. Damage to your reputation would be likely to lead to a loss of future business and would affect profits. You have various other developments under construction and would like to get some sales moving, and this dispute could lead to bad publicity.

On the Beachfront Condominiums development GBL was always aware that it was on a very tight budget to achieve the quality of development promised to purchasers. DDL’s price for the project was very low in comparison with other tenders and GBL anticipated difficulties in project delivery. In retrospect, GBL thinks the sales team may have overstated things a bit in discussions with prospective purchasers in order to make the sales. So you suspect that promises made by the sales team about the highest quality were not always consistent with the building specification and construction price. However, your lawyers have checked all of the documentation and have confirmed that such promises as might have been made in relation to the construction withstanding “all foreseeable weather conditions” were not made in writing and they do not appear in the sale contracts.

Members of three generations of the family work in GBL and differences have arisen between them regarding blame for the problems and the strategy for how to handle the numerous disputes. GBL now faces multiple arbitrations with the Owners and its legal costs are rising and are of concern to all family members. The older generation of GBL, who are living in the Beachfront Condominiums development, wish for peaceful relationships in the future with other neighbouring owners and they are pushing the other GBL family members for generous, rapid settlements with the Owners.

Regarding the particular issues in the Owners’ claims:

DDL have advised you that they can make some improvements to the windows. They cannot be sure whether they will keep out all rainwater, but think it likely. You have discussed with them the possibility of running some trials in one of the GBL family apartments. At your Corals development, which is currently under construction, for the first time you are installing sliding doors and windows designed to withstand a Category 3 hurricane, but this is because the market demand is changing for higher specifications (with higher sales prices) and the Corals development is on the most expensive part of the island, unlike the Beachfront Condominiums project.

Regarding the problem with the terracotta paving, DDL say it is a fault in One Stop Design’s specification. DDL have refused to remedy the problem. You would like this to be dealt with as an ongoing maintenance issue, but if this is important to achieve agreement on other matters you think you could meet the cost of this work and then claim it in your separate arbitration with One Stop Design.

With reference to the cap on maintenance, you cannot see why you should be obliged to give such an undertaking, but also you think there are areas where the building is not well finished. DDL estimates that around US$130,000 per annum should be budgeted for maintenance. However, if you use your own family building maintenance company, Granola Property Maintenance Ltd., you think you could do this work at cost for around US$75,000 per annum.

For the rental costs for the three families, GBL agrees that this should be paid. This is the kind of thing that could look very poor in the local newspaper.

In respect of the investors’ claims for loss of rent, your lawyer advises that the Owners have a low prospect of succeeding with this claim since GBL was not formally informed in writing that these properties were bought as investments to be rented out; and while local law will enforce

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an oral agreement or representation, the Owners will have to persuade the arbitrators on the basis of witness evidence that the potential for loss of rent was in the reasonable contemplation of the parties at the time of entering into the contracts. Your lawyer therefore has advised that you should resist this claim. However your business needs may take priority here and if the investors can be satisfied with a deal, perhaps US$10–15,000 each, then this could assist in keeping them and others in the market for further purchases of apartments in other projects. If investors were prepared to buy into another development, this could even be provided as a discount on the purchase price.

You are also quite keen to see a bit of Paris. You heard that the Owner’s representative used to play jazz trumpet and if you can get things on to a positive footing with him/her, you have been able to get four tickets to a concert being given by the famous jazz musician Buddy Giselli to which you could invite the Owner and his/her lawyer.

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The Beachfront Condominiums

Colin J Wall

Case Analysis

This is role-play depicts a typical construction dispute but with a twist. The twist is that in this particular case seven of the 65 apartments have been sold to the older generation of GBL family members who are the developers and who are in dispute with the remaining 40 owners. The seven GBL family members are pushing hard for a mediated solution, so that they can live in long-term peace with the neighbouring owners. This fact alone is a tremendous driving force towards trying to reach a mediated settlement that each party and the individuals that make up the parties can live with.

