CHALLENGES OF AN ORAL CONTRACT OR THE “HANDSHAKE DEAL”

Posted on June 27, 2015June 27, 2015 by Edward Garber

An oral contract is a contract that is not reduced to writing. In certain circumstances, and every disputed circumstance involving an oral contract, it becomes a “he said, she said” as to whether a contract was created and what the terms of the contract entailed. This is why it is always good practice to memorialize contractual terms in writing instead of accepting the “handshake deal” as the manner in which to do business.

Also, with oral contracts, the party being sued may argue that the statute of frauds bars the enforcement of the oral contract. The statute of frauds is a legal doctrine that states that an oral contract is unenforceable if it is not performed (or cannot be performed) within one year of the contract’s making. See Fla. Stat. s. 725.01. The statute of frauds does not apply if the oral contract is capable of being performed or accomplished within one year of the contract’s making. However, if there is a lawsuit concerning an oral contract, there is a strong chance that the defendant (or party the contract is being enforced against) will assert the statute of frauds as an affirmative defense.

The case of Loper v. Weather Shield Manufacturing, Inc., 40 Fla. L. Weekly D1492a (1^st DCA 2015) illustrates an oral contract scenario.

In this case, a house was constructed facing the ocean in 2001-2002. The house was constructed with large double-paned windows that came with a 10-year warranty. The owner noticed water intrusion started to occur between the panes of glass and windows began to develop a fogging affect. The contractor tried to correct the issue to no avail. In 2005, a representative from the window manufacturer inspected the windows and some of the windows were replaced. However, the water intrusion and window-fogging issues continued. In 2010, a meeting was conducted with the owner, window manufacturer, window installer, and contractor. During the meeting, the owner separately spoke with the representative from the window manufacturer. The representative explained that if the owner had a lawyer he was not going to be able to help the owner to which the owner replied he did not have a lawyer but plans to seek legal action if the problem does not get resolved. The owner stated that he wanted the defective windows replaced and wanted a new 10-year warranty (the original warranty was set to expire at the end of 2011). The representative responded that he would relay the request to his bosses; he subsequently contacted the owner to confirm there was a deal. The owner asked for the terms to be put in writing and the representative said his company’s legal department would prepare the agreement.

The owner never heard back from the representative. After calling many, many times, he discovered that the representative had been laid off. The owner then spoke with another representative that told the owner that he approved the deal and he would check on the status of the settlement agreement with his company’s legal department and get back to the owner. Of course, this did not occur. The owner followed-up with this representative and never received a call back.

By August 2011, and with the original warranty set to expire, the owner was still following-up with the manufacturer to reach a longstanding resolution to his window issues. Finally, approximately a month before the owner’s original 10-year warranty was set to expire, the owner received an e-mail from the manufacturer saying it will not extend the 10-year warranty and, thus, was reneging on the terms of the oral agreement between the parties.

The owner filed a lawsuit against the manufacturer claiming that the manufacturer breached an oral contract where windows would be replaced and a new 10-year warranty furnished.

After a jury trial, the jury returned a verdict in favor of the owner finding that there was an oral contract. However, the judge directed judgment in favor of the window manufacturer finding (1) there was insufficient consideration for the oral agreement between the owner and manufacturer and (2) even if there was consideration, the statute of frauds barred the enforcement of the oral contract because the contract required a new warranty that extended beyond one-year.

On appeal, the First District Court of Appeal reversed directing entry of judgment in favor of the owner on the breach of oral contract claim consistent with the jury’s verdict.

Regarding the trial court’s finding of insufficient consideration, the Court held that the owner’s forbearance from pursing legal rights, specifically in the context of an expiring 10-year warranty and a manufacturer’s overt run-around, was sufficient consideration. (“Viewed in a light favorable to Dr. Loper [owner], the parties had a deal that could be readily and promptly effectuated, but which languished — not due to Dr. Loper’s actions — but because of dawdling by Weather Shield [manufacturer]. The jury specifically answered ‘yes’ to the question of whether Dr. Loper ‘reasonably rel[ied] in good faith on Weather Shield Manufacturing, Inc., to reduce this oral agreement to writing,’ and could have readily concluded that the time period of Dr. Loper’s forbearance was expected to be brief, but ultimately was prolonged due to Weather Shield’s dithering….” Loper, supra.)

