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LEGAL COMPLEXITIES WHEN THERE IS A FAILED PROJECT

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Iberiabank v. Coconut 41, LLC, 2013 WL 6061833 (M.D.Fla. 2013) is a new case involving a failed mixed-use master development (subdivision) that illustrates some of the complexities when a construction project goes bad. It is a great case discussing aspects of Florida’s Lien Law (such as liens for subdivision improvements, single claim of lien, fraudulent liens) that are important for all construction participants. It is also a great case that discusses an unjust enrichment claim for unpaid work and a slander of title claim due to a fraudulently recorded lien. While the facts and issues are lengthy, there are numerous take-aways from this case that should not be ignored and are pointed out at the end of this article.

 

 

I. The Failed Development

 

 

In this case, a developer purchased approximately 46 acres of land. The land was intended to be developed into a master development. The developer sold approximately 14 acres referred to Development Area 2 to HG Coconut. The developer was responsible for installing the necessary infrastructure outside of Development Area 2 that would be required to develop both the developer’s land and Development Area 2. (This included, among other things, widening a road and sanitary-sewer work.)

 

To construct the infrastructure, the developer hired a heavy civil contractor. Two contracts were executed. The first contract was for on-site infrastructure improvements to the developer’s land. The second contract was for off-site infrastructure improvements such as the infrastructure improvements needed to develop Development Area 2. (There was no contract between the contractor and HG Coconut, the owner of Development Area 2.)

 

Because of nonpayment, the contractor recorded a single claim of lien. The lien included Development Area 2 (owned by HG Coconut). Remember, the contractor did not have a contract with the owner of Development Area 2.

 

II. Claims against HG Coconut – the Owner of Development Area 2 – and HG Coconut’s Claims against the Contractor

 

 

The contractor filed a lawsuit and asserted an unjust enrichment claim and lien foreclosure claim against HG Coconut–the owner of Development Area 2.  HG Coconut asserted a fraudulent lien claim and slander of title claim against the contractor.

 

 

A. Unjust Enrichment

 

The contractor contended that it benefited HG Coconut (a party it did not have a contract with) through infrastructure work it performed that provided value to Development Area 2. HG Coconut argued that the unjust enrichment claim should be barred because the contractor’s work was incomplete—it did not finish all of its work. The Middle District dismissed this argument equating recovery under an unjust enrichment theory to that of recovery when a contractor substantially performs. When a contractor substantially performs / completes its work, it is entitled to the full contract price minus the owner’s right to recover damages due to the contractor’s failure to render full performance. Since the contractor substantially completed its work subject to the unjust enrichment claim that provided a benefit to Development Area 2, the Middle District held that the contractor was entitled to the fair market value of the work minus HG Coconut’s offset for the remaining work.

 

B. Lien Foreclosure and Fraudulent Lien

 

The contractor argued that it was not paid for work performed under its off-site contract (the infrastructure work outside of developer’s land that was also needed to develop HG Coconut’s Development Area 2). HG Coconut asserted an affirmative claim against the contractor arguing that the contractor recorded a fraudulent lien.

 

The Middle District entered judgment against the contractor on its lien foreclosure claim. The fraudulent lien claim asserted by HG Coconut establishes the problems under Florida’s Lien Law with the contractor recording a lien that included Development Area 2.

 

Contractor’s performing subdivision improvements are entitled to certain protections under Florida’s Lien Law. Florida Statute s. 713.04(1) provides:

 

“Any lienor who, regardless of privity, performs services or furnishes material to real property for the purpose of making it suitable as the site for the construction of an improvement or improvements shall be entitled to a lien on the real property for any money that is owed to her or him for her or his services or materials furnished in accordance with her or his contract and the direct contract. The total amount of liens allowed under this section shall not exceed the amount of the direct contract under which the lienor furnishes labor, materials, or services. The work of making real property suitable as the site of an improvement shall include but shall not be limited to the grading, leveling, excavating, and filling of land, including the furnishing of fill soil; the grading and paving of streets, curbs, and sidewalks; the construction of ditches and other area drainage facilities; the laying of pipes and conduits for water, gas, electric, sewage, and drainage purposes; and the construction of canals and shall also include the altering, repairing, and redoing of all these things. When the services or materials are placed on land dedicated to public use and are furnished under contract with the owner of the abutting land, the cost of the services and materials, if unpaid, may be the basis for a lien upon the abutting land. When the services or materials are placed upon land under contract with the owner of the land who subsequently dedicates parts of the land to public use, the person furnishing the services or materials placed upon the dedicated land shall be entitled to a lien upon the land abutting the dedicated land for the unpaid cost of the services and materials placed upon the dedicated land, or in the case of improvements that serve or benefit real property that is divided by the improvements, to a lien upon each abutting part for the equitable part of the full amount due and owing. If the part of the cost to be borne by each parcel of the land subject to the same lien is not specified in the contract, it shall be prorated equitably among the parcels served or benefited. No lien under this section shall be acquired until a claim of lien is recorded. No notice of commencement shall be filed for liens under this section. No lienor shall be required to serve a notice to owner for liens under this section.”

 

 

However, just because a contractor performing subdivision improvements has certain lien rights, does not mean it can record a fraudulent lien. A fraudulent lien is defined in Florida Statute s. 713.31(2)(a):

 

“Any lien asserted under this part in which the lienor has willfully exaggerated the amount for which such lien is claimed or in which the lienor has willfully included a claim for work not performed upon or materials not furnished for the property upon which he or she seeks to impress such lien or in which the lienor has compiled his or her claim with such willful and gross negligence as to amount to a willful exaggeration shall be deemed a fraudulent lien.”

 

If a lien is deemed fraudulent, it is unenforceable. Fla.Stat. s. 713.31(2)(b). Additionally, an owner (or contractor, subcontractor, etc. that suffers damage from a fraudulent lien) can assert a claim for damages against the lienor for recording the fraudulent lien:

 

“An owner against whose interest in real property a fraudulent lien is filed, or any contractor, subcontractor, or sub-subcontractor who suffers damages as a result of the filing of the fraudulent lien, shall have a right of action for damages occasioned thereby. The action may be instituted independently of any other action, or in connection with a summons to show cause under s. 713.21, or as a counterclaim or cross-claim to any action to enforce or to determine the validity of the lien. The prevailing party in an action under this paragraph may recover reasonable attorney’s fees and costs. If the lienor who files a fraudulent lien is not the prevailing party, the lienor shall be liable to the owner or the defrauded party who prevails in an action under this subsection in damages, which shall include court costs, clerk’s fees, a reasonable attorney’s fee and costs for services in securing the discharge of the lien, the amount of any premium for a bond given to obtain the discharge of the lien, interest on any money deposited for the purpose of discharging the lien, and punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due or to become due and the amount actually due or to become due.”

Fla.Stat. 713.31(2)(c).

