CONSEQUENTIAL DAMAGES CAN BE RECOVERED AGAINST INSURER IN BREACH OF CONTRACT

Posted on June 1, 2019April 24, 2020 by Edward Garber

In a favorable case for insureds, the Fifth District Court of Appeal maintained that “when an insurer breaches an insurance contract, the insured is entitled to recover more than the pecuniary loss involved in the balance of the payments due under the policy in consequential damages, provided the damages were in contemplation of the parties at the inception of the [insurance] contract.” Manor House, LLC v. Citizens Property Insurance Corp., 44 Fla. L. Weekly D1403b (Fla. 5^thDCA 2019) (internal citations and quotation omitted). Thus, consequential damages can be recovered against an insurer in a breach of contract action (e.g., breach of the insurance policy) if the damages can be proven and were in contemplation of the parties at the inception of the insurance contract.

In Manor House, the trial court entered summary judgment against the insured holding the insured could not seek lost rental income in its breach of contract action against Citizens Property Insurance because the property insurance policy did not provide coverage for lost rent. However, the Fifth District reversed this ruling because the trial court denied the insured the opportunity to prove whether the parties contemplated that the insured, an apartment complex owner, would suffer lost rental income (consequential damages) if the insurer breached its contractual duties.

This ruling is valuable to insureds because Citizens Property Insurance, a creature of statute, cannot be sued for first-party bad faith. However, the Fifth District found that the consequential damages in the form of lost rental income did not require the insured to prove the insurer acted in bad faith, but merely, breached the terms of the policy. This holding can be extended to other breach of contract actions against an insurer when the insured suffered and can prove consequential-type damages caused by the breach.

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.

CONTRACTUAL WAIVER OF CONSEQUENTIAL DAMAGES

Posted on December 1, 2018April 24, 2020 by Edward Garber

Contractual waivers of consequential damages are important, whether they are mutual or one-sided. I believe in specificity in that the types of consequential damages that are waived should be detailed in the waiver of consequential damages provision. Standard form construction agreements provide a good template of the types of consequential damages that the parties are agreeing to waive.

But, what if there is no specificity in the waiver of consequential damages provision? What if the provision just states that the parties mutually agree to waive consequential damages or that one party waives consequential-type damages against the other party? Let me tell you what would happen. The plaintiff will argue that the damages it seeks are general damages and are NOT waived by the waiver of consequential damages provision. The defendant, on the other hand, will argue that the damages are consequential in nature and, therefore, contractually waived. FOR THIS REASON, PARTIES NEED TO APPRECIATE WHAT DAMAGES ARE BEING WAIVED OR LIMITED, AND POTENTIALLY THOSE DAMAGES NOT BEING WAIVED OR LIMITED, WHEN AGREEING TO A WAIVER OF CONSEQUENTIAL DAMAGES PROVISION!

Interestingly, this issue appeared in the recent case, Keystone Airpark Authority v. Pipeline Contractors, Inc., 43 Fla. L. Weekly D2601d (Fla. 1^stDCA 2018). Here, a plaintiff sued a contractor and engineer for defects to an airplane hangar and taxiways. The plaintiff claimed the engineer’s negligence through its failure to supervise the work as contractually required which resulted in defective construction. The plaintiff claimed that the engineer was responsible for the costs to repair the airplane hangar and taxiways. The engineer argued under a waiver of consequential damages provision that read:

“Passero [engineer] shall have no liability for indirect, special, incidental, punitive, or consequential damages of any kind.”

The engineer argued that the damages the plaintiff was seeking due to its failure to supervise was excluded under the waiver of consequential damages provision in the contract. The plaintiff argued that such damages are general damages and not barred. The trial court, as affirmed by the appellate court, held that the damage was barred because the damage was consequential. In doing so, the court examined the definitions of the types of damages:

General damages are ‘those damages which naturally and necessarily flow or result from the injuries alleged. . . . General damages ‘may fairly and reasonably be considered as arising in the usual course of events from the breach of contract itself. Stated differently, [g]eneral damages are commonly defined as those damages which are the direct, natural, logical and necessary consequences of the injury.