Regarding the trial court’s finding that the statute of frauds barred the enforcement of the oral contract, the Court held that the statue of frauds makes an oral contract unenforceable if it cannot be performed within one year of the contract’s making. But, if the oral contract is capable of performance within one year, it is enforceable. Here, the trial court focused on the fact that the contract could not be performed within one year because it contemplated a ten-year warranty (extending beyond one year). But, the issuance of the warranty could have been accomplished within one year and the issuance of the warranty, and not the length of the warranty, is what the trial court should have focused on. (“The record evidence supports the conclusion that Dr. Loper [owner] and Weather Shield [manufacturer] both intended that their oral agreement be effectuated promptly; no evidence supports that they intended that the issuance of the warranty was intended or required to occur beyond a year’s time. Because issuance of replacement policy could have, indeed should have, occurred in less than a year, the statute of frauds issue is inapplicable.” Loper, supra.)

Take-Aways

Although the owner prevailed on his breach of oral contract claim, it is always good to reduce the terms of an agreement (any agreement) to writing. The owner prevailed because he was probably a good witness that told a persuasive story to the jury that the jury found to be credible. It is the owner’s story of events the Court focused on since the owner received a jury verdict in his favor (and was the party appealing). Hence, having a credible, persuasive witness always helps!
Here, the owner’s counsel was creative. The owner’s counsel knew the owner could not sue the contractor or even the window installer because the statute of limitations expired. But, there was a colorable claim that could be asserted against the window manufacturer based on the outcome of a meeting that took place involving the owner and manufacturer. While this oral contract claim is certainly a difficult and probably expensive claim to prove, the owner prevailed on this claim (although, it is uncertain as to what expense meaning did the owner recover more than he incurred in legal fees and/or did he create an argument to recover attorney’s fees by serving a proposal for settlement).
It is uncertain why it took the owner so long to retain counsel to deal with a persistent water intrusion and window-fogging problem. The owner should have retained counsel earlier to best preserve his rights. Although the owner was able to show that his wiliness not to retain counsel supported the consideration for the oral contract, forbearance from pursuing legal rights should not come across as unreasonably indefinite or illusory. Here, the Court found that the forbearance was intended to be brief but was simply extended based on the run-around given by the manufacturer up until the point that the manufacturer knew the original warranty was expiring.

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.

CGL INSURER’S (HAVE NO!) DUTIES OF DEFENSE AND INDEMNITY UNDER FLORIDA STATUTES CHAPTER 558

Posted on June 21, 2015June 21, 2015 by Edward Garber

I previously wrote an article regarding Florida Statutes Chapter 558 and its pre-lawsuit application to construction defects. In particular, I discussed a claimant’s (e.g., owner) requirement to submit a written notice of construction defects to potentially responsible parties and those parties rights under Chapter 558.

When a party (e.g., contractor, subcontractor, design professional) receives a written notice of construction defects pursuant to Chapter 558, that party should notify its insurer (CGL or professional liability, as applicable) of a construction defect claim. This is generally the prudent avenue to ensure timely notice is given to the insurer and that the insurer starts to pay defense costs as a party participates in the Chapter 558 pre-lawsuit process.

But, what if the CGL insurer refuses to pay a party’s defense costs in participating in the pre-lawsuit process set out in Chapter 558? The recent opinion in Altman Contractors, Inc. v. Crum & Foster Specialty Ins. Co., 2015 WL 3539755 (S.D.Fla. 2015) deals with this very issue.