 

 

A lien will be fraudulent if it contains willfully exaggerated amounts which can include liening for amounts that are NOT properly lienable. See Coconut 41, supra, at *15. This is why it is imperative to consult an attorney before recording a claim of lien! Not spending the due diligence in advising an attorney of the facts and the accounting comprising the amount you want to lien for can result in a fraudulent lien. Also, because a fraudulent lien contains a willful exaggeration of amounts, the lienor’s consultation with its lawyer is a factor a court can consider to determine that there was no willful exaggeration. Id. “[A] lienor can rely on consultation with counsel prior to filing the claim of lien as evidence of good faith only in the event of a full and complete disclosure of the pertinent facts to the attorney from whom the advice is sought before the lienor acts on the advice. Consultation with an attorney is not entitled to any legal weight if the contractor did not disclose all pertinent facts to the attorney.” Id. quoting Sharrard v. Ligon, 892 So.2d 1092, 1097 (Fla. 2d DCA 2004). Notably, this means that if a lienor is using this defense to counteract a fraudulent lien claim /defense, certain discussions with counsel must be waived to establish the consultation and advice to show the lien and amount was recorded and compiled in good faith.

 

Here, the contractor recorded a single claim of lien that included Development Area 2. However, the entire lien amount did NOT pertain to infrastructure improving Development Area 2.

 

The Middle District pointed out that a single claim of lien was not proper because the property liened was owned by different owners. Florida Statute s. 713.09 discusses the concept of a single claim of lien:

 

“A lienor is required to record only one claim of lien covering his or her entire demand against the real property when the amount demanded is for labor or services or material furnished for more than one improvement under the same direct contract. The single claim of lien is sufficient even though the improvement is for one or more improvements located on separate lots, parcels, or tracts of land. If materials to be used on one or more improvements on separate lots, parcels, or tracts of land under one direct contract are delivered by a lienor to a place designated by the person with whom the materialman contracted, other than the site of the improvement, the delivery to the place designated is prima facie evidence of delivery to the site of the improvement and incorporation in the improvement. The single claim of lien may be limited to a part of multiple lots, parcels, or tracts of land and their improvements or may cover all of the lots, parcels, or tracts of land and improvements. In each claim of lien under this section, the owner under the direct contract must be the same person for all lots, parcels, or tracts of land against which a single claim of lien is recorded.”

 

For this reason, the Middle District found that the lien was willfully exaggerated. In other words, the contractor acknowledged that of its approximate $195,000 lien, the pro-rata share for work done on Development Area 2 was only approximately $61,000; thus, there was an exaggeration of over $100,000 in the lien that covered Development Area 2. “The Claim of Lien was for the total amount owing for offsite work even though Westwind Contracting knew that only a substantially lesser amount was apportionable to HG Coconut.” Coconut 41, supra, at *16. Although the contractor tried to counteract the fraudulent lien by testifying that it provided its counsel with certain information, there was no testimony that it advised counsel that the lien it wanted recorded included land owned by someone other than the entity that hired it.

 

Now, even though the lien was deemed unenforceable, HG Coconut still needed to prove its damages due to the fraudulent lien. The Middle District, however, found that HG Coconut failed to prove such damages. Remember, the damages are included in Section 713.21: “court costs, clerk’s fees, a reasonable attorney’s fee and costs for services in securing the discharge of the lien, the amount of any premium for a bond given to obtain the discharge of the lien, interest on any money deposited for the purpose of discharging the lien, and punitive damages in an amount not exceeding the difference between the amount claimed by the lienor to be due or to become due and the amount actually due or to become due.” HG Coconut did NOT put any evidence of the court costs, reasonable attorneys’ fees, bond premium, or punitive damages.

 

C. Slander of Title

 

In addition to asserting an affirmative claim for fraudulent lien, HG Coconut also asserted a claim against the contractor for slander of title based on the lien. This is a common claim when a party believes a lien was improperly recorded against their property. The elements of slander of title in Florida are: 1) a falsehood, 2) that has been published or communicated to a third party, 3) the defendant knew or should have known the falsehood would result in inducing others not to deal with the plaintiff, 4) the falsehood does result in others not dealing with the plaintiff, and 5) actual and/or special damages (inclusive of attorneys’ fees) are proximately caused by the falsehood. Coconut 41, supra, at *17 quoting McAllister v. Breakers Seville Ass’n, Inc., 981 So.2d 566, 574 (Fla. 4th DCA 2008). However, even if all of the elements above are proven, a defense to slander of title is good faith. Coconut 41, supra, at *18. This defense is important because good faith raises a privilege and shifts the burden to the plaintiff asserting the claim to prove actual malice in order to recover under a slander of title theory of liability. Id. quoting McAllister v. Breakers Seville Ass’n, Inc., 981 So.2d 566, 574 (Fla. 4th DCA 2008).

 

Here, the court did not need to delve into whether there was actual malice because HG Coconut did not prove the elements of slander of title. In particular, there was no evidence that the lien caused or induced anyone not to deal with HG Coconut or that the contractor should have known the lien would have that effect. Further, there was no evidence that HG Coconut incurred any actual and/or special damages caused by the lien. While HG Coconut clearly incurred attorneys’ fees, it did not put on any evidence as to the amount of fees it incurred.

 

III.  Important Take-Aways

 

Below are important points to take-away from this case:

 

  • Unjust enrichment is a claim that can be asserted if a contractor is not in contractual privity with the owner of the land and work was knowingly performed that conferred a benefit to the owner’s land
  • An owner can offset damages in an unjust enrichment claim by asserting as a defense that the work was incomplete/ the contractor failed to fully perform its work
  • A notice to owner is not required for subdivision improvements
  •  If a lien for subdivision improvements includes multiple parcels of land, it shall be prorated among the parcels (if not otherwise stated in the contract)
  • A single claim of lien can cover different land/ parcels if the owner is the same person
  • If there are multiple contracts, there should be separate liens for each contract (even if with the same owner)
  • A fraudulent lien includes a willful exaggeration and can include amounts not properly lienable
  • A party asserting a fraudulent lien needs to present evidence of its damages: attorneys’ fees, court costs, bond transfer costs, punitive damages, etc. to be entitled to damages due to the fraudulent lien
  • Consultation will a lawyer is a defense to a fraudulent lien but all of the important communications with the lawyer regarding the formation and compilation of the lien must be waived and must come into evidence to establish the good faith basis of the lien and lien amount
  • Slander of title is a difficult claim to prove based on a construction lien; the plaintiff must show defendant knew the lien would result in third parties not dealing with the plaintiff and, in fact, third parties did not deal with plaintiff because of the lien
  • A plaintiff in a slander of title action must prove its actual and/or special damages and special damages can include attorneys’ fees
  • A defendant in a slander of title action should assert good faith as a defense which would shift the burden to the plaintiff to prove actual malice

 

For more information on fraudulent liens and slander of title, please see: https://floridaconstru.wpengine.com/owners-defending-a-lien-especially-a-patently-fraudulent-lien/

 

For more information on liens and lienable items/ amounts, please see: https://floridaconstru.wpengine.com/the-final-furnishing-date-and-lienable-amounts-for-construction-liens-decided-on-a-case-by-case-basis/

 

For more information on unjust enrichment theories, please see: https://floridaconstru.wpengine.com/subcontractors-and-unjust-enrichment-claims/

and

https://floridaconstru.wpengine.com/the-reality-when-the-construction-lender-forecloses/

 

 

 

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.

CONSULTANT’S CORNER: PERSPECTIVES FROM A PROPERTY MANAGER REGARDING DEVELOPER TURNOVER

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Consultant’s Corner: In addition to providing perspectives and analysis from a lawyer, it is beneficial to hear from industry professionals and consultants. These are the folks that serve as expert witnesses during litigation / trial and consult with owners and contractors preconstruction, during construction, and postconstruction. Consultant’s Corner is dedicated towards hearing from those experienced and respected professionals.