–

In contrast, special damages are not likely to occur in the usual course of events, but may reasonably be supposed to have been in contemplation of the parties at the time they made the contract. They consist of items of loss which are peculiar to the party against whom the breach was committed and would not be expected to occur regularly to others in similar circumstances. In other words, general damages are awarded only if injury were foreseeable to a reasonable man and . . . special damages are awarded only if actual notice were given to the carrier of the possibility of injury. Damage is foreseeable by the carrier if it is the proximate and usual consequence of the carrier’s action.

–

[C]onsequential damages do not arise within the scope of the immediate buyer-seller transaction, but rather stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting. The consequential nature of loss . . . is not based on the damages being unforeseeable by the parties. What makes a loss consequential is that it stems from relationships with third parties, while still reasonably foreseeable at the time of contracting.

Keystone Airpark Authority, supra (internal citations and quotations omitted).

Based on these definitions, the court agreed that the repairs to the hangars and taxiways were not special damages as “[i]t cannot be said that repairs stemming from improperly supervised construction work are unlikely to occur in the usual course of business.” Keystone Airpark Authority, supra. Such damages did not involve special circumstances for which the plaintiff would be required to give the engineer actual notice.

BUT… these damages were CONSEQUENTIAL:

[T]he cost of repair here did not constitute general damages, either, because the damages were not the direct or necessary consequence of Passero’s [engineer] alleged failure to properly supervise the construction work. The contractor could have completed the job correctly without Passero’s supervision. Thus, the need for repair did not arise within the scope of the immediate transaction between Passero and the Airpark. Instead, the need for repair stemmed from loss incurred by the Airpark in its dealing with a third party – the contractor. While these damages ‘were reasonably foreseeable,’ they are consequential and not general or direct damages.

The appellate, however, certified the following question of great public importance:

WHERE A CONTRACT EXPRESSLY REQUIRES A PARTY TO SUPERVISE CONSTRUCTION WORK AND TO DETERMINE THE SUITABILITY OF MATERIALS USED IN THE CONSTRUCTION, BUT THE PARTY FAILS TO PROPERLY SUPERVISE AND INFERIOR MATERIALS ARE USED, ARE THE COSTS TO REPAIR DAMAGE CAUSED BY THE USE OF THE IMPROPER MATERIALS GENERAL, SPECIAL, OR CONSEQUENTIAL DAMAGES?

Thus, there could be a ruling in future from the Florida Supreme Court relating to construction industry, specifically relating to the damages associated with a supervising architect or engineer.

ECONOMIC DAMAGES CANNOT BE BASED ON SPECULATION

Posted on September 22, 2018April 24, 2020 by Edward Garber

Economic damages, unlike non-economic damages (such as those in personal injury disputes), need to rest on a reasonable basis. Economic damages are those routinely seen in a construction dispute. These damages cannot be based on conjecture or guesswork and need to be supported by competent substantial evidence. Otherwise, the economic damages will be deemed too speculative because they are not reasonably quantifiable. I recently discussed a case involving the professional boxer Canelo Alvarez that was sued by a former promoter for unjust enrichment. Although the promoter recovered a jury verdict for unjust enrichment damages against Canelo Alvarez, the verdict was reversed because the methodology utilized by the promoter to demonstrate damages was speculative. This is definitely not what a plaintiff wants to happen after prevailing at the trial level!

Parties are generally involved in civil disputes because of damages. Without damages, there is no lawsuit. Thus, a party’s damages, and the methodology used to calculate the damages, is critical. While economic damages do not need to be demonstrated with mathematical precision, they do need to be supported by competent substantial evidence, i.e., they need to be based on a reasonable degree of certainty.

QUICK NOTE: MITIGATION OF DAMAGES IN CONTRACT CASES

Posted on September 14, 2018April 24, 2020 by Edward Garber

In an earlier article, I discussed an owner’s measure of damages when a contractor breaches the construction contract. This article discussed a case where the contractor elected to walk off a residential renovation job due to a payment dispute when he demanded more money and the owners did not bite. This case also discussed the commonly asserted defense known as mitigation of damages, i.e., the other party failed to properly mitigate their own damages.

In the breach of contract setting, mitigation of damages refers to those damages the other side could have reasonably avoided had he undertaken certain (reasonable) measures. This is known as the doctrine of avoidable consequences.