In this case, a general contractor received written notices of construction defects from a condominium association per Chapter 558. The general contractor notified its CGL insurer of the written notices of defects and demanded that its insurer defend and indemnify it in connection with the notices. The CGL insurer denied it had any duties with respect to a written notice of defects under Chapter 558 since the matter was “not in suit.” Subsequently, the insurer claimed it would participate in the pre-lawsuit Chapter 558 process, but that it was going to hire its preferred counsel to represent the general contractor. The general contractor objected and filed a lawsuit against its CGL insurer seeking a declaration of rights under the policy that (a) the CGL insurer’s duty to defend the general contractor was triggered upon the general contractor’s receipt of the written notice of defects per Chapter 558 and (b) the CGL insurer was responsible for paying the general contractor’s private counsel’s defense costs from the time the CGL insurer was placed on notice of the written notice of defects claim.

In analyzing this issue, the court examined the following language in the general contractor’s CGL policy (common language in CGL policies):

We will pay those sums that the insured becomes legally obligated to pay as damages because of “bodily injury” or “property damage” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for “bodily injury” or “property damage” to which this insurance does not apply. We may, at our discretion, investigate any “occurrence” and settle any claim or “suit” that may result.

***

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or

b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

Altman Contractors, supra, at *5, 6.

As reflected by the CGL policy’s language, the policy required the CGL insurer to defend the general contractor against any “suit,” and the term “suit” was defined as a “civil proceeding.” The court looked at the ordinary definition / meaning of a civil proceeding and determined that the ordinary meaning was a judicial proceeding. Since the court determined that a Chapter 558 written notice of defects claim did NOT constitute a “civil proceeding” under the CGL policy, it concluded that the CGL insurer had NO duty to defend or indemnify the general contractor under the Chapter 558 pre-lawsuit process.

Takeaways:

If your CGL policy contains analogous language to the policy in this case regarding the definition of “suit,” there is a strong chance that your CGL insurer has NO duty to defend or indemnify you in the Chapter 558 notice of defects pre-lawsuit process. This means a party has to incur its own defense costs in participating in Chapter’s 558 pre-lawsuit process. This also means any decision a party makes in Chapter’s 558 pre-lawsuit process is probably not reimbursable.
If your CGL insurer has no duty to defend or indemnify you in connection with a written notice of defects under Chapter 558, this means you need to be sued for the alleged defects in order to trigger the CGL insurer’s duty to defend and indemnify you under the policy.
It is still good practice to notify your insurer of a written notice of defects under Chapter 558. And, if you are a claimant, it is still good practice to notify potentially responsible parties’ insurers of the written notice of defects. There are insurers that will assume the defense obligation at this point even though a lawsuit has not been initiated. But, as reflected in this case, the insurer may hire their own counsel instead of the insured’s preferred choice of counsel to do so (which also means that the insurer plans on using its preferred choice of counsel if/when a lawsuit is filed against the insured).

DISCOVERY ON UNRELATED PROJECTS IS IRRELEVANT (NOT REASONABLY CALCULATED TO LEAD TO THE DISCOVERY OF ADMISSIBLE EVIDENCE)

Posted on June 18, 2015June 18, 2015 by Edward Garber

I love the Third District Court of Appeal’s recent ruling in a discovery dispute in Kobi Karp Architecture & Interior Design, Inc. v. Charms 63 Noble, LLC, 40 Fla. L. Weekly D1428a (Fla.3d DCA 2015), because its focuses on irrelevant discovery in a construction dispute.

In this case, an architect entered into a contract to perform construction administration services. The contract included certain basic services (covered by the lump sum amount) and certain optional additional services (that would result in additional compensation to the architect). One such optional additional service was the architect’s responsibility to prepare as-built plans.

After construction, the City of Miami required the owner to submit as-built plans since the completed construction deviated from the permitted plans. (This is a common occurrence as the completed construction rarely corresponds exactly with the permitted plans.) The owner wanted the architect to prepare the as-built plans for free. The architect refused since preparing as-built plans was an optional additional service entitling the architect to additional compensation. Oddly, instead of the owner working with the architect on a price for this additional service, the owner sued the architect for breach of contract for failing to prepare the as-built plans as a basic service.

