CUMULATIVE IMPACT CLAIMS AND DEFINITION BY CERTAIN BOARDS

Posted on June 2, 2024June 2, 2024 by David Adelstein

What is a cumulative impact claim? This is commonly referred to as the unforeseeable ripple effect of changes, i.e., the death by a thousand cuts. Cumulative impact claims refer to a disruption on productivity based on the cumulative impact of changes and their impact on unchanged work. Cumulative impact claims are difficult claims to prove, particularly based on the causation standpoint (and argument they could be released based on change order language). If pursuing or considering a cumulative impact claim, you will need to work with a consultant(s) and lawyer that understand the dynamic of these claims to best maximize your arguments and recovery from a causation and damages standpoint. Cumulative impact damages are real. They occur. But they are not damages you can just throw out there or use loosely and expect to develop traction on compensation.

Below is how cumulative impact claims are defined by certain Boards of Contract Appeals. The definitions are important.

In Appeal of Centex Bateson Construction, Co., Inc., 9901 BCA P 30153, VABCA 4613 (VABCA 1998), the Board explained:

Direct impact, as the immediate and direct effect of a change on unchanged work, is considered foreseeable.

***

Direct impact is generally characterized as the immediate and direct disruption resulting from a change that lowers productivity in the performance of the changed or unchanged work. Direct impact is considered foreseeable and the disrupting relationship to unchanged work can be related in time and space to a specific change Cumulative impact is the unforeseeable disruption of productivity resulting from the “synergistic” effect of an undifferentiated group of changes. Cumulative impact is referred to as the “ripple effect” of changes on unchanged work that causes a decrease in productivity and is not analyzed in terms of spatial or temporal relationships. This phenomenon arises at the point the ripples caused by an indivisible body on two or more changes on the pond of a construction project sufficiently overlap and disturb the surface such that entitlement to recover additional costs resulting from the turbulence spontaneously erupts. This overlapping of the ripples is also described as the “synergistic effect” of accumulated changes. This effect is unforeseeable and indirect. Cumulative impact has also been described in terms of the fundamental alteration of the parties’ bargain resulting from changes. This approach is highlighted by the ASBCA’s discussion of cumulative impact in Atlantic Dry Dock Corporation:

The Board has long recognized the concept of so-called cumulative disruption. In Triple “A” South, [citation omitted] we defined this type of impact as the disruption, which occurs between two or more change orders and basic work and is exclusive of that local disruption that can be ascribed to a specific change. It is the synergistic effect… of changes on the unchanged work and on other changes. Describing appellant’s evidence of such impact as merely ‘anecdotal/ the Board held that to recover for cumulative disruption, a contractor must show that the Government exceeded the permissible limits of its discretion under the Changes clause and ordered changes that ‘materially alter the nature of the bargain agreed upon.’ [citation omitted]

***

Causation, in the context of a cumulative impact, can be an elusive commodity because the concept of cumulative impact is, in itself, somewhat amorphous. Several points relevant to cumulative impact and causation, however, are clear. First, the mere existence of numerous contract changes in and of themselves, whether or not the number of changes is considered to be reasonable or unreasonable and whether or not the changes resulted from defective specifications, establishes no right to recover cumulative impact costs. Consequently, contract changes alone, regardless of their number or nature combined with Government liability do not serve as a substitute for causation and do not necessarily give rise to cumulative impact damages. Second, it is clear that demonstrating an overrun in labor and the existence of numerous changes without some evidence linking the changes to the overrun is insufficient proof of causation. Finally, there must be some proof of a causal connection established showing that the undifferentiated group of contract changes affecting the changed and unchanged contract work resulted in the loss of productivity on that work. This proof may take the form of demonstrating that there are no other reasons for a loss of productivity for which the Government is not responsible.

In Appeals of Norman Engineering Co., 92-BCA P 24900, NASA BCA No. 1189-12 (NASA 1992), the Board noted:

As a matter of law, an “impact” claim or a “cumulative impact” claim is a claim based on the constructive change theory that is asserted separately from individual compensable changes. Cumulative impact arises from changes which had such an effect on performance that there is a separately compensable impact claim that does not include the direct costs of the changes.