 

 

K. Patrick Whalen (photo) is President and owner of MPlus Property Services LLC, a Community Association and Commercial Property Management Company with offices throughout Florida. Mr. Whalen is a Florida Licensed Community Association Manager and Licensed Real Estate Salesperson who has served as both an expert witness and consultant to developers and community associations from the early planning stages through turnover. Turnover of the association from the developer to the owners is a crucial milestone to associations. Having an experienced property manager that can navigate owners through the process in ensuring the developer provides all applicable funds and documentation (e.g., minutes of the association, financial records, plans and specifications, certificates of occupancy, written warranties, a turnover inspection report, etc. – see Fla.Stat. s. 718.301(4) relating to condominium association) is imperative. Mr. Whalen takes the time to provide his perspective on developer turnover as a property manager.

 

 

PERSPECTIVES ON TURNOVER

 

 

As a property manager one of the biggest challenges in maintaining a community after developer turnover is identifying sources for materials and supplies provided, such as mailboxes, light fixtures, decorative tiles and other architectural features on or in a commercial building, home or condominium, or common area.

 

Having managed and transitioned over 200 developer communities since 1989, experience has helped me to learn and understand the importance of keeping meticulous records on personnel and subcontractors working in a particular community or commercial project. While doing so may involve a considerable amount of time, it can also save you or your clients time and money months and years from now when you can go back to those notes and recall important information.

 


Over the past 25 years of managing community associations, there have been countless examples of the importance of such records, but one example illustrates how the smallest detail can save tens of thousands of dollars: In 2011, I got a call from a developer asking about a homeowners association we managed for them from beginning through turnover. The developer was concerned because they had received a letter from an attorney threatening to sue over rusting mailboxes installed at each home.
Given that the community built-out to over 5,000 homes and estimates to replace the mailboxes were about $30.00 per mailbox, with another $10.00 per mailbox to remove the old one and install the new ones, the tab for this was going to be around $200,000.00.
Sure the developer could think of a number of reasons why they should not or would not have to pay for the mailboxes, they understood that taking such a position would not be popular with their 5,000+ customers.
Just days before committing the funds, the developer recalled a detailed warranty book that we maintained and provided to the association at turnover. They took note of the fact that the book included not just the warranties on common components like the pool pump, paint and roofing for the common area amenities, but also details about decorative fixtures and finishes, like lights, maybe, just maybe, it included something about the mailboxes, even though they were not the maintenance obligation of the Association. It seemed a longshot.
At the time of their call, it had been over 5 years since turnover and the community transitioned to self-management shortly after. The warranty book given to the on-site manager was nowhere to be found. Wanting to help, we turned to our electronic back-ups for any records kept on our server regarding this community. Among the records we found was a spreadsheet on suppliers / manufacturers and details about their own individual warranties and, to our surprise, we even had scanned copies of warranty papers, which included what came inside the mailboxes—a manufactures lifetime warranty.

 

 

Without a doubt, the developer would have paid the cost to replace the mailboxes, but instead was able to make a claim with the manufacturer who not only agreed to replace the mailboxes, but also split the cost of the installation, with the other half paid by the developer. This saved our client over $180,000 in parts and labor and again reminded them of what an invaluable service partner we are to them.

 

 

 

For more information on K. Patrick Whalen:

Website: http://mplusmore.com/mplus/home.asp

Phone:  1-855-99-MPlus (67587)

Email: Patrick.Whalen@MPlusMore.com

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.

CONSULTANT’S CORNER: FIVE TIPS FOR BETTER CONSTRUCTION PROJECT DOCUMENTATION

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don carlowConsultant’s Corner: In addition to providing perspectives and analysis from a lawyer, it is beneficial to hear from industry professionals and consultants. These are the folks that serve as expert witnesses during litigation / trial and consult with owners and contractors preconstruction and during construction. Consultant’s Corner is dedicated towards hearing from those experienced and respected professionals.

 

Don Carlow (photo) is the owner of Florida Construction and Scheduling Consultants, LLC and has over twenty-five years of experience in CPM planning and scheduling, cost engineering, construction claims analysis, and program and construction management. He serves as both an expert witness and as a consultant preconstruction and during construction in scheduling, forensic delay analysis, cost and damages analysis, and litigation support on construction projects ranging in size and scope.  His project experience includes heavy civil; transportation; pipelines/underground utilities; government/military; mixed-use commercial; airports; hospitals; high-rise; theme parks; hospitality; schools/ universities; and single/multi-family residential.   Mr. Carlow has taken the time to share with us a very important article on maintaining organized and good project documentation based on his experience.

 

FIVE TIPS FOR BETTER CONSTRUCTION PROJECT DOCUMENTATION

 


When it comes to claims and disputes, I have often heard the proverbial advice that “you should document everything.” However, in reality this is rarely done and it is often impossible to accomplish. Normally, the folks on a construction project simply don’t have the time to write down everything that’s going on at the site and at every project meeting and then respond to every email and phone call. In fact, I would not advise you to try! Doing so would be frustrating at best and counterproductive at worst. Your management team should be focused on managing the project. This is especially true on a troubled project, where you have to put out one fire after another. Your team’s efforts should be focused on using their time in the office wisely and making sure that the important items are documented. So, how are they supposed to know which of the items are the most important to document? This article attempts to answer that question by establishing some rules and by providing an objective framework that can be used when deciding how and what to document.

 

1. SUPPORT YOUR POSITION

 

For each contractual disagreement or issue, spend the time to write the letters or emails that support your position and explain why your position is correct. This should be the overall framework from which you are focusing your documentation efforts. Document the issues and events as they occur; take a photo, write an email, or put an extra note in the daily report that explains the event or occurrence from your perspective. Make sure there is evidence in the file that supports and explains your position. You’d be surprised how the resolution of an issue was changed by a single photo or a couple of sentences included in a daily report.

 

2. RESPOND TO EVERY LETTER

 

When is it necessary to write a letter? When someone writes one to you. It is not necessary to engage in a letter-writing campaign (it is simply not true that the person with the highest stack of letters automatically “wins”). But, for each letter that’s written to you make sure there is a written response in the file. One solid letter for each issue is a good rule of thumb. Get your points documented, keeping in mind tip #1, above.

 

3. BE PROFESSIONAL

 

In your written correspondence, always be professional and stick to the facts. Be objective, rational and unemotional. There is no need to tell the owner’s rep that he’s an idiot (even if he is). Many people may be involved in the resolution of the dispute after the project is over and they may never meet you. People are going to form their opinions of you based on what you say and how you say it.

 

4. GIVE NOTICE

 

Notice provisions are written into contracts for a reason. Their purpose is to give the other party time to investigate, mitigate expenses, and track costs. Read your contract and make sure you are complying with the notice requirements. To make giving notice easier, we recommend that our clients develop form notices. At a minimum, we suggest having form notices available for each of the following situations: (a) Excusable Delay/Request for Time Extension, (b) Differing Site Condition, (c) Conflicting Specifications, (d) Acceleration (Directed or Constructive), (e) Disruption of Work Force, and (f) A/E Change. Have your lawyer review the notices before using them in the field.

