BREACH OF A CONSTRUCTION CONTRACT & AN EQUITABLE REMEDY?

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

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

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

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

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

Posted on December 2, 2014December 2, 2014 by Edward Garber

Just 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.

The 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.

HAS A MATERIAL BREACH OF CONTRACT OCCURRED? CONSULT COUNSEL TO BEST DETERMINE RIGHTS!

Posted on May 17, 2014May 17, 2014 by Edward Garber

When a dispute arises, whether it is a payment dispute or otherwise, parties sometimes point the finger to the other party to argue that the other party breached the contract. What exactly does this mean? For a breach of contract to occur, the breach (or nonperformance) must be a MATERIAL BREACH. See Abbot Labs, Inc. v. Gen. Elec. Capital, 765 So.2d 737, 740 (Fla. 5^th DCA 2000). A material breach is one that goes to the essence of the contract versus a minor aspect of the contract. See Covelli Family, L.P. v. ABG5, L.L.C., 977 So.2d 749, 752 (Fla. 4^th DCA 2008). The Covelli Family Court explained:

“To constitute a vital or material breach, a party’s nonperformance must go to the essence of the contract. A party’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach.”

Id. (internal quotations and citations omitted).

Stated similarly:

“To constitute a vital or material breach a defendant’s nonperformance must be such as to go to the essence of the contract; it must be the type of breach that would discharge the injured party from further contractual duty on his part. Corbin, supra, s 1104. A defendant’s failure to perform some minor part of his contractual duty cannot be classified as a material or vital breach. Corbin states, at s 1104, pp. 562-565:

‘. . . The injured party, however, can not maintain an action for restitution of what he has given the defendant unless the defendant’s non-performance is so material that it is held to go the ‘essence’; it must be such a breach as would discharge the injured party from any further contractual duty on his own part. Such a vital breach by the defendant operates, with respect to the right of restitution, in the same way that a repudiation of the contractual obligation would operate. A minor breach by one party does not discharge the contractual duty of the other party; and the latter being still bound to perform as agreed can not be entitled to the restitution of payments already made by him or to the value of other part performances rendered.‘”

Beefy Trail, Inc. v. Beefy King Intern, Inc., 267 So.2d 853, 857 (Fla. 1972) citing and quoting Corbin on Contracts, Vol. 5.

In numerous circumstances, nonpayment can constitute a material breach. See Scott v. Rolling Hills Place Inc., 688 So.2d 937 (Fla. 5^th DCA 1996) (finding that developer first breached contract by not paying engineer that discharged engineer of performance obligations). However, it is important for parties to consider that nonpayment does not automatically in of itself constitute a material breach. For instance, did the contract have a pay-if-paid clause? Did the party claiming nonpayment satisfy contractual conditions precedent to payment? Was the nonpaying party withholding money due to a performance issue such as defective or incomplete work? Was the payment late by a few days or was it never paid? Is the payment amount a relatively insignificant amount? Does the payment amount concern disputed amounts such as change orders or disputed defective or incomplete work? These are all questions that need to be a considered before a party takes an extreme position that it will no longer perform under the contract due to the nonpayment. A party should consult their written contract and counsel before taking any extreme position that the other party materially breached the contract to best determine the strategy and lay the foundation for the position.

The case of Marshall Const., Ltd. v. Coastal Sheet Metal & Roofing, Inc., 569 So.2d 845 (Fla. 1^st DCA 1990), illustrates the ramifications of a party without a written contract taking an extreme position due to nonpayment. In this case, a general contractor entered into a contract to repair and replace roofs on three buildings at a Florida State Hospital. The general contractor then entered into an oral contract with a roofing subcontractor. During construction, a water leak arose with the new roof installed on one of the buildings. Both the general contractor and subcontractor appeared to agree that the new roof was defective and needed to be replaced. However, the subcontractor could not finance the repair / replacement work without getting paid for the work it had performed. The subcontractor was not paid for the work performed and determined that it would not perform any more work until it was paid. As a result, the general contractor terminated the subcontractor and hired a new roofing subcontractor to finish the balance of the roofing work and replace the defective roof. The subcontractor then sued the contractor for breaching their oral contract. The trial court ruled in favor of the subcontractor; the First District Court of Appeal reversed maintaining that the subcontractor actually committed the material breach:

“It is undisputed that Coastal [roofer] failed to install the roofing system on the east wing as required under the contract. When Coastal refused to repair the roof without further payment, it committed a material breach. Marshall [general contractor] was entitled to treat the breach as a discharge of its duty to pay Coastal until such time as Coastal repaired the defective roof and fulfilled its contractual duties. In light of the fact that the terms of the [general contractor’s] contract [with the owner] required substantial completion by July 25, 1988, and that Coastal refused to return to work until it was paid, Marshall was completely justified in determining that a material breach had occurred and ordering Coastal off the job.

We find no substantial, competent evidence to support a finding that Marshall [general contractor] breached the contract. The undisputed evidence demonstrates that Coastal [roofer] committed a material breach of the contract. This breach excused Marshall’s obligation to pay Coastal until the roof was repaired. We therefore reverse and remand for a new trial on damages and liability.”

Marshall Const., 569 So.2d at 848 (internal citations omitted).

Now, this case demonstrates why oral contracts are disfavored because rights and obligations are amorphous. Nothing is clearly defined and there is no written agreement to consult. If there was a written contract, most likely there would be a pay-if-paid provision in which the general contractor’s payment to the subcontractor was conditioned on its receipt of payment from the owner. It is uncertain whether the owner paid the general contractor for the defective work; if the owner did not, then the general contractor’s payment obligation would not have been triggered. But, let’s assume the owner did pay the general contractor. Well, the subcontract most likely contained a clause pertaining to defective work that would authorize the subcontractor to fix the work at its own costs and also entitle the general contractor to withhold sums as the result of incomplete or defective work. For instance, the standard form agreement between a contractor and subcontractor published by the ConsensusDocs (Document 750) contains the following provisions:

3.22.2.1 If the Architect/Engineer or Contractor rejects the Subcontract Work or the Subcontract Work is not in conformance with the Subcontract Documents, the Subcontractor shall promptly correct the Subcontract Work whether it had been fabricated, installed or completed. The Subcontractor shall be responsible for the costs of correcting such Subcontract Work, any additional testing, inspections, and compensation for services and expenses of the Architect/Engineer and Contractor made necessary by the defective Subcontract Work.

10.1.1 NOTICE TO CURE If the Subcontractor refuses or fails to supply enough properly qualified workers, proper materials, or maintain the Progress Schedule, or fails to make prompt payment to its workers, subcontractors or suppliers, or disregards laws, ordinances, rules, regulations or orders of any public authority having jurisdiction, or otherwise is guilty of a material breach of a provision of this Agreement, the Subcontractor shall be deemed in default of this Agreement. If the Subcontractor fails within three (3) business Days after written notification to commence and continue satisfactory correction of the default with diligence and promptness, then the Contractor without prejudice to any other rights or remedies, shall have the right to any or all of the following remedies:

10.1.1.1 supply workers, materials, equipment and facilities as the Contractor deems necessary for the completion of the Subcontract Work or any part which the Subcontractor has failed to complete or perform after written notification, and charge the cost, including reasonable overhead, profit, attorneys’ fees, costs and expenses to the Subcontractor;

10.1.1.2 contract with one or more additional contractors to perform such part of the Subcontract Work as the Contractor determines will provide the most expeditious completion of the Work, and charge the cost to the Subcontractor as provided under Clause 10.1.1.1; or

10.1.1.3 withhold any payments due or to become due the Subcontractor pending corrective action in amounts sufficient to cover losses and compel performance to the extent required by and to the satisfaction of the Contractor.

These provisions would hurt a subcontractor’s argument that it should get paid for work performed, including defective work performed, so that it could finance the repairs.