In contract cases, there is really no “duty to mitigate” because the claimant “is not compelled to undertake any ameliorative efforts”; rather, he is merely prevented from recovering damages he “could have reasonably avoided.” The word “reasonably” is important. The doctrine of avoidable consequences does not allow a trial court to reduce damages “based on what ‘could have been avoided’ through Herculean efforts. It applies only where a claimant fails to undertake measures to avoid damages that are available to him without undue effort or expense.

Forbes v. Prime General Contractors, Inc., 43 Fla.L.Weekly D2094a (Fla. 2d DCA 2018) (internal citations omitted).

Stated differently, (1) what reasonable efforts could the other party have undertaken to avoid damage or further damage and (2) if the other party employed such efforts, what is the quantum of those avoidable damages. Typically, you want these addressed by an expert witness so that there is evidence of reasonable efforts the other side could have undertaken and had these efforts been undertaken their damages would be reduced to “X” or it would have prevented them from incurring “Y” in damages.

CONTRACTOR WALKS OFF JOB. WHAT ARE THE OWNER’S DAMAGES?

Posted on September 14, 2018April 24, 2020 by Edward Garber

What are your damages as the result of a breach of the construction contract? This is an important question, right? It is probably the most important part of your case. If you didn’t have damages, you wouldn’t be in a dispute. So, I repeat, what are your damages as the result of a breach of the construction contract? The below case explains dealing with a contractor that elected to walk off the job mid-construction.

In Forbes v. Prime General Contractors, Inc., 43 Fla.L.Weekly D20194a (Fla. 2d DCA 2018), owners hired a contractor to perform a residential renovation job for $276,000. The owners were to pay the contractor in five draw payments (common for residential jobs) where the third draw payment was due upon the contractor’s completion of the dry-in (as defined in the contract). After the contractor received the first two draw payments totaling $138,000 plus an additional $6,000 for updated architectural plans, the contractor claimed the job doubled in price and demanded that the owners pay the contractor the third draw payment immediately (before it was due) plus an additional $31,450. The contractor refused to continue unless the owners agreed to its terms, and then walked off the job when the owners would not agree to these terms (nor should the owners agree to those terms). At the time the contractor walked off the job, the owners’ home was not habitable due to the construction.

The owners sued the contractor for breach of the construction contract and had two damages methodologies they could employ:

(1) they could deem the contract a total breach, treat the contract as void, suspend their own performance under the contract, and look to be placed in the position they would have been in prior to entering the contract (i.e., had they not hired the contractor); or

(2) they could seek the damages that would place them in the position had the contractor completed the contract. This damages methodology is more common and would result in the owners seeking the difference between the total amount to complete the contract and the amount owed under the original contract. For example, if the owners were all in at $376,000 to complete the contract, the contractor would be liable for $100,000, since the owners were always planning on the original contract amount of $276,000.

In this case, however, the owners chose the less common first damages methodology. The reason being is that the owners could not find another contractor that was reasonably willing to complete the contract. Also, because the home was uninhabitable, the owners were forced to buy another house versus indefinitely renting. This resulted in the owners losing the uninhabitable house to foreclosure and their $45,000 equity in the house. Accordingly, the owners, seeking to be put in the position had they never hired the contractor, sought to recover, among other damages (i) the first two draw payments totaling $138,000 plus the additional $6,000 for updated architectural drawings, (ii) $5,600 in rent, and (iii) $45,000 in lost equity. These were permissible recoverable damages under the first damages methodology:

They [owners] sought to be put in the position they would have occupied had they never contracted with Prime [contractor]. It was clear at trial that the Forbeses [owners] regarded the breach as total; indeed, they were explicit that they were entitled to suspend their own performance under the contract. And the damages they asked the court to award — return of payments made under the contract and the equity in their home at the time of contracting — were of a type that regarded the contract as void and attempted to restore the Forbeses to their precontractual situation.

Forbes, supra.

