Payment disputes between owners and contractors are common. The recent case of Hibachi Grill, Inc. v. Arki Construction, Inc., 39 Fla. L. Weekly D954a (Fla. 3d DCA 2014), illustrates two common scenarios that exist in the payment dispute: (1) the contractor claims it is owed the full contract price for substantially performing the work and (2) the owner wants to setoff amounts that it paid directly to subcontractors.
This case turned on the contractor’s approximate $32,000 breach of contract claim against the owner for unpaid contract balance for building out leased space. Both the owner and contractor agreed that the owner paid approximately $14,000 directly to subcontractors. The owner argued that this amount should reduce the contractor’s $32,000 claim; however, the trial court entered a judgment for the contract balance that did not include this set-off. The Third District agreed that the owner’s direct payment to subcontractors should reduce the contractor’s claim; otherwise, the contractor would receive a windfall since it no longer has to pay those subcontractors.
The owner further argued that the contractor’s unpaid contract balance claim should be further reduced by “lost profit” that was included in the contractor’s unpaid contract balance claim. To support this argument, the owner relied on inapplicable cases where contracts were breached BEFORE substantial performance of the contract was achieved. However, when the contractor substantially performs, it is entitled the full contract price subject to appropriate deductions. In the instance case, the deduction was the payment the owner made directly to subcontractors. In other situations, the owner could deduct deficient work from the contract price. See, e.g., Wm. Dejon Developers, Inc. v. Panhandle Grading & Paving, Inc., 538 So.2d 88 (Fla. 1st DCA 1989) (deducting from full contract price of roadwork the amount of the contractor’s deficient work); Oven Development Corp. v. Molisky, 278 So.2d 299 (Fla. 1st DCA 1973) (discussing that contractor that substantially performs is entitled to full contract price subject to proper deductions from the owner supported by competent evidence of the contractor’s breaches).
This case would support an owner’s position that it can pay subcontractors directly to reduce the amount owed to the contractor. In many situations, this is totally acceptable. The contractor may agree to the payment owed to the subcontractors either through a direct payment or joint check. In other situations, such as when the subcontractor properly preserved lien rights, the owner may want to preserve its right to pay those subcontractors in consideration of releases of lien to ensure its property does not get liened by the subcontractor. However, what about the situation where the owner pays a subcontractor that otherwise has no lien rights? According to this case, the owner could do so to reduce its payment to the contractor since the contractor would owe that money to the subcontractor. Yet, by the owner doing so, especially if it does so unilaterally, it prevents the contractor from potentially resolving a dispute with the subcontractor that the owner is not fully informed about (and which could include work that formed a basis as to the owner’s dispute with the contractor). And, it prevents the contractor from negotiating a final payment amount with the subcontractor so that it can, in turn, negotiate a final payment amount with the owner that is less than its contract balance. So, while this case explains the windfall to the contractor without the deduction for the owner’s direct payment to subcontractors, that windfall may not always be the case.
And, this case demonstrates the importance of how a contractor that substantially performed should present its damages. A contractor that substantially performs is entitled to the contract price subject to applicable deductions that the owner proves with competent evidence (e.g., deficient work, payment to subcontractors, etc.).
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.