Again, before extreme positions are taken, a party should absolutely consult their written contract to determine rights, obligations, and risks they agreed to. Having a lawyer involved on the front end during the contract negotiation can help a party negotiate and/or appreciate the risks they are agreeing to. Even if a lawyer was not involved on the front end, having the lawyer involved when difficult issues arise during the course of construction will allow a party to preserve rights / arguments and take positions or avoid positions based on a determined strategy. As the expression goes, “An ounce of prevention is worth a pound of cure!”

AN OWNER’S “INTENDED THIRD PARTY BENEFICIARY” STATUS UNDER A SUBCONTRACT

Posted on March 29, 2014March 29, 2014 by Edward Garber

Sometimes, during a dispute, there are arguments as to whether an owner is an INTENDED third party beneficiary of the subcontract by and between the general contractor and the subcontractor. There are instances where an owner desires to be an intended third party beneficiary of a subcontract so that it could pursue a breach of contract claim directly against the subcontractor. (These instances can relate to concerns over the solvency of the general contractor and/or the insurance coverage limits of the general contractor.)

“A party is an intended [third party] beneficiary only if the parties to the contract clearly express, or the contract itself expresses, and intent to benefit the third party or a class of persons to which that party claims to belong.” Dingle v. Dellinger, 2014 WL 470679, *1 (Fla. 5th DCA 2014). In other words, an intended third party beneficiary is not a signatory or party to the contract. Rather, it is expressly clear from the contract that the contract’s intent is to directly benefit that third party. Dingle, 2014 WL at *1 (finding to assert a breach of an intended third party beneficiary contract, the third party must show an intent that the contract was to directly and primarily benefit the third party). Because the intent of the contract is to directly benefit the third party, the third party is entitled to enforce the contract and, thus, sue for a breach of that contract.

However, if a third party is not an intended third party beneficiary of the contract, it will be deemed an incidental beneficiary that maintains no rights whatsoever to enforce the contract. McKinney-Green, Inc. v. Davis, 606 So.2d 393, 396 (Fla. 1st DCA 1992).

Now, a property owner is typically not regarded as an intended third party beneficiary of a subcontract between a general contractor and subcontractor. See J.W. Hodges Drywall, Inc. v. Mizner Falls, LLP, 865 So.2d 681 (Fla. 4th DCA 2004) (owner could not enforce arbitration provision in subcontract between general contractor and drywall subcontractor); accord Lillibridge Health Care Services, Inc. v. Hunton Brady Architects, P.A., 2010 WL 3788859 (M.D. Fla. 2010) (owner not intended third party beneficiary of mechanical engineer’s subconsultant agreement with architect); City of Tampa v. Thornton-Tomasetti, P.C., 646 So.2d 279 (Fla. 2d DCA 1994) (public owner not intended third party beneficiary of subconsultant’s agreement between subconsultant and architect); Vogel Bros. Bldg. Co. v. Scarborough Constructors, Inc., 513 So.2d 260 (Fla. 2d DCA 1987) (public owner not intended third party beneficiary of subcontract). Indeed, the Fifth District of Florida maintained: “As one court put it, ‘[a]lthough the work performed by subcontractors ultimately accrues to the property owner, the owner is ordinarily regarded as only an incidental beneficiary of the subcontract.” Publix Super Markets, Inc. v. Cheesbro Roofing, Inc., 502 So.2d 484, 488 (Fla. 5th DCA 1987) (superseded on other grounds) quoting National Cash Register Co. v. Unarco Indus., Inc., 490 F.2d 285, 286 (7th Cir. 1974). In addition, a subcontractor is not going to be deemed an intended third party beneficiary between the prime contract between the owner and the general contractor that would entitle it to assert a breach of contract claim against the owner. Esposito v. True Color Enterprises Const., Inc., 45 So.3d 554 (Fla. 4th DCA 2010).

If an owner wants to be an INTENDED third party beneficiary of the subcontracts, it should require the general contractor to include certain buzz language in the subcontracts that expressly sets forth this intent. Such buzz words would be something to the effect:

“It is understood and agreed that this subcontract is to primarily and directly benefit the Owner; therefore, the Owner is deemed an intended third party beneficiary of the subcontract and can enforce the subcontract as an intended third party beneficiary.”