 

5. RESERVE YOUR RIGHTS

 

I have been involved in several lawsuits in which the judge upheld signed releases on payment applications and change orders, and barred recovery for damages. Have your lawyer review the release language on any document before you sign it. At a minimum, cross out the offending language, or simply write that you are reserving your right to additional money or time for the impact encountered on the project or as a result of the change.

 

Knowing how and what to document will keep your team focused on managing the project and put your company in a much better position when it comes to resolving disputes when they arise.
Please contact Don Carlow for more information regarding the value he can provide to your construction project or litigation team. He can be reached at the following contact information:
Website: http://florida-consultants.com/
Email: don@florida-consultants.com
Phone: (407) 603-6165

 

 

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.

CONDOMINIUM ASSOCIATION RIGHTS REGARDING CONSTRUCTION DEFECTS & THE STATUTE OF LIMITATIONS FOR STATUTORY IMPLIED WARRANTIES

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Contractors, subcontractors, suppliers, developers, and design professionals that are involved in the design and construction of condominiums need to appreciate three items relating to the construction of condominiums and the rights of condominium associations:

 

(1) The condominium association, upon turnover from the developer to the unit owners, may sue for matters affecting the common elements or matters of common interest concerning most or all of the unit owners (Fla. Stat. s. 718.111)

 

(2) The condominium association’s statute of limitations to assert construction defect claims does not begin to accrue until the developer has turned over control of the association to the unit owners (Fla. Stat. s. 718.124); and

 

(3) The developer, the contractor, subcontractors, and suppliers owe certain statutory implied warranties to the unit owners that can be asserted by the association as a class representative (Fla. Stat. s. 718.203). For instance, under Fla. Stat. 718.203(2): “The contractor, and all subcontractors and suppliers, grant to the developer and to the purchaser of each unit implied warranties of fitness as to the work performed or materials supplied by them as follows: (a) For a period of 3 years from the date of completion of construction of a building or improvement, a warranty as to the roof and structural components of the building or improvement and mechanical and plumbing elements serving a building or an improvement, except mechanical elements serving only one unit.”

 

A.  THE STATUTE OF LIMITATIONS FOR STATUTORY IMPLIED WARRANTY CLAIMS

 

A topic that comes up is the statute of limitations for an association to assert a statutory implied warranty claim since the statutory implied warranties kick in from the completion of the building (i.e., the Certificate of Occupancy) and are of a shorter time period than the four year statute of limitations period from the time the defect was discovered (or should have been discovered with the exercise of due diligence).

 

This issue was addressed by the Florida Supreme Court in Charley Tropino & Sons, Inc. v. Seawatch at Marathon Condominium, Ass’n, Inc., 658 So.2d 922 (Fla.1994). In this case, three condominium buildings were constructed and the last building received its Certificate of Occupancy in April 1983. The association was turned over from the developer to the unit owners more than two years later in August 1985. The association then asserted a construction defect lawsuit that included claims for breach of statutory warranties against the general contractor, developer, etc., (over defective concrete and metal decking) in May 1988: more than five years from the Certificate of Occupancy of the last building and almost two years from when the association was turned over to the unit owners.

 

The Florida Supreme Court was asked to determine whether the turnover of the association from the developer to the unit owners extended the time for unit owners to assert a breach of statutory implied warranty claim.  (Based on the facts of the case, the question was whether the association in 1988 could assert breach of statutory warranty claims against the developer, general contractor, etc., when the Certificate of Occupancy was issued more than five years earlier for the last building and unit owners obtained control of the association approximately two years earlier.) The Court answered this question “Yes,” maintaining:

 

“[A] condominium association has a statutory right to file suit on behalf of its unit owners for breach of implied warranty of fitness and merchantability for construction defects affecting the common interest. Such a suit must be filed within the general time limits set out in chapter 95, but the commencing of this limitations period shall be tolled until control of the association passes from the developer to the unit owners.”
Charley Tropino, 658 So.2d 925.

 

This means that the statutory implied warranty period is not a statute of limitations. Rather, it is simply the time period in which the life of the warranty applies to cover defects that occur within that time period. However, these claims are then tolled until the association is turned over to the unit owners at which time the association has four years to assert its breach of statutory warranty claims. See Saltponds Condominium Ass’n v. Walbridge Aldinger Co., 979 So.2d 1240 (Fla.3d DCA 2008) (a condominium association was turned over in August 2002 and had until August 2006 to preserve its rights to sue for breach of statutory implied warranty claims).

 

Let’s apply this law to hypotheticals because it is confusing:

 

Hypothetical 1: A Certificate of Occupancy was issued for a condominium tower in March 2005. The condominium association was turned over to the unit owners on April 2008. Due to construction defects, the association filed a lawsuit against the general contractor for structural defects in February 2012 that included breach of statutory warranty claims.

 

Under s. 718.203, as referenced above, the contractor owes to the association an implied warranty for structural components from three years from the completion of the building (defined as the Certificate of Occupancy date). This means that a breach of this implied warranty should have taken place between March 2005 (Certificate of Occupancy date) and March 2008 (three years from that date). But, and this is an important but, the condominium association does not need to file suit on this breach of the implied warranty until April 2012 (four years from the April 2008 date the condominium association was turned over to the unit owners since the statute of limitations is tolled until an association is turned over to the unit owners).

 

Hypothetical 2: An interesting twist to the above hypothetical is if the association did not file its lawsuit until March 2014-nine years from the Certificate of Occupancy date and six years from the turnover date. Under these dates, the association will have to assert that it did not discover the defects until on or after March 2010 in order to fall within the four year statute of limitations. However, by doing this, the condominium association really should NOT have a breach of statutory warranty claim against the general contractor because the life of the warranty would have expired before the breach of that duty was actually discovered.

 

Hypothetical 3: Now, let’s assume the association did not file suit until March 2016 or eleven years from the Certificate of Occupancy date and argues that it did not discover the defects until March 2014. Under this context, the association should not have any claims since the turnover of the association to unit owners has no bearing and does not toll the ten year statute of repose period to file suit (i.e., the last date a lawsuit must be filed-not matter what). See Sabal Chase Homeowners Ass’n, Inc. v. Walt Disney World Co., 726 So.2d 796 (Fla. 3d DCA 1999) (finding that turnover of condominium association to unit owners did not extend the statute of repose).

 

B.  TIDBITS FOR CONTRACTORS CONSTRUCTING CONDOMINIUMS

 

General contractors constructing condominiums need to operate under the presumption that there is a strong likelihood that the association will assert construction defect related claims including breach of statutory warranty claims. Many condominium associations retain engineers at turnover or shortly thereafter to perform a comprehensive analysis of the plans, as-built plans, submittals, and condition of the condominium to determine if there are any design / construction defects. Associations will want to do this to ensure they preserve warranty-related items / claims and provide parties notice of those items sooner than later. Contractors, knowing claims are forthcoming, need to be proactive:

 

  • They will want to hire subcontractors that do not have residential or condominium exclusions in their policies, or an exclusion in a liability policy that excludes coverage for condominium projects.
  • They will want to ensure that they maintain the appropriate liability coverage with completed operations coverage and are identified as an additional insured under subcontractor policies.
  • They may want to account for the presumed claim in their price knowing that certain overhead may be devoted to addressing claims long after completion.
  • I have also seen escrow provisions included in the developer-contractor contract where an escrow account is to be funded and maintained during the statute of repose period to offset claims. I have never been a big fan of this since (i) parties prefer to have the money instead of having that money fund an account for ten years, (ii) it could, perhaps, serve as motivation that there is money to fund claims that are not otherwise insurable claims, and (iii) it could lead to disputes down the road as to the allocation of that money in the event a dispute is initiated and fingers are pointed as to the cause of the defect.
  • If the contractor and the developer are in a dispute over certain defects and a settlement is reached, the settlement should reflect that the developer is entering into this agreement on behalf of the association (assuming it is still in control of the association) and accepts money, etc., for the specific items in consideration for a full and final release for the defects. This way, at a minimum, the contractor could create an argument in the event the association later files suit against the contractor for the same exact defects that the defects were already resolved and accepted by the developer on behalf of the association.