The owner decided to subpoena for documents six of the architect’s clients (other owners on unrelated construction projects) for numerous documentation including contracts and communications. The owner wanted to establish that it was the architect’s custom and usage to prepare as-built plans as a basic service with other owners. (What?!?) Despite objections and a motion for protective order from the architect, the trial court allowed the owner to move forward and subpoena these non-party owners for documents. The architect moved for a writ of certiorari arguing that the court order allowing the owner to pursue this discovery departs from essential requirements of the law resulting in material irreparable injury that cannot be remedied on an appeal at the conclusion of the case.

The Third District agreed with the architect and quashed the trial court’s order allowing this discovery to take place. This appears to absolutely be the right ruling from my perspective. An architect’s contract or documents with any other owner on unrelated projects have no bearing on the contract at-issue. These other agreements or documents do not dictate what an architect agreed to do as a basic service for the instant project. They are irrelevant. What a party bargains for on one project may likely be different than what that party bargains for on another project (hence, the definition of a negotiated contract).

Although a party in litigation can pursue discovery reasonably calculated to lead to the discovery of admissible evidence (a very liberal standard), this does not mean a party has carte blanche to pursue completely irrelevant discovery or use discovery as a sword to harass another party. Here, the owner requiring the architect’s clients on unrelated projects to produce voluminous documentation would result in irreparable material injury. The Third District held that it was at a loss to see how documents from the architect’s other clients could ever be relevant (or reasonably calculated to lead to the discovery of admissible evidence) in this instant dispute.

One of the reasons I like this ruling is because there are times a party in a construction dispute seeks discovery on unrelated projects that have no bearing on the construction project in dispute. Oftentimes, this is done simply because the party pursuing the discovery knows it will be an aggravation to its opponent to produce this documentation. But, besides the aggravation, what occurs on one project typically has no significance except to that particular project. A contract for one project, and what occurs on that project, has no significance to any other project (especially a project for a different owner).

A MILLER ACT ASIDE: WHAT HAPPENS TO A THIRD TIER ENTITY IF A SUBCONTRACTOR FILES FOR BANKRUPTCY

Posted on June 13, 2015June 13, 2015 by Edward Garber

The opinion in J&B Boat Rental, LLC v. Jag Construction Services, Inc., 2015 WL 237604 (E.D.La. 2015) provides interesting analysis as to a third tier supplier’s Miller Act claim. In this case, a subcontractor entered into an oral contract with a supplier to provide self-propelled vessels (tugs) to move barges. Of course, because it was an oral contract, a dispute arose as to the rental rate for the vessels. The supplier served its notice of non-payment and filed a Miller Act payment bond lawsuit against the Miller Act payment bond surety, prime contractor, and asserted a breach of contract action against the subcontractor that hired it. The supplier was seeking approximately $66,000 in principal.

During the course of the lawsuit, the subcontractor filed for bankruptcy and the case was stayed. The supplier filed a proof of claim in the subcontractor’s bankruptcy that was objected to by the subcontractor. An evidentiary hearing was held in the bankruptcy court where the supplier was held to have an oral contract with the subcontractor and owed approximately $44,000 in principal. Of this amount, the supplier was only paid approximately $3,000 from the subcontractor’s bankruptcy estate.

The supplier then moved to lift the stay in its lawsuit to pursue only its Miller Act payment bond lawsuit against the payment bond surety and prime contractor. The supplier was seeking the $41,000 balance in rental costs for the vessels it was not paid based on the rental value of the vessels determined by the bankruptcy court. The supplier moved for summary judgment and the prime contractor and surety moved for a cross-motion for summary judgment.