This language clearly indicates the required intent for the intended third party beneficiary status that will enable the owner to enforce the subcontract. Without such language that clearly articulates this intent, an intended third party beneficiary status should not be extended to all situations where an owner decides to sue a subcontractor for breach of subcontract when the subcontractor was not hired by the owner. Although the owner will make the argument that the subcontractor’s work is to benefit the owner under the subcontract, the subcontractor could make a similar argument that the owner’s payment obligations to the general contractor under the prime contract is to benefit the subcontractors since the owner knew that the general contractor was not self-performing the work. If however the owner is an intended third party beneficiary of the subcontract and enforces the subcontract, it should be deemed bound by all of the terms, conditions, and burdens of the subcontract. See Woods v. Christensen Shipyards, Ltd., 2005 WL 5654643 (S.D.Fla. 2005); accord Consolidated Bathurst, Ltd. v. Rederiaktiebolaget Gustaf Erikson, 645 F.Supp. 884, 886 (S.D.Fla. 1986).

A LANDLORD’S REFUSAL TO TIMELY PERFORM NEEDED REPAIRS / MAINTENANCE ITEMS

Posted on November 29, 2013November 29, 2013 by Edward Garber

What happens if the landlord refuses to timely repair defects or perform necessary maintenance items that it is otherwise responsible to perform per the lease? What happens if the landlord makes rental space untenantable? The case of Katz Deli of Aventura, Inc. v. Waterways Plaza, LLC, 38 Fla. L. Weekly D2511b (Fla. 3d DCA 2013), illustrates the issue of “constructive eviction” and a tenant’s recourse against its landlord including its recovery of lost profits when a landlord does not timely implement needed repairs that impacts a tenant’s business.

In this case, a successful deli in Pembroke Pines opened a new location in a shopping plaza in Aventura. After a couple of years of growing revenue, the deli leased larger space within the same Aventura plaza. The lease for the larger space was for five years, with 3% annual rent increases, and with three lease renewal options for five-year terms. Of importance to this case, the landlord was required to make all of the required repairs to the shopping plaza’s structure and roof.

After the execution of the lease, the shopping plaza was purchased by the defendant-landlord (which assumed the deli’s existing lease). The new landlord learned exercising its due diligence of inspecting the plaza’s condition prior to purchase that the roof needed to be replaced (re-roofed). Yet, even though it purchased the plaza, it did not timely replace the roof. As a result, leaks started at the deli and became progressively worse resulting in mold and a musty odor in the deli. Naturally, this condition caused the deli to lose business and customers and reached the point where the deli could not continue to operate as a restaurant. Then, suspiciously, after the deli vacated the space, the landlord decided to re-roof the space and found new tenants that leased the space at a much higher rental rate. The deli sued the landlord for breach of lease (breach of contract) and constructive eviction.

The deli argued that the landlord constructively evicted it in order to capitalize on substantially higher rental rates because the agreed-upon rental rate in the lease that the deli entered into with the former landlord (and that the defendant assumed when it purchased the plaza) was well below market rate.

At a bench trial, the deli argued that its damages consisted of lost profits. It utilized an accounting expert to prove lost profits. The landlord contended that lost profits was not the proper damages methodology and the deli should have proven its damages by analyzing the market value of the deli since the deli was destroyed. The reason the landlord argued this is because the deli put on no evidence as to these damages (meaning, if this was the proper methodology, the deli would be entitled to no damages because it failed to put on any evidence of these damages). The trial court found that the deli was entitled to lost profits but only awarded lost profits through the end of the initial lease term, and not the three five year lease renewal options.

On Appeal, the Third District Court of Appeal maintained:

“A constructive eviction constitutes a breach of the covenant of quiet enjoyment. Furthermore, Waterways’ [landlord] grossly negligent failure to repair the roof as required by the lease was a breach of its contract. In an action for breach of contract, the goal is to place the injured party in the position it would have been in had the other party not breached the contract so as to give the aggrieved party the benefit of its bargain. However, a successful plaintiff is not entitled to be placed, because of that breach, in a position better than that which he would have occupied had the contract been performed. The injured party may only recover those damages that naturally flow from the breach and can reasonably be said to have been contemplated by the parties at the time that the contract was made. It is not necessary that the parties have contemplated the exact injury that occurred as long as the actual consequences could have reasonably been expected to flow from the breach.”