DOCTRINE OF AVOIDABLE CONSEQUENCES AS AFFIRMATIVE DEFENSE

Posted on January 27, 2018January 27, 2018 by Edward Garber

The doctrine of avoidable consequences is an affirmative defense that can be used in certain property damage lawsuits. This is a defense that does not go to liability, but it goes to damages. This doctrine of avoidable consequences defense holds that a plaintiff cannot recover damages caused by a defendant that the plaintiff could have reasonably avoided. See Media Holdings, LLC v. Orange County, Florida, 43 Fla.L.Weekly D237c (Fla. 5^th DCA 2018). Stated differently, if the plaintiff could have reasonably avoided the consequences of the damages caused by the defendant then the plaintiff cannot recover those damages. However, the defendant needs to prove this defense — the burden is on the defendant to establish this defense (ideally through expert testimony).

For example, in Media Holdings, a party that was putting on a trade show at a convention center caused the fire sprinkler system to be set off causing substantial water damage. The owner of the convention center sued the party. The party argued the doctrine of avoidable consequences, i.e., that the convention center’s damages were caused by or exacerbated by its failure to shut down the sprinkler system as soon as reasonably possible; had the convention center done so, its damages would be much different. This defense was a question of fact. Remember, it is not a defense as to liability because the party did cause the sprinkler system to be set off. Rather, it went directly to the amount of damages the plaintiff was seeking.

CREATIVE AVENUE FOR JUDGMENT CREDITOR TO COLLECT A JUDGMENT

Posted on October 22, 2016October 22, 2016 by Edward Garber

I have a judgment against another entity. Now what? I want to briefly talk about this “now what?” in the context of the recent decision in MYD Marine Distributor, Inc. v. International Paint, Ltd., 41 Fla. L. Weekly D2364a (Fla. 4^th DCA 2016). Although this case is not a construction case, it poses an interesting issue for any entity that has a judgment entered against it (known as the judgment debtor) while it is contemporaneously the plaintiff and pursuing monetary damages in an unrelated case or cases. This case also presents an avenue for any judgment creditor to pursue in the event other post-judgment collection efforts are unsuccessful.

In this case, a judgment creditor received a judgment for $550,000 against the judgment debtor. The judgment creditor proceeded with post-judgment collection activities and recovered only $120,000 from these activities. The judgment debtor at this time was the plaintiff in an unrelated lawsuit. The judgment creditor instituted proceedings supplementary pursuant to Florida Statute s. 56.29 to have the judgment debtor’s pending lawsuit assigned to it. This would allow the judgment creditor to control the pending lawsuit, settle the lawsuit, and, importantly, utilize any proceeds from the lawsuit to reduce the judgment. The trial court allowed this assignment and the appellate court affirmed:

Donovan [judgment creditor] used section 56.29 to initiate proceedings supplementary. Section 56.29(5) provides that a court “may order any property of the judgment debtor, not exempt from execution, in the hands of any person, or any property, debt, or other obligation due to the judgment debtor, to be applied toward the satisfaction of the judgment debt.” A “chose in action” is “property” within the meaning of section 56.29(5). A “chose in action” is a “personal right not reduced into possession, but recoverable by a suit at law. . . . A right to receive or recover a debt, demand, or damages on a cause of action ex contractu or for a tort or omission of a duty.” MYD’s [judgment debtor’s] lawsuit against Lauderdale Marine [unrelated party] was a chose in action subject to the reach of section 56.29(5) proceedings supplementary.

MYD Marine Distributor, supra (internal citations omitted).

BREACH OF A CONSTRUCTION CONTRACT & AN EQUITABLE REMEDY?

Posted on September 2, 2016September 2, 2016 by Edward Garber

In payment or collection-type lawsuits, the party suing for money sometimes asserts a claim for unjust enrichment or quantum meruit as an alternative equitable remedy to a breach of contract claim. Frankly, sometimes a party will do this as a means to throw everything against the wall hoping something, just something, sticks. However, if there is a contract by and between the parties, equitable claims such as unjust enrichment or quantum meruit will invariably fail. They will fail because a party cannot circumvent a contract simply because their recourse may prove better under an equitable theory. It doesn’t work like that! And, it should not!