The surety and prime contractor contended that the supplier should not be able to pursue the Miller Act claim because the supplier’s claim was barred (by the doctrine of claim preclusion) because it received a ruling in the bankruptcy court and was partially paid on the claim. The trial court dismissed this argument because what the supplier recovered in the bankruptcy proceeding (under a breach of contract theory) had no bearing in the supplier’s Miller Act lawsuit against the surety and prime contractor (other than, perhaps, any amounts the supplier received would offset any recovery against the surety and prime contractor).

The surety and prime contractor further contended that they should not be bound by the bankruptcy court’s holding that an oral contract existed between the supplier and subcontractor and the liquidated $44,000 amount of the contract. The court agreed because the prime contractor and surety were not parties to the bankruptcy proceeding and did not have the opportunity to litigate these issues. For this reason, the court denied the supplier’s summary judgment.

What does this mean? This means that the supplier is not capped by the $44,000 amount of its contract determined by the bankruptcy court and could proceed in its Miller Act action based on its original $66,000 amount. So, while the supplier lost the summary judgment, by doing so, it could technically proceed with more damages than it anticipated. Sounds like a win! As it pertains to the surety and prime contractor, not only did they give the supplier an argument to potentially recover more damages, but how are they going to defend against the supplier’s claim? The supplier furnished vessels that were utilized by the subcontractor in the subcontractor’s performance of the work. The supplier clearly has unreimbursed rental costs. So, without knowing any other defenses the surety and prime contractor may have, it is uncertain the value they get by trying to relitigate certain issues decided by the bankruptcy court. Again, that could benefit the supplier.

ASIDE ON THE MILLER ACT

As an aside, the trial court provided a good discussion as to a claimant’s Miller Act payment bond rights, which is definitely worthy of reiteration:

Under the Miller Act, a contractor that is awarded a contract of more than $100,000 for the construction, alteration, or repair of any public work of the United States must provide a payment bond to the government for the protection of all persons supplying labor or materials in the prosecution of the contract work. It was enacted to protect parties such as subcontractors or suppliers who work on federal projects as state-law liens cannot be applied against federally-owned property and traditional state-law remedies are unavailable. The Miller Act is highly remedial in nature and is entitled to a liberal construction and application in order properly to effectuate the Congressional intent to protect those whose labor and materials go into public projects.

***

The elements of a Miller Act claim are: (1) the plaintiff supplied materials in prosecution of the work provided for in the contract; (2) the plaintiff has not been paid; (3) the plaintiff had a good faith belief that the materials were intended for the specified work; and (4) the plaintiff meets the jurisdictional requisites of timely notice and filing.

***

Under the Miller Act, a subcontractor can sue on the payment bond by bringing a direct action against the surety without joining the contractor as a party defendant.

***

The Miller act provides a federal cause of action for which the scope of the remedy as well as the substance of the rights created thereby is a matter of federal not state law. The liability of a Miller Act surety is controlled by federal law because determination of the extent of the liability involves the construction of a federal statute, the Miller Act, under which it was created.

J&B Boat Rental, LLC, supra, at *3, 4 (internal quotations and citations omitted).

RESIDENTIAL CONSTRUCTION – SHOULD BOTH HUSBAND & WIFE SIGN THE CONTRACT?

Posted on June 7, 2015June 7, 2015 by Edward Garber

It is always good practice for residential contractors to get both husband and wife to sign the residential construction contract. But, even if only one spouse signs the contract, Florida’s Lien Law doesn’t really punish the contractor when its comes to construction liens.

Florida Statute s. 713.12 provides:

When the contract for improving real property is made with a husband or wife who is not separated and living apart from his or her spouse and the property is owned by the other or by both, the spouse who contracts shall be deemed to be the agent of the other to the extent of subjecting the right, title, or interest of the other in said property to liens under this part unless such other shall, within 10 days after learning of such contract, give the contractor and record in the clerk’s office, notice of his or her objection thereto.

In other words, one spouse is deemed the agent of the other spouse when it comes to subjecting the other to construction liens. This makes sense because generally when one spouse signs a contract for construction at his/her property, the other spouse has knowledge and is on board of the construction project. But, assuming the other spouse wasn’t aware, Florida’s Lien Law allows that spouse to provide the contractor an objection to the contract and record that objection in the public records in order for any construction lien not to impact that spouse’s interest in the property.