Waterways Plaza, supra (internal citations and quotations omitted).

When dealing with the issue of a landlord constructively evicting its tenant, there are cases that hold that the measure of damages is the market value of the business as of the date of loss when the business is completely destroyed. This is why the landlord argued that this should have been the damages methodology employed by the deli. “However, where, as here, a business [the deli] continues after suffering from an act of negligence the business is entitled to recover the lost profits attributable to defendant’s [landlord] negligent act, but cannot recover both lost profits, and the market value of the business.” Waterways Plaza, supra (internal quotations omitted).

The deli was not completely destroyed when the leaks started. Rather, the leaks progressed over a period of time until the space was untenantable. Largely for these reasons, there was no bright line test as to when the deli was completely destroyed. As the Third District explained: “Awarding market value for a business that has been slowly reduced to nothing due to a defendant’s breach, thereby leaving the plaintiff without an adequate recovery, would be completely inequitable, and is not the law in Florida.” Waterways Plaza, supra.

Since lost profits was the proper damages methodology, the Third District next analyzed whether the deli sufficiently proved such damages during the trial.

“Lost profits are recoverable regardless of how well established a business is so long as there is some ‘yardstick’ by which prospective profits can be measured.
***
A business can recover lost prospective profits regardless of whether it is established or has any ‘track record.’ The party must prove that 1) the defendant’s action caused the damage and 2) there is some standard by which the amount of damages may be adequately determined.
***
Any ‘yardstick’ used to show the amount of profits must be reasonable, and the loss of the profits as a result of the [defendant’s conduct] must be reasonably certain. Lost profits must be established with a reasonable degree of certainty and must be a natural consequence of the wrong. The projected profits cannot be mere speculation or conjecture, but the inability to prove a precise damages amount will not prevent a plaintiff from recovering so long as it is clear that some loss resulting from the defendant’s actions is certain.”

Waterways Plaza, supra.

The deli was able to establish a yardstick because it had another location in Pembroke Pines, had success at its former smaller space within the same shopping plaza, and had limited success during the short time it was in the larger space prior to the leaks. Thus, it was able to demonstrate a history of sales that enabled its expert to establish sale projections and projected profit.

Even though lost profits was the proper damages methodology, the deli wanted lost profits that extended through all lease renewals. The deli argued it clearly would have renewed the lease based on the success at that location and plaza prior to the leaks, because its rent was well below market rate, and because the successor tenants leasing the same space after the re-roof were still leasing the space close to ten years after the deli vacated the space. Despite this evidence, the Third District held that this was a question of fact to be determined by the trier of fact, and because the fact finder was the judge, the judge’s fact finding will be presumed correct on appeal unless clearly erroneous. Since the trial judge found that lost profits extending beyond the original five year lease term was speculative, the Third District affirmed the court’s fact finding because it was not clearly erroneous.

Notably, the deli also tried to foreclose an equitable lien and recorded a lis pendens against the shopping plaza. The deli’s equitable lien theory was based on the following language in the lease: “Tenant shall look solely and only to the Landlord’s interest in the Plaza in the event of any default or breach.” Waterways Plaza, supra. However, the lis pendens was discharged and the equitable lien claim was dismissed by the trial court. The deli appealed this arguing that the dismissal of the lis pendens to foreclose its equitable lien was error. The Third District affirmed the trial court finding that the language in the lease did not give the tenant an interest in the landlord’s property that would entitle it to an equitable lien and lis pendens.

This case illustrates options a tenant has when its rental space becomes untenantable, especially due to the landlord’s failure to timely implement or perform needed repairs / maintenance items. This case further illustrates the importance of knowing and proving a party’s correct damages methodology due to a breach. Also, considering the factual circumstances in lost profit cases, such as this case, and how a party establishes its lost profits provides future guidance to ensure that these damages are proven with their required reasonable degree of certainty!