In Appeal of Bechtel Nat., Inc., 90-1 BCA P 22549, NASA BCA No. 1187-7 (NASA BCA 1989), the Board found:

Cumulative impact need not be traced to specific causes of increased performance costs, but can arise from changes which, when viewed retrospectively, were so many and had such effect on performance that there is a separately compensable impact claim. We do not require the specificity here that would otherwise be necessary for Appellant to prevail on entitlement. The sheer number of change orders, however, cannot establish the validity of a cumulative impact claim. Impact is not demonstrated solely by showing the number of changes or clarifications to the contract. General unsupported statements that a contractor suffered impact are not sufficient proof that it did, and the absence of contemporaneous documentary evidence of the disruptive effects to the work may provide reason for rejecting the claim.

In McMillin Bros. Constructors, Inc., 91-1 BCA P 23351, EBCA No. 328-10-84 (EBCA 1990), the Board maintained:

Since 1968, when the Changes clause was amended to include the above phrase “whether or not changed by any order”, boards have experienced an increasing number of claims of cost “impact” on unchanged work, which allegedly was not priced and settled as a cost of performing the changed work. In cases involving a multitude of changes, these alleged added costs have been commonly referred to as “cumulative impact” costs. Because contractors are required to include known and generally foreseeable impacts on unchanged work in pricing the cost of a change, the term “cumulative impact” has come to mean, in a generic sense, the impact on unchanged work which is not attributable to any one change but flows from the synergy of the number and scope of changes issued on a project. The underlying theory is that numerous changes cause a cascading ripple-type of impact on performance time and efficiency which is too uncertain or diffuse to be readily discernable at the time of pricing each individual change.

We do not question that such impacts from cumulative changes do, in some instances, occur and should be compensated. However, we are mindful that impacts, whether on changed or unchanged work, which flow directly from individual changes are, with few exceptions, legally compensated by the price negotiated for the change and, thus, should be excluded from recovery under a cumulative impact claim. We are also mindful that even when a compensable cumulative impact is found, proof of damages under a total cost approach (an approach often relied upon in this type of claim) is acceptable only where safeguards for its use have been clearly established. The total cost method is not favored, in part, because it is extremely difficult to assure that the contract is not transformed into a de facto cost reimbursement contract and that costs which should be borne by Appellant are excluded.

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.

THE INDEPENDENT TORT DOCTRINE (AND ITS IMPORTANCE)

Posted on October 1, 2022October 1, 2022 by Edward Garber

A non-construction raises an important legal principle. Here it is because it applies to construction disputes. It actually applies to many business-type disputes. It is based on what is widely referred to as the independent tort doctrine:

Florida law does not allow a party damaged by a breach of contract to recover exactly the same contract damages via a tort claim. “It is a fundamental, long-standing common law principle that a plaintiff may not recover in tort for a contract dispute unless the tort is independent of any breach of contract. A plaintiff bringing both a breach of contract and a tort claim must allege, in addition to the breach of contract, “some other conduct amounting to an independent tort.”

Bedoyan v. Samra, 47 Fla.L.Weekly D1955a (Fla. 3d 2022) (internal citations omitted).

The reason this principle–the independent tort doctrine–is important is because it has become common for parties to assert many causes of action against another party in the same lawsuit. Oftentimes, they deal with the SAME damages and underlying conduct. Sometimes, it is the “throw everything but the kitchen sink” approach. Thus, a party may assert a contract claim (or seek contractual damages) in conjunction with numerous tort claims (e.g., negligence, fraud, negligent misrepresentation, breach of fiduciary duty, etc.). Yet, when push comes to shove, the damages sought are no different than the contractual damages, i.e., it is all the same damages based on the same conduct. The damages do not derive from an independent tort (e.g, separate conduct) unrelated to a contractual breach, or contractual damages.

This case of Bedoyan is an example. Here, there was a partnership dispute that was tried. The plaintiff claimed the defendant breached their oral partnership agreement and breached fiduciary duties. The trial court granted defendant’s motion for a directed verdict on plaintiff’s breach of fiduciary duty claim. The plaintiff’s breach of fiduciary duty claim “was not independent from his allegation of breach of contract; the same conduct gave rise to both. As such, there are no damages for breach of fiduciary duty separate and apart from the breach of the contract, and the trial court correctly directed a verdict against [plaintiff] on this issue.” Bedoyan, supra.