As with many construction disputes there are several specific individual claims, so it will be important that the mediator listens carefully to the parties’ presentations and draws up a detailed and accurate agenda for discussion. Simply saying that there are defects will be insufficient. There are seven matters in dispute and each one needs to be separately addressed. As in real mediations in which one or more parties has multiple interested individuals involved in the dispute, the authorized representative of the group will have somewhat limited settlement authority. In the case of the Owners, three owners have a specific claim for the cost of alternative accommodation, 20 owners have bought apartments as an investment and several owners cannot continue to fund the currently stayed arbitrations. Not only do the individual owners have different concerns but they also have different interests as well. Ten of the 20 owners are looking for further investments on the island and GBL has another up-market development which might be of interest to them.

GBL are also not in complete unity either as to what they wish to achieve in any mediated settlement. As previously noted, the older members of the family business are pushing hard for a mediated resolution. That said, neither GBL nor the Owners are keen to pursue the arbitrations. In particular GBL is concerned about reputation loss.

As is absolutely necessary in situations such as these, the authorized representative of each party has carefully prepared for the mediation and has quite specific instructions on how to deal with each of the seven disputes. A wise mediator might wish to ask the parties where they would like to start their discussion of the agenda items, hoping that the parties will choose an easy issue to start with, so as to provide momentum to the mediation. Mediators may even make this decision themselves, if they have sufficient understanding of the parties’ positions on each matter in dispute.

There are zones of agreement against the individual items in dispute and it should be relatively straightforward for there to be a settlement agreement that meets the interests of all. Any minor disagreements are likely to be resolved by the goodwill that will exist as the parties reach a consensus on the various issues in dispute. Some matters are unlikely to be recorded in the settlement agreement, like the desire of the 20 owners to seek further property investments on the island and the willingness of GBL to introduce them to their new development, but those matters will still be actioned. The burning question is will the mediation finish in time for both party representatives to put the “icing on the cake” and watch Buddy Giselli and his famous Blues band perform?

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The Beachfront Condominiums

Greg Bond

Commentary for Training

Preparing Issues, Interests, Tripwires, Options, BATNAs, and More

This is the kind of dispute where both parties are interested in resolution and both have some leeway on a number of the disputed matters. Given the nature of the conflict in housing construction, both parties really need to come to agreement. Both have enough flexibility on specific matters that the chance of agreement is good. In this case thorough preparation is likely to contribute significantly to the success of the mediation. Good preparation here means: knowing what all the issues to be discussed are and knowing what your own interests concerning each issue are. It will also include preparation on the part of the lawyers so that they can be able to back up specific demands with legal reasoning. There can be much more.

Preparation can also include working out tripwires1 for each issue. A tripwire is the moment an offer begins to look unacceptable, so that accepting will only work if offers on other issues are good enough to compensate. In this case, if GBL offers the Owners only $10,000 to make up for the loss made by those who purchased the apartments as investors, then this should be a warning bell to the Owners’ representative in mediation: the offer is low and either it has to be raised so as to meet the investors’ interests or some other benefit must be found for those investors. For each issue at stake in this mediation, each side can prepare its worst and best offers, and each will be listening for offers that fall within an acceptable range. When these are below or near the bottom of that range, the tripwire is activated.

Preparation can also involve working on various options for each issue to be discussed, and also a BATNA — the best alternative to negotiated agreement — for each issue rather than just for the agreement as a whole. The advantage in doing this is that it may make it possible to come to agreement without having to settle every outstanding matter. In this case, there are many issues to be resolved, and while full resolution of them all is desirable, the option of considering part resolution as an acceptable outcome is worth considering.

Having prepared a list of issues, interests, tripwires, options and BATNA for itself, a party might enhance its preparation by doing the same for the other party — based partly on what is known about the other party and partly on reasonable assumptions. If they are astute, in this case both the Owners’ and GBL’s representative will both have included Buddy Giselli’s concert on their list of issues and interests and the Chairman of GBL will already know that this will be on the Owners’ representative’s list.

Assuming that the parties prepare well, what is the role of the mediator? Why do they even need a mediator? In a multiple-issue dispute like this, the mediator plays a key role in structuring discussion and making sure the parties talk about everything they need to in a sensible order. Good mediators and negotiators may well ensure that offers are made and deemed acceptable in principle, but that they are then “parked” and nothing is committed to until everything has been talked through.

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1
The use of the concept of the tripwire in this context is taken from roger Fisher and William Ury, Getting to Yes. Negotiating Agreement without Giving In.