 

For more on condominium statutory warranties, please see https://floridaconstru.wpengine.com/florida-condominium-acts-statutory-warranties-difference-between-manufacturer-and-supplier/

 

https://floridaconstru.wpengine.com/statutory-implied-warranties-for-condominium-associations/

 

For more on the statute of limitations and statute of repose, please see: https://floridaconstru.wpengine.com/watering-down-the-10-year-statute-of-repose-period-for-construction-disputes/

 

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.

WATERING DOWN THE 10 YEAR STATUTE OF REPOSE PERIOD FOR CONSTRUCTION DEFECT DISPUTES

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Yes, it appears that the Second District Court of Appeals in Clearwater Housing Authority v. Future Capital Holding Corp., 38 Fla. L. Weekly D2323a (2nd DCA 2013), just entered an opinion that has watered down the ten year statute of repose for construction disputes. That is right – watered down the statute of repose. This is excellent for owners with construction latent defect disputes, but bad for contractors and design professionals.

 

The statute of limitations for construction disputes is governed by Florida Statute s. 95.11(3)(c):

 

(c) Within Four Years. An action founded on the design, planning, or construction of an improvement to real property, with the time running from the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest; except that, when the action involves a latent defect, the time runs from the time the defect is discovered or should have been discovered with the exercise of due diligence. In any event, the action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.

 

The bolded language above is the ten year statute of repose language, which means that a lawsuit brought after this date is forever barred even if it is otherwise filed within four years from the date an owner discovered a latent defect (the statute of limitations period). In other words, after this repose period, latent defects become moot.

 

However, the Second District in Clearwater Housing Authority gave owner an excellent argument to extend the repose period. In this case, an owner hired a contractor and design professionals for purposes of building an apartment project in Clearwater. The property was then purchased by Clearwater Housing Authority. The Certificate of Occupancy was issued in 2000 and this was when Clearwater Housing Authority took possession of the property. However, a final plat was not submitted by the engineers on the project until 2003.

 

In 2009, Clearwater Housing Authority initiated a dispute for construction defects against various parties. But, in 2011, it amended its complaint to assert a claim against Future Capital Holding Corporation (“Future Capital”). Future Capital did the right thing and moved for summary judgment due to the expiration of the statute of repose. The math was simple. The Certificate of Occupancy occurred in 2000 and it was brought into the lawsuit in 2011, more than 10 years after-the-fact. The trial court agreed and summary judgment was entered in favor of Future Capital.

 

Clearwater Housing Authority creatively argued that the engineer did not submit the final plat until 2003 and this marked the date that triggered the beginning of the repose period; thus, it had until 2013 to assert claims for construction defects. This argument was based on the repose language: “[T]he action must be commenced within 10 years after the date of actual possession by the owner, the date of the issuance of a certificate of occupancy, the date of abandonment of construction if not completed, or the date of completion or termination of the contract between the professional engineer, registered architect, or licensed contractor and his or her employer, whichever date is latest.” Stated differently, “the [ten year] repose period commences on the latest date that any of the listed entities—the professional engineer, registered architect, or licensed contractor—completed or terminated their contract.” Clearwater Housing Authority, supra.

 

The Second District reversed the summary judgment based on Clearwater Housing Authority’s argument and because an issue of fact remained as to when the contract was completed.

 

What effect does this have? A huge effect! An owner can sue a contractor or design professional outside of ten years from the issuance of the Certificate of Occupancy and argue that the repose period did not run based on the following arguments: (a) the contractor’s contract was not completed until well after the Certificate of Occupancy date because the contractor was doing endless punchlist work or (b) the design professional had not completed its contract because it was required to submit as-built plans (or some relatively minor task) which it did not do until well after the Certificate of Occupancy. Therefore, based on this holding, owners can be very creative as to when contracts were arguably completed to create questions of fact to postpone the repose period, especially if they are concerned with this defense. On the other hand, contractors and design professionals sued for construction defects that otherwise have a statute of repose argument, like Future Capital seemed to have in the Clearwater Housing Authority case, need to appreciate that a creative owner will be able to create a question of fact to preclude the entry of summary judgment.

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.

WHAT IS SUBSTANTIAL COMPLETION?

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The term “substantial completion” is in most construction contracts. And, it should be. This date marks the date the owner expects to be able to use its project for its intended purpose and, if it cannot, the contractor will (likely) be assessed liquidated damages for the delay to the substantial completion date. The owner’s contractual ability to assess liquidated damages serves to motivate the contractor to substantially complete the project by the agreed date and to reimburse the owner for delay-related damages that cannot be ascertained with a reasonable degree of certainty at the time of the contract.

 

 

A.   How is Substantial Completion Defined

 

 

Under the general conditions of the AIA (American Institute of Architects A201 Document 2007), substantial completion is the “stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.” (AIA Document A201 s. 9.8.1)   Under the AIA, the architect is required to conduct inspections to determine the date of substantial completion and certifies this date.

 

 

The general conditions of the EJCDC (Engineers Joint Contract Documents Committee C-700 Document 2007) defines substantial completion similarly as:

 

 

“The time and date at which the Work has progressed to the point where, in the opinion of Engineer, the Work is sufficiently complete, in accordance with the Contract Documents, so that the Work can be occupied and/or utilized for the purposes for which it is intended….Substantial Completion cannot occur before the Project is issued a Certificate of Occupancy (or Completion, if applicable) by the governing building department that allows Owner to utilize the entire Project for the purposes for which it is intended.” (EJCDC Document C-700 s. 1.01.46)
Whether it is an AIA, EJCDC, or other industry form document, substantial completion is routinely defined as that point in time when the owner can utilize its project for the purposes for which it is intended.

 

 

A leading case in Florida discussing substantial completion is J.M. Beeson Co. v. Sartori, 553 So.2d 180 (Fla. 4th DCA 1989). This case involved an owner assessing liquidated damages against its contractor. The contractor was hired to construct a shopping center that required substantial completion within 300 days of commencement. The contract provided that substantial completion occurred when “construction is sufficiently complete in accordance with the Contract Documents, so the owner can occupy or utilize the work or designation portion thereof for the use for which it is intended.” J.M Beeson, 553 So.2d at 181. Although two anchor tenants in the shopping center received Certificates of Occupancy within the 300 days, another tenant did not. The owner took the position that substantial completion had not been achieved, irrespective of the Certificates of Occupancy, because items such as landscaping were not completed. The Fourth District dismissed the owner’s position finding:

 

 

“[W]hen the owner can put tenants in possession for fixturing and can begin to collect rents, the owner begins to utilize the work for its intended purpose. When the owner was able to occupy and fixture the constructed space, the construction was substantially completed.”  J.M. Beeson, 553 at 182-83 (internal citations omitted).