For more information on proving lost profits, please see: https://floridaconstru.wpengine.com/proving-lost-profit-damages-with-a-reasonable-degree-of-certainty/

PROVING LOST PROFIT DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY

Posted on October 13, 2013October 13, 2013 by Edward Garber

Lost profit damages are challenging damages to prove, but are an important form of consequential damages that parties seek based on the dynamics of the case. These damages must be proven with a reasonable degree of certainty. The recent Southern District of Florida opinion, Topp Paper Co., LLC v. ETI Converting Equipment, 2013 WL 5446341 (S.D.Fla. 2013), explained:

“Under Florida law, lost profits must be proven with a reasonable degree of certainty before the loss is recoverable. Courts have construed this standard as requiring that the mind of a prudent or impartial person be satisfied that the damages are not the result of speculation or conjecture. In unproven businesses such as Topp’s [plaintiff], Florida courts have allowed damages where the plaintiff proves that (1) the defendant’s action caused the damage and (2) there is some standard [yardstick] by which the amount of damages may be adequately determined.” Id. at *7 (internal citations and quotations omitted).

The first step is the causation requirement, i.e., that the defendant’s conduct caused the lost profit damages that the plaintiff seeks.

The second step is the lost profit methodology demonstrating the plaintiff’s lost profit damages with a reasonable degree of certainty and without speculation. Oftentimes parties retain experts to prove these damages based on the yardstick or standard in which the lost profit damages are determined. However, in Topp Paper, the Southern District maintained that both steps “may be satisfied without resort to expert testimony.” Topp Paper, supra, at *8. In this case, the plaintiff, a new business, planned to show lost profits without an expert by laying the foundation for cancelled contracts with its clients that were solely caused by the defendant’s actions. The plaintiff’s position was that but for defendant’s actions, it would have been able to satisfy the contracts with its actual clients and, because it was not able to, it lost the profit associated with those contracts.

On the other hand, the Southern District would not allow the plaintiff to prove its lost profit damages through income projections by comparing projected income with actual income to assess lost profits. The reason is that establishing lost profit damages through projections would be purely speculative, especially considering the plaintiff’s business was a new business without a history of profits.

In Topp Paper, the plaintiff could be in a position to establish lost profits because it actually had contracts with clients that had to be cancelled due to the defendant’s alleged actions. This was vital because the plaintiff could establish lost profits without the need to retain an expert. However, what if the plaintiff, as a new business, did not actually have cancelled contracts? It would not be able to prove damages through income or profit projections. In this scenario, the plaintiff would need to establish some yardstick to prove its damages with a reasonable degree of certainly. One yardstick could be the plaintiff’s past business and profit history. A plaintiff’s accountant or financial officer could assist in this methodology / calculation (although, if possible, it helps to have this supported by an expert). However, as a new business, the plaintiff did not have a business history. The other way would be to find a comparable business with a comparable business model as the yardstick to establish lost profits. This should require expert testimony and it will be important to work with the expert and cross-examine the expert to flesh out any speculative portion of the yardstick.

The bottom line is that lost profit damages are challenging and require a game plan that will be used to support (1) causation–that the defendant’s action caused these damages and (2) the standard or yardstick that will be utilized to support lost profit damages. A new business will likely have a different game plan than an established business unless there is documentary evidence (such as in Topp Paper) that the business had actual clients that would have been serviced but for the defendant’s actions. Also, knowing that income projections or pro forma profit and loss statements will be deemed speculative, getting an expert involved sooner than later is important to assist with establishing the yardstick or methodology that will be used to prove lost profits with a reasonable degree of certainty.