MEASURE OF DAMAGES FOR BREACH OF CONSTRUCTION CONTRACT

Posted on September 26, 2021September 26, 2021 by Edward Garber

How do you determine damages for a breach of a construction contract? If you are interested in pursing a breach of a construction contract action, this is something you NEED TO KNOW!

The recent Fourth District Court of Appeal’s decision in Cano, Inc. v. Judet, 46 Fla. L. Weekly D2083b (Fla. 4^th DCA 201) explains:

Where a contractor breaches a construction contract, and the owner sues for breach of contract and the cost to complete, the measure of damages is the difference between the contract price and the reasonable cost to perform the contract. See Grossman Holdings Ltd. v. Hourihan, 414 So. 2d 1037, 1039-40 (Fla. 1982). In Grossman, the supreme court adopted subsection 346(1)(a) of the Restatement (First) of Contracts (1932), which it concluded was “designed to restore the injured party to the condition he would have been in if the contract had been performed.” Id. at 1039. In other words, the owner will obtain the benefit of his bargain [and this is known as benefit of the bargain damages]. But where there is a total breach of the contract as opposed to a partial breach, an injured party may elect to treat the contract as void and seek damages that will restore him to the position that he was in prior to entering into the contract or the party may seek the benefit of his bargain. See McCray v. Murray, 423 So. 2d 559, 561 (Fla. 1st DCA 1982).

In Judet, an owner entered into a fixed price contract with a contractor to repair damage from a lightning strike. The contract amount was $300,000 payable in $30,000 installments. A few months after the contractor commenced performance, the owner terminated the contractor because the owner learned the contractor had not obtained required electrical and plumbing permits. At this time, the owner had paid the contractor $90,000. The contractor recorded a $40,000 lien for an amount it claimed it was owed and filed a lawsuit to foreclose its construction lien. The owner counter-sued the contractor to recover a claimed over-payment and a disgorgement of monies for unpermitted work. The owner was NOT claiming benefit of the bargain damages, but rather, damages for the contractor’s total breach “to restore him to the position that he was in prior to entering into the contract.”

After a bench trial, the trial court found the contractor committed the first material breach by failing to obtain the required electrical and plumbing permits. Thus, the trial court held that the contractor was only entitled to the value of the work it performed, an amount of $49,150 as determined by the owner’s expert. The trial court then entered a judgment in favor of the owner for $40,850 which was the difference between the value of the work performed ($49,150) and what the owner had paid the contractor prior to termination ($90,000). This was affirmed by the appellate court: “The trial court entered judgment for [the owner] to place him in the position immediately prior to the contract by returning the payments he made to [the contractor] less the quantum meruit value of [the contractor’s] work.” Judet, supra.

ANTICIPATORY REPUDIATION OF A CONTRACT — THE PROSPECTIVE BREACH

Posted on June 12, 2021June 12, 2021 by Edward Garber

There are instances where a party can engage in the anticipatory repudiation of their obligations under a contract. In essence, this is basically a party prospectively breaching the contract by repudiating their obligations in the contract.

A prospective breach of contract occurs where there is absolute repudiation by one of the parties prior to the time when his performance is due under the terms of the contract. Such a repudiation may be evidenced by words or voluntary acts but the refusal must be distinct, unequivocal, and absolute. Moreover, repudiation can be shown where one party makes additional demands not included in the initial agreement:

The law is clear that where one party to the contract arbitrarily demands performance not required by the contract and couples this demand with a refusal to further perform unless the demand is met, the party has anticipatorily repudiated the contract, which anticipatory repudiation relieves the non-breaching party of its duty to further perform and creates in it an immediate cause of action for breach of contract.

24 Hr Air Service, Inc. v. Hosanna Community Baptist Church, Inc., 46 Fla. L. Weekly, D1344a (Fla. 3d DCA 2021) (quotations and citations omitted).