 

 

The Fourth District indicated that the substantial completion date occurred no later than the date the shopping center was able to obtain certificates of occupancy for the tenants.  Notably, if the contractor in J.M. Beeson was simply required to build shell retail space where the tenants were responsible for their own tenant improvements, the substantial completion would likely occur when an applicable certificate of completion was issued for the shell space pursuant to the shell permit that would entitle the tenants to begin their individual improvements. See, e.g., Hausman v. Bayrock Investment Co., 530 So.2d 938 (Fla. 5th DCA 1988) (finding that test for substantial completion for property tax purposes is the date property is put to use for which it is intended; in this case, since contactor was building shell retail space, substantial completion occurred when shells were completed).

 

 

If an owner is in a position to use its project for its intended purpose (whether for personal use, public use, whatever the project entails), this really should mark the substantial completion date. This is more of an objective date determined by the governing building department through the issuance of a certificate relating to the permit.

 

 

B.  Contract Drafting / Understanding Tips

 

 

I prefer the substantial completion definition in the general conditions of the EJCDC (above) because it references that this point in time should not be earlier than the issuance of a Certificate of Occupancy (or applicable Certificate of Completion). Even though most contracts give certain discretion to the design professional to determine and certify the date, the fact remains that the Certificate of Occupancy is realistically the date that determines when an Owner can use its project for its intended purpose since it permits occupancy. I often like to tie the substantial completion date in the contract to the Certificate of Occupancy date or Temporary Certificate of Occupancy date (since the TCO date may be the date that allows occupancy under certain conditions) since this more accurately reflects the date the Owner can use its project for its purpose (or, if it is a project for shell space, the Certificate of Completion date that authorizes the tenant to construct finishes / improvements).  Also, this removes some of the discretion from the design professional and shifts their focus to generating the punchlist and working towards final completion.

 

 

From an owner’s perspective, if it agrees to a mutual waiver of consequential damages in the contract, it must absolutely include a liquidated damages provision tied to the substantial completion date. If it does not want to include a liquidated damages provision, then the owner needs to ensure there is not a mutual waiver of consequential damages provision and, if there is a delay to the substantial completion date, be in a position to prove its actual delay-related damages.

 

 

From a contractor’s perspective, it wants to agree to a substantial completion date where arguably there is float built into its schedule to ensure it has enough time to substantially complete the project. Also, it will want to ensure through flow-down provisions in its subcontracts that it has the ability to flow down assessed liquidated damages to responsible subcontractors that impact its critical path.

 

 

From a subcontractors’ perspective, it needs to understand the contractor’s schedule and how the work is sequenced and ideally have input particularly relating to durations for its activities based on the sequencing of the work. Otherwise, the subcontractor could be putting itself in a position where it will be notified of delays since it is unable to meet its required durations.

 

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.

DIFFERENCE BETWEEN A DESIGN AND PERFORMANCE SPECIFICATION AND THE SPEARIN DOCTRINE

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UnknownThe difference between a design specification and a performance specification is important under what is known as the Spearin doctrine–the implied warranty of constructability doctrine–based on the United Supreme Court case U.S. v. Spearin, 248 U.S. 132 (1918). The Spearin doctrine is recognized in Florida. See Martin K. Eby Const. Co., Inc. v. Jacksonville Tranp. Authority, 436 F.Supp.2d 1276 (M.D.Fla. 2005).

 

Under the Spearin doctrine, a general contractor is not liable for defects in the plans and specifications furnished by the owner if it constructs the project pursuant to the plans and specifications. This is because the owner impliedly warrants the plans and specifications that it furnishes to its contractor. The Supreme Court in Spearin stated:

 

“[I]f the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications. This responsibility of the owner is not overcome by the usual clauses requiring builders to visit the site, to check the plans, and to inform themselves of the requirements of the work….”

 

Travelers Cas. And Surety Co. of America v. U.S., 74 Fed.Cl. 75, 89 (2006) citing Spearin, 248 U.S. at 136.

 

There are many cases discussing the application and limitations of the Spearin doctrine arising from federal government contract law. What is important is that the Spearin or implied warranty of constructability doctrine applies to design specifications and does not apply to performance specifications. See Martin K. Eby, 436 F.Supp.2d at 1308 (“The purpose of the Spearin doctrine is to allow contractors to recover when the government [owner] does not fulfill the responsibility it has undertaken in preparing and supplying design specifications.”)

 

So, what is the difference between a design and performance specification? The difference between these two types of specifications is best described as as follows:

 

“Design specifications dictate the ‘how’ governing a contractor’s tasks, in contrast to performance specifications, which concern the ‘what’ that is to be done…The relevant inquiring [as to the distinction between these specifications] concerns quality and quantity of the obligations that the specifications impose. Hence, detailed measurements, tolerances, materials, i.e., elaborate instructions on how to perform the contract qualify as design specifications. In other words, where the specifications are described in precise detail and permit the contractor no discretion, they are design [specifications]. In contrast, where the specifications set forth simply an objective or standard and leave the means of attaining that end to the contractor, they are performance [specifications].”

 

Travelers Cas. And Surety Co. of America, 74 Fed.Cl. at 89; See also Martin K. Eby, 436 F.Supp.2d at 1308, n.47 (“Design specifications explicitly state how the contract is to be performed and permit no deviations. Performance specifications, on the other hand, specify the results to be obtained, and leave it to the contractor to determine how to achieve those results.”) (internal quotations and citation omitted).

 

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 CERTIFICATE OF INSURANCE IS NOT INSURANCE COVERAGE

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Owners always want to see the certificate of insurance (“COI”) from the general contractor. The general contractor wants to see the COI from its subcontractors. Parties want to see the COI from an entity they are hiring to confirm they have applicable insurance (proof of insurance) and so that the COI identifies them as an additional insured. (Importantly, just because an entity is listed as a “certificate holder” on the COI does not make them an additional insured; it just means they are being provided proof of the insurance identified in the COI. This is not additional insured status!)  Without seeing the actual policy, specifically with respect to a liability policy, it is uncertain (a) what that entity is actually covered for and (b) what entities would be covered as an additional insured under the liability policy.

 

The summary judgment opinion in Bluewater Builders, Inc. v. United Specialty Ins. Co., 2013 WL 5670957 (S.D.Fla. 2013), demonstrates that a COI is not all it is cracked up to be. In this case, a general contractor sued its subcontractor’s CGL carrier for indemnification. The general contractor did so after it obtained a judgment against the subcontractor for water damage arising from the subcontractor’s work at a commercial high-rise officer tower. (Under Florida Statute s. 627.4136, the general contractor could not sue the subcontractor without first obtaining a settlement or verdict against the subcontractor-insured.) The insurer moved for summary judgment because the insured-subcontractor’s policy provided on the Declarations page that the policy covered the subcontractor’s operations for the following classification: “carpentry-construction of residential property not exceeding three stories in height.” Buewater Builders, 2013 WL at *1. The Declarations page further provided that coverage was strictly limited to this classification and that no coverage would be provided for any other classification.  The policy did not cover the subcontractor’s work at a commercial high-rise tower.