For example, in Daake v. Decks N Such Marine, Inc., 41 Fla. L. Weekly D1992e (Fla. 1^st DCA 2016), a contractor was hired to construct a seawall and a beach house on two lots. One lot was owned by the homeowners in a personal capacity and the other lot was owned by them in the name of a family trust. The contractor was unpaid and sued the owners for breach of contract and sued the family trust for quantum meruit. The problem was that the family trust was deemed a party to the contract. Because the family trust was a party to the contract, the contractor could NOT recover any damages under an equitable theory such as quantum meruit or unjust enrichment. This was a harsh ruling, but the correct ruling since the contractor was deemed a party to the contract. The contractor was owed money but did not sue the family trust for breach of contract. As a result, the contractor could not recover money by bypassing a breach of contract claim for an equitable quantum meruit claim. A court cannot award damages under an equitable theory when the contractor has an adequate remedy of law—a breach of contract claim. See Daake, supra, (“Quantum meruit is premised upon the absence of an express and enforceable agreement; accordingly, the existence of a valid, written contract between the parties necessarily precludes the doctrine’s application.”).

There are times where pleading alternative theories of liability is important. This includes pleading a breach of contract claim and an alternative equitable claim such as unjust enrichment or quantum meruit. This becomes important if you do NOT know whether a certain party will actually be bound by and deemed a party to the contract, which was the situation in Daake. With that said, in your typical payment / collection-type lawsuit, there is a contract between the parties and the equitable claim will fail and should fail. If parties could bypass the harsh remedy of contractual provisions by suing for unjust enrichment or quantum meruit, believe me, they would. When parties are owed money or lost money on a contract, they typically want to avoid risks they agreed to by virtue of the contract.

LIQUIDATED DAMAGES IN CONSTRUCTION CONTRACTS – WHO BEARS THE BURDEN?

Posted on June 18, 2016June 18, 2016 by Edward Garber

Liquidated damages are in many, many construction contracts. They are designed to capture an owner’s damages if a project, or portion thereof, is not substantially completed by an agreed date. The liquidated damages provision contemplates that the contractor will be liable for a daily rate of “x” for each day of delay beyond the substantial completion date (or any agreed change to this date). Sometimes there is a cap on the contractor’s liquidated damages exposure (say, capped at the contractor’s fee) and sometimes there is no cap. On private projects, the liquidated damages provision is a negotiated provision. Typically, on public projects, the liquidated damages provision is not negotiated, but is known upfront and the contractor can try to account for that risk in any bid or proposal.

Assume a project is completed 100 days beyond the agreed-upon substantial completion date. The contract provides for liquidated damages of $2,000 per day with no cap. This means the contractor has liquidated damages exposure in the amount of $200,000. The question, however, is who bears the burden relating to the 100-day delay that triggers the application of the liquidated damages provision. Understanding this burden is important, especially if you are the contractor looking to challenge this assessment and, perhaps, support a claim for extended general conditions / overhead.

The owner’s initial burden is typically an easy burden—known as the burden of persuasion. The owner really just needs to produce evidence that the project was not substantially completed by the agreed-upon date. Once the owner does this, the burden shifts to the contractor to prove that the owner prevented performance, there was excusable delay such as concurrent delay, or the owner caused the delay or a portion of the delay (e.g., design-changes, late change orders, etc.). The contractor will want to do this to not only establish it is not liable for a majority or all of the assessed liquidated damages, but that the owner is liable for the contractor’s extended general conditions / overhead associated with delay. Once the contractor does this, the burden of proof then shifts back to the owner since the owner carries the overall burden relating to its assessment of liquidated damages.

This sentiment was conveyed In the Armed Services Board of Contract Appeal’s decision in In re Idela Const. Co., ASBCA No. 45070, 2001 WL 640978 (ASBCA 2001) (internal quotations and citations omitted):

In order to assess liquidated damages the Government [owner] must prove by a preponderance of the evidence that the contractor is in default, that it did not prevent performance or contribute to the delay, and that the appellant was the sole cause of the days of delay. The Government has established that substantial completion did not occur until 109 days after the adjusted contract completion date.

In order to defeat the Government’s claim for liquidated damages, the appellant [contractor] must come forward with evidence to show that the Government prevented performance or contributed to the delay or that the delay was excusable. Because liquidated damages is a Government claim, the Government continues to have the overall burden of proof, and if the responsibility for days of delay is unclear, or if both parties contribute to the delay, for the Government [t]o recover liquidated damages the Government must prove a clear apportionment of the delay attributable to each party.