In 24 Hr Air Service, an air conditioning contractor agreed to perform repairs to a Church’s air conditioning unit. However, when the contractor went into the attic to start the repairs, the wooden platform in the attic was unstable and a portion of the ceiling collapsed. The Church repaired the ceiling. However, the contractor refused to return to complete its repairs citing safety reasons. The contractor requested proof the repairs to the ceiling were made before it returned to complete its contracted work and such proof was never provided.

Did the contractor’s refusal to complete its work amount to anticipatory repudiation of its contract by imposing the additional demand of proof of repairs to the ceiling before completing its contracted work? Both the trial and appellate court believed so.

The Contractor’s request that the Church provide safety assurances of the ceiling repairs constitutes an additional demand that was not agreed to by the parties under the service contract. Despite the Contractor’s argument that it never abandoned the job, its demand for safety assurances coupled with its refusal to complete the agreed repairs until such assurances were provided was an anticipatory breach of the contract.

24 Hr Air Service, Inc., supra.

Based on the anticipatory repudiation or breach of the contract, what were the Church’s damages?

The proper measure of damages “would be either the reasonable cost of completion, or the difference between the value the repair would have had if completed and the value of the repair that has been thus far performed.” 24 Hr Air Service, Inc., supra (quotation and citation omitted). This is referred to as benefit-of-the bargain damages, with the objective to place the damaged party in the position “he would have been in had the contract been completely performed.” Id. The party, however, cannot seek what is known as “betterment” or a better deal than what it originally bargained for—a party “can neither receive more than [it] bargained for nor be put in a better position than [it] would have been had the contract been performed.” Id.

If you are dealing with a breach of contract, or even a prospective breach / anticipatory repudiation of an existing contract, it is advisable to seek legal counsel to assist you in preserving your arguments, the proper measure of damages for the breach, and any potential betterment associated with your damages.

CONSTRUCTION COSTS MUST BE REASONABLE

Posted on April 18, 2021April 18, 2021 by Edward Garber

When it comes to proving a construction cost, particularly a cost in dispute, the cost must be REASONABLE. Costs subject to claims must be reasonably incurred and the party incurring the costs must show the costs are reasonable.

An example of the burden falling on the contractor to prove the reasonableness of costs is found in government contracting.

“[T]here is no presumption that a [government] contractor is entitled to reimbursement ‘simply because it incurred…costs.’” Kellogg Brown & Root Services, Inc. v. Secretary of Army, 973 F.3d 1366, 1371 (Fed. Cir. 2020) (citation omitted). Stated differently, a federal contractor is not entitled to a presumption of reasonableness just because it incurs costs. Id.

In government contracting, the Federal Acquisition Regulations (known as “FAR”) puts the burden of reasonableness on the contractor that incurred the costs. Id.

FAR s. 31-201-2(a) [Determining allowability] provides, “A cost is allowable only when the cost complies with all of the following requirements: (1) Reasonableness….”

FAR 31-201-3 [Determining reasonableness] maintains:

(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b) What is reasonable depends upon a variety of considerations and circumstances, including-

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

(2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

(3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor’s established practices.

In Kellogg Brown & Root Services, a government contractor on an international project received a task order from the government to provide accommodations and life support services which equated to trailers for temporary housing for army personnel. The government was to provide protection / security for the contractor. The contractor subcontracted the procurement of the trailers. The contractor claimed due to delays from the Army’s failure to meet its protection obligations, there were delivery delays resulting in storage costs and additional double handling costs (e.g., loading and unloading of trailers more than once) incurred by its subcontractor. The contractor submitted a claim of “$48,754,547.25 in equitable adjustments for idle truck costs due to the backup of trailers at the border and double handling costs” due to the government’s failure to provide protection, along with associated markup. Kellogg Brown & Roof Services, supra, at 1369. The contracting officer’s final decision denied all of the claim but $3,783,005 which pertained to land that had to be leased to store the trailers due to the delay.

