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

shutterstock_1059607865What 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.

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.

 

 

QUICK NOTE: ATTORNEY’S FEES AND THE SIGNIFICANT ISSUES TEST

imagesAttorney’s fees become a component of damages that parties seek to recover whenever there is a contractual or statutory basis for them to recover their fees.  Parties want to be able to recover all or substantially most of the attorney’s fees they incurred in pursuing their claim. (In my experience, recovering all of the fees incurred is very challenging.)  But, to be entitled to attorney’s fees, a party has to be deemed the prevailing party.  There is the sentiment that as long as you recover a positive net judgment (even if it is for $100 when your claim was for $50,000) then you will be able to recover your attorney’s fees which will likely exceed the amount that was ever in dispute.  With this sentiment, certain disputes become solely driven by attorney’s fees.  Now, there is a trend for the prevailing party for purposes of attorney’s fees for certain disputes such as construction lien actions and breach of contract actions to be determined by the significant issues test.  While recovering a net judgment is important, there are other equitable considerations a court or arbitrator can consider to determine the party that prevailed on the significant issues for purposes of awarding attorney’s fees.  This article explains more.  

 

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.

BREACH OF A CONSTRUCTION CONTRACT & AN EQUITABLE REMEDY?

UnknownIn 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. 1st 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.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

letter of intentJust because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor.   While it is good practice for there to be an executed contract in place, this does not always occur.  But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract.  Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor.  The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

 

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract.  Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project.  The specifications, among other things, contained a liquidated damages section.  A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

 

pilingThe sub-subcontractor started to perform its scope of piling work based on the letter of intent.  Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work.  The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work.  Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor.  The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions.  The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions. 

 

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance.  As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay.  The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

 

 

Take-aways:

  • If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications.  The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

 

  • It is good practice to have both the contractor and subcontractor sign the letter of intent.

 

  • An unexecuted contract does not mean there is not a written contract between the parties.  Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

 

  • It is  good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions.  In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract. 

 

 

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.