For more information on lost profit damages, please see https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/

THE DIFFERENCE BETWEEN LOST PROFIT AND LOSS OF USE DAMAGES

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

Lost profits are a type of damages that are sometimes thrown around in a litigation. However, these damages are very difficult to establish and prove and they really require expert testimony. If the theory to recover lost profits is speculative, or the way the lost profits is measured is speculative, they will not be recoverable. (Typically, lost profits require a history of profits to measure against and/or establishing the profitability of another business using a substantially similar business model for comparative purposes). Lost profit damages have a difficult burden of proof in order to avoid the argument that they are speculative in nature.

Loss of use is another type of damages that is often confused with lost profit damages. Loss of use damages is generally the rental value of property / fair market value due to the loss of use of that property. See B&B Tree Service, Inc. v. Tampa Crane & Body, Inc., 38 Fla. L. Weekly, D970a (Fla. 2d DCA 2013) citing MD. Cas. Co. v. Fla. Produce Distribs., Inc., 498 So.2d 1383 (Fla. 5th DCA 1986) and Meakin v. Dreier, 209 So.2d 252 (Fla. 2d DCA 1968). Hypothetically speaking, this type of damage can come into play if an owner is trying to recoup the rental value of units / fair market value of units that are out of service due to a defect, i.e., water intrusion problem.

There is a better argument for an owner under Florida caselaw to testify as to loss of use damages than lost profits, although with both types of damages, a qualified expert is preferential. “An owner is qualified to testify to the value of his property based on a presumed familiarity with the characteristics of the property, knowledge or acquaintance with its uses and purposes, and experience dealing with it….An owner must be shown to have knowledge regarding the property and its value sufficient to qualify him.” B&B Tree Service quoting Craig v. Craig, 982 So.2d, 724, 729 (Fla. 1st DCA 1993) (internal quotations omitted). The key is the owner’s familiarity with the property and value to support his opinion testimony regarding loss of use damages.

Understanding the differences between lost profit damages and loss of use damages, as well as the ways to prove such damages, is important if these are damages a party is looking to recover. Not understanding the burdens of proof for these types of damages can be fatal to recovery or can lead a party to an unrealistic method of thinking during the course of a case and prevent the party from entertaining reasonable settlement offers.

SUPPORTING CONSTRUCTION DEFECT DAMAGES WITH AN ESTIMATE

Posted on April 25, 2013April 25, 2013 by Edward Garber

One of the issues in construction defect disputes is whether the owner can prove damages with an estimate, which is often the case. Recently, in Kritikos v. John T. Anderson d/b/a Anderson Builders, et al., 38 Fla. L. Weekly D931a (Fla. 4th DCA 2013), the Fourth District Court of Appeals confirmed that an estimate as to the costs to repair construction defects can support a plaintiff’s (owner) damages. In other words, the plaintiff does not actually have to incur the costs to repair in order to be entitled to recover damages to correct a construction defect.

In this case, the contractor recorded a construction lien. The owner asserted, as a defense, that it is entitled to set-off the amount of the lien due to construction defects and delay-related damages. (The owner in this case ended up terminating the contractor when the project was substantially over budget and behind schedule.) It was the owner’s position that the defective work was subject to a design change so the measure of damages needed to be based on an estimate of what it would cost to complete the work (i.e., repair the defects) according to the original design / contract. The owner’s argument, as supported by the Fourth District, was based on precedent discussing an owner’s measure of damages when there is a construction defect, particularly the Florida Supreme Court decision of Grossman Holding Limited v. Hourihan, 414 So.2d 1037 (Fla. 1982) and the Second District Court of Appeals’ decision of Temple Beth Shalom & Jewish Center, Inc. v. Thyne Construction Corp., 399 So.2d 525 (Fla. 2d DCA 1981). Both the cases of Grossman and Temple Beth Shalom maintain that the measure of damages when dealing with construction defects / unfinished construction contract is the reasonable cost to complete / repair per the original design / contract provided this does not result in economic waste. Kritikos, supra.

The key is that whether using an estimate or actual costs to support damages from a construction defect, the measure of damages is the reasonable cost to complete per the original design / contract (versus a subsequent and better design to repair the defects) provided that the repair costs do not amount to economic waste.

