SUBCONTRACTORS AND UNJUST ENRICHMENT CLAIMS

Posted on August 24, 2013August 24, 2013 by Edward Garber

Unpaid subcontractors should not overlook unjust enrichment claims against an owner on a private construction project. There is Florida law that maintains that if it is proven that an owner has not paid the general contractor (or anyone) for the subcontractor’s scope of work, an unjust enrichment claim against the owner can survive. On the other hand, if it is proven that an owner has paid anyone for the subcontractor’s work, the unjust enrichment claim will not survive. See, e.g., 14th Henberg, LLC v. Terhaar and Conley General Contractors, Inc., 43 So.3d 877 (Fla. 1st DCA 2010); Commerce Partnership 8098 Limited Partnership v. Equity Contracting Company, Inc., 695 So.2d 383 (Fla. 4th DCA 1997); Zalay v. Ace Cabinets of Clearwater, Inc., 700 So.2d 15 (Fla. 2d DCA 1997); Zaleznik v. Gulf Coast Roofing Co., Inc., 576 So.2d 776 (Fla. 2d DCA 1991).

The case of Commerce Partnership demonstrates that a subcontractor’s unjust enrichment claim can survive if evidence proves that the owner never paid the general contractor or anyone for the subcontractor’s work:

“The judgment appealed is reversed, and the cause is remanded to the trial court to take additional evidence from the parties on whether Commerce [owner] made payment to or on behalf of its general contractor covering the benefits Equity [subcontractor]conferred on the subject property. Equity shall have the burden of proving is claim of contract implied in law that Commerce has failed to make such payment by the greater weight of the evidence. If the court shall determine that Commerce [owner] has not paid anyone for the benefits conferred by Equity, then it shall enter judgment for Equity; correspondingly, if the court shall determine that Equity has failed to prove that Commerce did not make such payment, then the court shall enter judgment for Commerce.”
Commerce Partnership, 695 So.2d at 390.

The reason this argument should not be overlooked is because subcontracts often have a pay-when-paid provision meaning the general contractor is not responsible for paying the subcontractor until it receives payment from the owner. Hence, if the general contractor has not been paid by the owner, then the subcontractor may not have good legal recourse against the general contractor. For this reason, exploring the possibility of pursuing an unjust enrichment claim against the owner may be worthwhile.

The question becomes whether the subcontractor has preserved any payment bond or lien rights. If it has, irrespective of the pay-when-paid provision, these arguments should definitely be explored and perhaps pursued. But, sometimes, a subcontractor does not properly preserve lien or bond rights, or the subcontractor is owed amounts in which there are arguments as the lienability. In these circumstances, pursuing the unjust enrichment claim could be a worthwhile alternative especially if the subcontractor has a good feeling that the general contractor was not paid the amounts it is seeking.

For more information on unjust enrichment claims, please see: https://floridaconstru.wpengine.com/legal-complexities-when-there-is-a-failed-development-project/

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CARVING OUT EXCEPTIONS IN RELEASES

Posted on August 16, 2013August 16, 2013 by Edward Garber

Releases in consideration for progress payments are a routine occurrence in the construction industry. The release language will typically include a release of lien and bond rights through a certain date and it may be broad enough to include a release of other rights through that date, such as a release of any and all claims, damages, costs, fees, amounts, etc. that are known about or incurred through the date of the release.

Contractors and subcontractors that have pending or disputed additional / extra work items and/or pending or disputed claims (whether for additional / extra work, delay, lost productivity or inefficiency, acceleration, etc.) need to be sure to carve out the subject matter of the pending items from the release language. It is ok if the specific amount of the carve-out for the additional / extra work or claim is not known as long as the carve-out clearly reflects that the entity is not releasing the amounts associated with the item.

If an owner (in the case of a contractor) or a contractor (in the case of a subcontractor) refuse to pay the progress payment after it receives the release with items carved out, there is really not much the entity can do because it needs the progress payment. However, to preserve its rights, it should absolutely save the release that was not accepted with the carve-out language and should follow-up with an e-mail or other letter that the owner or contractor, whatever the case may be, refused to pay the entity with the items carved out in the release. This way, if a dispute arises down the road, the entity has done what it can to preserve these items and prevent the opposing party from arguing that the entity waived and released its rights by virtue of the releases it executed in consideration of payment.

THE REALITY WHEN THE CONSTRUCTION LENDER FORECLOSES

Posted on August 15, 2013August 15, 2013 by Edward Garber

Sometimes, projects go bad and the developer’s (owner) lender forecloses on the real property, whether at some point during construction or after. When this happens, there are often unpaid contractors which may be named in the lender’s lawsuit so that their inferior interests to the property are foreclosed. Hopefully, the general contractor has a pay-when-paid provision in its subccontracts so that it is not responsible to pay subcontractors until it receives payment from the developer for the subcontractor’s work. While both the general contractor and subcontractors have lien rights (if the rights were preserved under Florida’s Lien Law), when the developer’s lender forecloses it more often than not means that the general contractor and its subcontractor’s liens are worthless since there will not be a surplus of funds after a foreclosure sale.