 

The general contractor argued that the insurer should be estopped from relying on the exclusionary language in the policy because it received a COI from the subcontractor and it detrimentally relied on this COI in hiring the subcontractor. Specifically, the general contractor relied on the doctrine of promissory estoppel which applies when a “plaintiff detrimentally relies upon a defendant’s promise, the defendant should have expected the promise to induce reliance, and injustice can only be avoided by enforcement of the promise.” Bluewater Builders, 2013 WL at *3. However, the general contractor could not point to any promise the insurer actually made because the insured-subcontractor was the one that transmitted the COI. And, the COI did not state that it would insure the subcontractor’s work for the project; it was simply evidence of insurance without any “promise.” In fact, the COI at-issue is believed to have not even listed the insurer as the liability insurer for the subcontractor. Thus, the Court granted summary judgment in favor of the insurer finding there was no coverage for the subcontractor’s work at the commercial high-rise under the policy.

 

 

It is important to remember that the COI does not create an obligation for an insurer.  This is demonstrated by the following portion of the Court’s opinion:

 

The Certificate [of Insurance] does not suggest that Defendant [insurer] would insure Ferman [insured-subcontractor], nor does it create some other obligation on Defendant’s part. Further insight into the preparation of the Certificate [of Insurance] is therefore inapposite to whether Defendant owes any obligation to Ferman or Plaintiff [general contractor] under the Policy.”

Bluewater Builders, 2013 at *4.

 

Remember, the COI does not create insurance coverage which is why it is always beneficial to see the policy and, as it pertains to additional insured status, to see the actual additional insured endorsement.

 

For more information on a third party suing a liability carrier, please see https://floridaconstru.wpengine.com/a-third-party-suing-a-liability-carrier/

 

For more information on additional insured status, please see https://floridaconstru.wpengine.com/understanding-your-rights-as-an-additional-insured/

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.

PRESERVING PERFORMANCE BOND CLAIMS

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Performance bonds can be a valuable source of protection to owners that want their general contractors to provide a performance bond and, likewise, to general contractors that want certain subcontractors to provide a performance bond. The performance bond is designed to benefit the obligee in the event the contractor that issues the bond defaults under its contractual obligations. It is absolutely crucial that parties take the proper steps under the terms of the performance bonds to preserve their rights and arguments under the bond. To do this requires an unequivocal formal default of the contractor that issued the bond and that the party will be looking solely to the surety to complete the defaulted party’s contractual obligations. Otherwise, a court will rule in favor of the surety finding that the obligee of the bond did not comply with conditions precedent to preserve the performance bond claim and/or breached the terms of the bond by not allowing the surety to investigate and complete performance. This is exactly the situation in two federal district court summary judgment opinions relying on Florida law: North American Specialty Insurance Co. v. Ames Corp., 2010 WL 1027866 (S.D.Fla. 2010) and CC-Aventura, Inc. v. Weitz Co., 2008 WL 2699577 (S.D.Fla. 2008). Both of these cases illustrate the importance of formally and unequivocally declaring the party that issued the performance bond in default irrespective of whether the issue arises pre-completion or post-completion. Both cases also pertain to a subcontractor that provided a performance bond identifying the general contractor as the obligee (or beneficiary) of the bond.

 

I. North American Specialty Ins. Co. v. Ames Corp. (Pre-Completion)

 
In this case, a general contractor hired a roofer for a federal project. The roofer provided performance bonds identifying the general contractor as the obligee. The bonds provided as follows (which is common language in performance bonds):

 

“Whenever Principal shall be, and be declared by Obligee to be in default under the subcontract, the Obligee having performed Obligee’s obligations thereunder:

(1) Surety may promptly remedy the default …;

(2) Obligee after reasonable notice to Surety may, or Surety upon demand of Obligee may arrange for the performance of Principal’s obligation under the subcontract …;

(3) … If the Surety arranges completion or remedies the default, that portion of the balance of the subcontract price as may be required to complete the subcontract or remedy the default and to reimburse the Surety for its outlays shall be paid to the Surety at the times and in the manner as said sums would have been payable to Principal had there been no default under the subcontract.”

Ames Corp., 2010 WL at *1.

 

During construction, the general contractor notified the surety that the roofer was refusing to perform and that the general contractor will look to the surety for costs incurred above the roofer’s subcontract amount. A follow-up notice advised the surety that expenses were being incurred to finish the roofer’s subcontract amount and no one from the surety visited the jobsite. The surety then commenced an investigation while advising the general contractor that the “prior letters were not accompanied by supporting documentation and/or prior notice to the principal of default and/or potential default.” Ames Corp., 2010 WL at *3. A meeting was coordinated with the owner, the general contractor, the roofer, and the roofer’s surety at which time the surety represented it would need up to 5 months to assume responsibility and take action. After this meeting, the general contractor sent another letter to the surety and the roofer explaining that the roofing subcontract was not terminated or declared in default and that the surety needed to appreciate the short time allotted for completing the roofer’s contract. The surety responded that because the general contractor had not declared the roofer in default, the surety had no obligation to act under the performance bonds.

 

Notwithstanding the general contractor never formally declaring the subcontractor in default, it supplemented the roofer’s scope of work. Both the roofer and the surety objected; the surety even advised that such efforts would be a material breach of the bonds. However, due to leaks with the roofing system (the manufacturer of the roofing system inspected the roof and found that there were installation defects), the general contractor incurred substantial costs to complete the roofer’s scope of work which exceeded the roofer’s subcontract balance. In addition, the general contractor incurred delay damages associated with completing the roofer’s scope of work.

 

The surety initiated this lawsuit based on the monetary demands from the general contractor. The surety moved for summary judgment based on the argument that a condition precedent to the bonds obligations was never triggered, that being that the general contractor never declared the roofer in default. The surety also argued that the general contractor breached the bonds by not allowing the surety the right to remedy any default and by not making available to the surety the unpaid subcontract balance in connection with the surety remedying the default.

 

Relying on Florida law, the Southern District found:

 

[A] surety’s liability on a bond is determined strictly from the terms and conditions of the bond agreement. The purpose of a performance bond is to guarantee completion of the contract upon default by the contractor.

***

A declaration of default sufficient to invoke the surety’s obligations under the bond must be made in clear, direct, and unequivocal language. The declaration must inform the surety that the principal has committed a material breach or series of material breaches of the subcontract, that the obligee regards the subcontract as terminated, and that the surety must immediately commence performing under the terms of the bond.

Ames Corp., 2010 WL at *6 (internal citations and quotations omitted).

 

Based on this law, the Southern District held that none of the letters the general contractor sent to the surety defaulted the roofer in clear, direct, and unequivocal language. While the letters urged the surety to become involved and threatened default, they did not formally and unequivocally default the roofer. Accordingly, the court granted summary judgment in favor of the surety.

 

Furthermore, the Southern District agreed with the surety that the general contractor breached the bond by completing / supplementing the subcontract without giving the surety the opportunity to remedy any default under the subcontract. As the court explained: “‘[O]nce Ames/Dawson [general contractor] engaged in the supplementation of work without allowing NAS [surety] to perform, its conduct constituted a material breach that voided the bond.” Ames Corp., 2010 WL at *9.