Interestingly, this case also discussed the owner’s set-off for delay damages. It is uncertain in this case whether the owner utilized any expert to establish delay damages, which is often and properly the case, or how the owner specifically presented the delay damages (as there is no discussion that there was a liquidated damages provision in the contract). The Fourth District simply stated: “Delay damages were properly presented to the jury. By their very nature, delay damages may not be subject to exact calculation, making the owner’s opinion of the value of his loss of use of his property admissible and relevant.” Kritikos, supra. Based on this limited statement, it would seem that these damages are not referring to liquidated damages or delays to the critical path of a construction schedule, but rather an owner (without any expert testimony) testifying as to “loss of use damages,” i.e., an owner testifying that due to the circumstances of the case, he/she was damaged by being not being able to utilize his residence. But, it is uncertain what the owner did to support these damages.

For more information on loss of use damages, please see: https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/

THE CARDINAL CHANGE DOCTRINE

Posted on May 15, 2012May 15, 2012 by Edward Garber

The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

In this case, the Court held:

“To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000).

The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.

MORE ON PRECONSTRUCTION AGREEMENTS AND DEPOSITS (an update to 7/16/11 post)

Posted on July 23, 2011July 23, 2011 by Edward Garber

Craigside, LLC v. GDC View, LLC, 36 Fla. L. Weekly d1577e (Fla. 1st DCA 2011) is another case dealing with a buyer of a preconstruction condominium unit trying to recover its deposit from a developer/seller. In this case, the preconstruction contract was entered on September 2, 2004. The buyer tendered an initial deposit and then paid the balance of the purchase price on a later date. The purchase price of the unit was paid prior to the commencement of construction on the unit. The contract required the developer “to complete the condominium unit…within two (2) years of the date of this Agreement but in no event later than May 1, 2007.” The contract allowed for extensions only for “delays caused by events which would support a defense based on impossibility of performance for reasons beyond [the seller’s] control.”

The seller sent the buyer a letter advising that closing was anticipated for May 1, 2007. In response, the buyer sent the seller a letter on April 16, 2007 (notably, more than two years from the date of the contract) notifying the seller that the seller failed to complete the condominium unit per the agreement and further demanding a return of the purchase price. The seller refused to return the initial deposit, although it returned the additional deposit (balance of purchase price).

An issue at trial was the number of days the seller was entitled for delays to the completion date of the unit — these days allowed the seller to extend the completion date of the unit. The trial court granted the seller 253 days of delay, but unfortunately, this case does not discuss the basis for the delays. An understanding of these delays are critical because these delays allowed the seller to complete the unit more than two years from the date of the preconstruction contract.

The First District affirmed the trial court holding that the buyer committed an anticipatory breach of the contract by notifying the seller that it was not going to close on May 1, 2007 and demanding its money back. The First District explained:

“In dealing with anticipatory repudiations the law is clear that a repudiation gives rise to a claim for damages by the nonbreaching party. As stated in Restatement (Second) of Contracts § 253 (1979):

(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other party’s remaining duties to render performance.

Therefore, the nonbreaching party is relieved of its duty to tender performance and has an immediate cause of action against the breaching party.”

In other words, because the buyer notified the seller that it was not going to close on the unit, the buyer committed a breach of the contract. This decision provide crucial because it authorized the seller to keep a substantial initial deposit as liquidated damages associated with the buyer’s refusal to close on the unit. This case reinforces the position that a buyer seeking to avoid closing on a unit takes a certain degree of risk by not closing (i.e, that risk being a loss of its deposit). For this reason, it is important that this business decision is made with the input of an attorney to ensure all arguments are preserved and understood. In this case, the fundamental issue was how many days the seller was given to extend the completion of the unit. While the case did not discuss this issue in any detail, these days put the buyer in the position that when it notified the seller it was not going to close on the unit, the buyer breached the contract allowing the seller to retain the deposit and resell the unit to another buyer.

For more information on preconstruction contracts and recovering deposits, please see: https://floridaconstru.wpengine.com/preconstruction-and-purchase-sale-contracts-arguments-to-revoke-the-contract-and-recover-the-deposit/