The recent case of CMH Homes, Inc. v. LSFC Company, LLC, 38 Fla. L. Weekly D1712a (Fla. 1st DCA 2013), illustrates a creative argument a general contractor tried to argue when the construction lender moved to foreclose on the construction loan and named the general contractor to foreclose its inferior interest to the property. In this case, a developer took out loans to finance a residential development. The lender recorded a mortgage.

Thereafter, the developer entered into a contract with a contractor. The contract provided that the contractor would construct a model home and would be paid for the model home when the model home was sold, but the model home could not be sold until other homes in the development were first built. (Also, in the contract, the contractor agreed that the developer possessed title to the lot in which the model home was built free and clear of all encumbrances except for the developer’s lender’s mortgage.)

The notes the developer executed and the mortgage were assigned to a new entity. The new entity filed a lawsuit to foreclose the mortgage and named the contractor as a defendant (in order to foreclose any interest the contractor may have relating to the real property). In defense, the contractor argued an unjust enrichment theory, that being it would be inequitable for the lender / new entity to take ownership of the model home without paying the reasonable value for the model home. The trial court rejected the contractor’s unjust enrichment defense. The First District Court of Appeal affirmed the trial court maintaining that the contractor conferred no benefit upon the new entity (or original lender) because the decision to loan money to the developer was made prior to the construction of the model home and prior to the developer defaulting on the loan. (Besides, the contractor contractually agreed that its interests in the real property the model home was built was inferior to the security interest of the lender’s mortgage.)

DEFERENCE GIVEN TO ARBITRATION PROVISIONS

Posted on August 12, 2013August 12, 2013 by Edward Garber

The recent case of Pulte Home Corp. v. Bay at Cypress Creek Homeowner’s Association, Inc., 38 Fla. L. Weekly D1705a (Fla. 2d DCA 2012) involves a dispute by a homeowner’s association against its developer / homebuilder. In this case, the association sued the developer / homebuilder for building code violations under Florida Statute s. 553.84. The association did this in order to try to circumvent an arbitration provision in the developer / homebuilder’s limited warranty given in favor of initial purchasers. The developer / homebuilder moved to compel arbitration which was denied by the trial court. On appeal, the Second District Court of appeals reversed the trial court finding that statutory claims were covered by the arbitration provision.

The issue to remember is that deference is given to arbitration provisions and that statutory claims, breach of contract claims, warranty claims, and tort claims are all claims that may be submitted to arbitration pursuant to an arbitration provision. In Pulte Home, the association, for strategic reasons, did not want to arbitrate and tried to pursue a claim that did not subject it to arbitration. Although the Second District did not recite the arbitration provision in the opinion, the Court maintained that the agreement to arbitrate in the limited warranty given to initial purchasers covered statutory claims.

LIEN TRANSFER BONDS AND VENUE

Posted on August 12, 2013August 12, 2013 by Edward Garber

The Fourth District Court of Appeals in Attaway Electric, Inc. v. Kelsey Construction, Inc., 38 Fla. L. Weekly D1693a (Fla. 4th DCA 2013) recently ruled that an action on a lien transfer bond (posted pursuant to Fla. Stat. s. 713.24 in the county where the project is located and lien recorded) needs to be initiated in the county where the bond is recorded. This means that even if there is a contract between the parties that requires a different venue outside of where the lien transfer bond is posted, that venue provision will not be enforced so that an action as to the lien transfer bond and an action under the contract can both be brought in the same county, i.e., where the lien transfer bond is posted.
In Attaway Electric, a subcontractor recorded liens for alleged nonpayment on Broward County projects with the same general contractor. The liens were transferred to lien transfer bonds by the general contractor. The subcontractor moved to foreclose the liens in Broward County and also sued the general contractor for breach of contract. The general contractor then moved to transfer venue to Orange County pursuant to a forum selection provision in the subcontract. The trial court granted the motion and transferred venue. The Fourth District, however, reversed finding that an action on a lien transfer bond must be brought in the county where it is recorded and “contract claims involving the same matters should be brought in the same place to avoid inconsistent rulings.” Attaway Electric.

This recent decision is important because contractors that want to obtain the benefit of a forum selection provision in a subcontract probably need to have a payment bond and ensure in the subcontract that the forum selection provision covers claims as to the payment bond surety. If there is no payment bond, specifically for a private project, a subcontractor can lien the private project for monies owed. If the general contractor (or even perhaps the owner) then transfers the lien to a lien transfer bond, the subcontractor will be able to foreclose the lien as to the lien transfer bond in the county where the bond is recorded as well as pursue a breach of contract claim against the contractor in the same county, even if the subcontract contains a forum selection provision with a different venue.