See also Sauer, Inc. v. Danzig, 224 F.3d 1340, 1347 (Fed. Cir. 2000) “(As a general rule, a party asserting that liquidated damages were improperly assessed bears the burden of showing the extent of the excusable delay to which it is entitled.); A.G. Cullen Const., Inc. v. State System of Higher Educ., 898 A.2d 1145, 1162 (Pa. 2006) quoting PCL Constr. Servs., Inc. v. U.S., 53 Fed. Cl. 479, 484 (2002) (“As to the applicable burden of proof in a liquidated damages claim, the government has “the ultimate burden of persuasion as well the initial burden of going forward to show that the contract was not completed by the agreed contract completion date and that liquidated damages were due and owing.”).

Remember, a liquidated damages provision is a common provision in construction contracts. Make sure you appreciate how this clause is triggered, the application of the clause, and who carries what burden when its comes to assessing and challenging liquidated damages.

PROVING & DEFENDING LOST PROFIT DAMAGES

Posted on May 27, 2016May 27, 2016 by Edward Garber

I have written numerous articles regarding the challenge in proving lost profit damages. Yes, lost profits are a form of damages in business disputes, but they are a form of damages that are subject to a certain degree of conjecture and speculation. For this reason, lost profit evidence is oftentimes precluded from being presented at trial or lost profit damages are reversed on appeal. This is why it is imperative to ensure i’s are dotted and t’s are crossed when it comes to proving lost profit damages. It is also imperative, when defending a lost profit claim, to put on evidence and establish the speculative nature of the lost profit damages.

In the recent decision of Arizona Chemical Company, LLC v. Mohawk Industries, Inc., 41 Fla. L. Weekly D1213a (Florida 1^st DCA 2016), the First District Court of Appeals held that the plaintiff’s lost profit evidence was sufficient and affirmed the lost profit damages. In this case, a flooring / carpet manufacturer sued the manufacturer of resin utilized for a particular brand of broadloom commercial carpet claiming that the resin was defective. This resulted in spikes in consumer complaints and warranty claims relating to the particular brand of carpet. The plaintiff utilized a forensic accountant (expert witness) to testify as to lost profit damages. The expert determined the average annual profits from the sale of the particular carpet brand before 2008, which is when the manufacturer became aware of the defects with the brand. The expert then used this data along with market data for broadloom commercial carpet to project the revenue the manufacturer would have gained from the sale of the specific carpet brand between 2008 and 2017, but for the defects. The expert testified he factored in the economic recession on the demand for broadloom commercial carpet brands and market trends to determine the projected revenue.

The defendant challenged the speculative nature of the lost profit testimony because the plaintiff’s expert failed to consider competition in the flooring marketplace, a shift in the market from broadloom commercial carpet towards carpet tile, and reputational damage to the manufacturer due to the failure of another of the manufacturer’s brands that failed. The First District, however, held that such issues did not render the lost profit damages insufficient or speculative because nothing in the record established that such factors had a substantial effect on the sale of the particular brand of broadloom commercial carpet.

The defendant needed to put on evidence and establish that other factors had an actual impact and link on the sale of the particular brand of carpet such that the plaintiff’s expert’s failure to consider these factors rendered his testimony speculative. Had the defendant done so and established this link, the appellate court may very likely have reversed the lost profit damages awarded to the plaintiff based on their speculative nature.

When it comes to lost profit damages, the First District explained:

A plaintiff can recover lost profits as damages if the defendant’s actions caused the damage and there is some standard by which the amount of damages may be determined. The plaintiff need not show that the defendant’s action was the sole cause of the damages sought; instead, the plaintiff’s burden is to show that the defendant’s action was a substantial factor in causing the lost profits and establish the amount with reasonable certainty. However, where the plaintiff’s evidence reflects a mere assumption that the defendant’s action caused its lost profits without consideration of other factors shown by the record to be significant, the evidence is legally insufficient to support a claim for lost profits.

Arizona Chemical Company, supra (internal quotations and citations omitted).