 

II. CC-Aventura, Inc. v. Weitz Co. (Post-Completion)

 

In this case, the general contractor was hired to construct a senior living facility. The general contractor hired a painter with a subcontract that contained an indemnification provision and a provision that required the painter to correct defective work. The painter provided a performance bond identifying the general contractor as the obligee.

 


After completion of the project, the owner sued the general contractor for water intrusion and damage. The general contractor sued subcontractors including its painting subcontractor. The general contractor also asserted a claim against the painting subcontractor’s performance bond surety for breach of the bond. The surety moved for summary judgment arguing that the bond obligations were never triggered because the general contractor never formally declared the painting subcontractor in default.

 

The general contractor argued that it did provide default notices when it transmitted the owner’s expert and its expert reports regarding the paint that the painter applied. In the notices, the general contractor demanded that the surety correct the defects and that the painter’s failure to take corrective action will be a default under the subcontract.

 

The surety took the position that these types of notices were insufficient. The Southern District of Florida agreed and granted summary judgment in favor of the surety finding:

 

“Both of Weitz’s [general contractor] letters do state that Delta [subcontractor] is in ‘default’ of its Subcontract-and had Weitz maintained that position and indicated that Weitz now looked to American Casualty [surety] alone, both of its letters could reasonably be interpreted as declarations of default sufficient to trigger American Casualty’s liability on the Bond. However, in its December 30, 2005 letter Weitz also advised Delta to ‘please accept this letter as The Weitz Company’s final written demand that Delta Painting or its Surety take appropriate corrective action’….In its April 11, 2006 letter, Weitz reiterated that it had made ‘numerous demands upon both Delta and American to correct [the painting] deficiency.’ Weitz then stated its intention to perform the corrective work itself and announced that ‘Weitz will seek such costs and all other damages from Delta and American.’ If Weitz wanted to trigger American Casualty’s obligations on the Bond, it would have had to clearly and unambiguously notify American Casualty that it now looked to it to complete Subcontract obligations, in accordance with the Bond.”

CC-Aventura, 2008 WL at *4.

 

 

As illustrated above, there are certainly procedural hurdles that are required to take place in order to properly default a contractor that provided a performance bond. Not doing so can be fatal to the performance bond claim. Default is always viewed as a last resort because parties do not want to be in material breach for incorrectly defaulting or terminating a party. However, by not defaulting a party, the performance bond’s obligations are not triggered. Due to these hurdles, general contractors are now obtaining subguard (subcontractor default insurance) instead of requiring individual subcontractors to provide performance bonds. This allows the general contractor to be more involved in the process since it is the one obtaining subguard and it eliminates subcontractors from having to obtain the bond (which could be problematic for certain subcontractors).

 

For more on performance bonds, please visit: https://floridaconstru.wpengine.com/statute-of-limitations-on-performance-bond-claims/

 

 

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.

 

MORE ON A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY FROM THE CONTRACTOR BOND-PRINCIPAL AND BOND GUARANTORS

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I previously discussed a surety’s right to demand collateral security from its bond principal and personal guarantors by discussing the case Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013). (Please see below for the link where this blog article can be located.)

 

To add to this discussion, the Middle District of Florida in Travelers Cas. and Sur. Co. of America v. Industrial Commercial Structures, Inc., 2012 WL 4792906 (M.D.Fla. 2012), a case that preceded Bi-Tech Construction, dealt with a similar issue of a performance bond surety demanding the bond principal and guarantor to post / deposit collateral to offset the surety’s liability exposure. In this case, the surety issued a performance bond to the contractor in connection with a residential project. A dispute arose between the contractor and the owner and the contractor sued the owner for, among other claims, breach of contract and to foreclose a construction lien. The owner countersued the contractor and the performance bond surety (which is not uncommon in a payment dispute where the owner asserts construction defects or incomplete performance). The dispute was hotly contested.

 

During the dispute with the owner, the surety demanded that the contractor post collateral – it demanded that the contractor deposit money into a reserve account that would be used to offset the surety’s liability. When the contractor did not post / deposit the amount of money the surety wanted, the surety filed a lawsuit against the contractor (principal) and the contractor’s guarantors that executed the General Agreement of Indemnity (the agreement the surety requires to be executed before it issues bonds on the principal’s behalf). The surety moved for a preliminary injunction asking the Court to order the contractor to deposit the money into a reserve account. The surety also moved for an injunction demanding that the contractor not transfer or encumber assets, allow the surety to have a full accounting of the contractor and guarantor’s assets, and allow the surety access to the contractor and guarantor’s books and records.

 

The Middle District, analyzing the requirements for a preliminary injunction, agreed with the surety and ordered that the contractor post / deposit collateral into the reserve account. Of interest, the surety prior to the lawsuit demanded collateral of $1.5 million that it subsequently reduced to $300,000. Although the surety in its motion for preliminary injunction demanded that the contractor deposit the $1.5 million in collateral, the court ordered the contractor to deposit $300,000 to the reserve account. (There was some indication in the opinion that the contractor posted approximately $139,000 as collateral, but it is uncertain whether this was collateral provided in connection with the issuance of the bonds or the lawsuit with the owner.)

 

The MIddle District elaborated:

 

“As one federal court of appeals has succinctly explained, ‘[a] collateral security provision [in an indemnity agreement] provides that once a surety…receives a demand on its bond, the indemnitor must provide the surety with funds which the surety is to hold in reserve. If the claim on the bond must be paid, then the surety will pay the loss from the indemnitor’s funds; otherwise, the surety must return the funds to the indemnitor.’ Moreover, ‘[s]ureties are ordinarily entitled to specific performance of collateral security clauses.’ This is because ‘[i]f a creditor is to have the security position for which he bargained, the promise to maintain the security must be specifically enforced.’ Industrial Commercial Structures, supra, at *2 (internal citations omitted).

 

However, the court did not order the contractor or guarantor to give a full accounting, provide the surety access to books and records, or prohibit the transferring of assets as the surety did not establish it would be irreparably harmed (a requirement for an injunction) if this relief was not granted. Also, the court, unlike the court in Bi-Tech Construction, required the surety to post a $100,000 bond for the injunction to cover damages in the event the injunction was wrongly ordered.

 

Although the court in this case did not discuss the collateral security provisions, such provisions are virtually identical in most General Agreements of Indemnity. Even in a hotly contested dispute between the contractor and the owner (such as the situation in Industrial Commercial Structures), if a claim is asserted against the surety or it is sued, the surety can demand for the principal and guarantor to post collateral into a reserve account to offset the surety’s liability exposure. However, if the surety demands more, such as an accounting, access to books, etc., this case can support the argument that these remedies are not warranted because the surety has not established it will be irreparably harmed if this recourse is not ordered. Now, if the circumstances are different and the surety carries its burden of establishing irreparable harm, it is possible that this recourse will also be ordered; however, this additional recourse should ideally result in a higher injunction bond amount.

 

The objective is for the contractor (bond-principal) and guarantors to understand their rights and options in the event a claim or lawsuit is asserted against the bond.

 

To find out more about this issue and the requirements for a preliminary injunction, please see
https://floridaconstru.wpengine.com/a-suretys-right-to-demand-collateral-security/

 

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.