However, the statute only applies to real property and doesn’t apply to personal liability relating to the non-signing spouse. See Mullne v. Sea-Tech Const. Inc., 84 So.3d 1247, 1249 (Fla. 4^th DCA 2012); Meadows Southern Const. Co. v. Pezzaniti, 108 So.2d 499, 502 (Fla. 2d DCA 1959). This is why it is good practice for the contractor to get both spouses so sign the contract because while the contractor may be able to lien the non-signing spouse’s interest, that will be about it because it will not be able to impose personal liability against the non-signing spouse.

OWNER REQUESTING PROGRESS PAYMENT AFFIDAVITS FROM CONTRACTOR

Posted on June 3, 2015June 3, 2015 by Edward Garber

Florida’s Lien Law provides an owner, in particular, an infrequently used tool to take advantage of before making a progress payment to a contractor.

Previously, I talked about a contractor’s requirement to furnish the owner with a final payment affidavit before foreclosing on its construction lien.

But, an owner can request for a contractor to serve a progress payment affidavit before making a progress payment to a contractor. The owner, however, seldom requests this progress payment affidavit before making a progress payment.

Florida Statute s. 713.06(3)(c) provides:

(c) When any payment becomes due to the contractor on the direct contract, except the final payment:

1. The owner shall pay or cause to be paid, within the limitations imposed by subparagraph 2., the sum then due to each lienor giving notice prior to the time of the payment. The owner may require, and, in such event, the contractor shall furnish as a prerequisite to requiring payment to himself or herself, an affidavit as prescribed in subparagraph (d)1., on any payment made, or to be made, on a direct contract, but the furnishing of the affidavit shall not relieve the owner of his or her responsibility to pay or cause to be paid all lienors giving notice. The owner shall be under no obligation to any lienor, except laborers, from whom he or she has not received a notice to owner at the time of making a payment.

2. When the payment due is insufficient to pay all bills of lienors giving notice, the owner shall prorate the amount then due under the direct contract among the lienors giving notice pro rata in the manner prescribed in subsection (4). Lienors receiving money shall execute partial releases, as provided in s. 713.20(2), to the extent of the payment received.

3. If any affidavit permitted hereunder recites any outstanding bills for labor, services, or materials, the owner may pay the bills in full direct to the person or firm to which they are due if the balance due on the direct contract at the time the affidavit is given is sufficient to pay the bills and shall deduct the amounts so paid from the balance of payment due the contractor. This subparagraph shall not create any obligation of the owner to pay any person who is not a lienor giving notice.

4. No person furnishing labor or material, or both, who is required to serve a notice under paragraph (2)(a) and who did not serve the notice and whose time for service has expired shall be entitled to be paid by the owner because he or she is listed in an affidavit furnished by the contractor under subparagraph (c)1.

One reason an owner should want to comply with these provisions in Florida’s Lien Law and request a progress payment affidavit is to safeguard what is known as the proper payments defense. Under the proper payments defense, an owner will not be liable for construction liens that exceed the owner’s contract price with its contractor. See Continental Concrete, Inc. v. Lakes at La Paz III Ltd. Partnership, 758 So.2d 1214 (Fla. 4th DCA 2014) (“The [proper] payment defense provides that where an owner fulfills all the duties the Mechanics’ Lien Law places upon him, his liability for all mechanics’ lien claims cannot exceed the contract price.”) (internal citation omitted). But, for the proper payments defense to apply, an owner is required to comply with the requirements of Florida’s Lien Law. An owner makes proper payments by obtaining progress payment affidavits in consideration of each progress payment made to the contractor (and a final payment affidavit in consideration of the final payment) and by getting progress / partial lien wavers and releases from the contractor and subcontractors and suppliers that preserved their lien rights (and a final lien waiver / release in consideration of final payment).