The contractor appealed the final decision to the Armed Services Board of Contract Appeals. The Board concluded that the contractor had NOT demonstrated its costs were reasonable. In particular, the Board found: (a) the contractor did not demonstrate a prudent person conducting a competitive business would have resolved its subcontractor’s delay claim upon the same model submitted by the subcontractor; and (b) the contractor did not demonstrate the double handling costs were reasonable. The contractor submitted estimates from its subcontractor and did not submit any actual costs; thus, the Board found the damages models (estimates) were unreasonable and flawed. For this reason, the Board denied all recovery prompting the contractor to appeal to the United States Court of Appeals for the Federal Circuit.

The United States Court of Appeals agreed with the Board that the contractor failed to show the costs it incurred were reasonable. Even if the contractor established the government’s liability for the costs, the claim failed due to the failure to show the reasonableness of the incurred cots.

In addressing this issue, the Court noted that the contractor was not required to show the actual costs incurred by the subcontractor, but it was required to show the payments to its subcontractor—costs incurred—were reasonable. The problem for the contractor was that it failed to show in any of its cost calculations that the methodology used to calculate the delay costs was reasonable. Instead, the Court picked apart, based on what the Board concluded from the evidence, the model employed by the contractor for being inconsistent and unreasonable based on a number of different grounds as the contractor’s damages model did not depict actual events that occurred. The Court explained, “[the contractor] supplied no meaningful evidence to the Board showing the reasonableness of its costs, nor has it explained the inconsistencies between its proposed cost model and the factual record.” Kellogg Brown & Root Services, supra, at 1374.

Regardless of the type of project, it is important to remember that a party (e.g., contractor) still must demonstrate that the cost it is claiming as damages is a cost that it is reasonably incurred!

SPECIFIC PERFORMANCE: EQUITABLE REMEDY TO ENFORCE AFFIRMATIVE OBLIGATION

Posted on December 19, 2020December 19, 2020 by Edward Garber

When a party breaches an agreement, particularly when dealing with real estate, there is an equitable remedy known as specific performance that requests the trial judge issue an order to affirmatively force the breaching party to perform, i.e., close on the real estate contract. You are asking the court to require the other party to specifically perform an affirmative obligation. See Melbourne Ocean Club Condominium Ass’n, Inc. v. Elledge, 71 So.3d 144, 146 (Fla. 2011).

A decree of specific performance is an equitable remedy ‘not granted as a matter of right or grace but as a matter of sound judicial discretion’ governed by legal and equitable principles. Specific performance shall only be granted when 1) the plaintiff is clearly entitled to it, 2) there is no adequate remedy at law, and 3) the judge believes that justice requires it.

Castigliano v. O’Connor, 911 So.2d 145, 148 (Fla. 3d DCA 2005) (internal citations omitted).

An example of specific performance may play out, as mentioned, in a real estate contract where a seller refuses to close on the transaction.

For instance, in M&M Realty Partners at Hagen Ranch, LLC v. Mazzoni, 2020 WL 7296793 (11^th Cir. 2020), a buyer entered into a land sale contract with a seller. The contract included a six-year (contingency) period for the buyer to secure permits required to develop the land. Closing never occurred and the buyer sued the seller for specific performance – to force the seller to close on the sale of the land.

During the six-year contingency period, the buyer spent substantial monies to secure permits. Meanwhile, during this period, the seller received a better offer for the land. The buyer claimed this prompted the seller to avoid closing. Nonetheless, when the buyer secured the approvals to develop the land, it notified the seller that it wants to close on the land. The seller refused claiming the buyer had not satisfied all conditions to closing, prompting this lawsuit for specific performance. The trial court ruled in favor of the seller holding that the buyer failed to prove it was ready, willing, and able to perform (close) under the contract because there was no evidence that the buyer had sufficient funds to close. The Eleventh Circuit Court of Appeals affirmed.

To establish a prima facie claim for specific performance of a contract or for damages for breach of a contract, Florida law requires the plaintiff to show it was ready, willing, and able to perform the contract. A purchaser may show it is financially ready and able by showing it has (1) the necessary “cash in hand,” (2) “personal[ ] possess[ion] of assets … and a credit rating” that show a “reasonable certainty to command the requisite funds,” or (3) “a binding commitment … by a financially able third party.” It is undisputed that [the buyer]…in this case, had neither (1) the necessary $5 million of cash in hand [to close] nor (2) assets and a credit rating sufficient to command that sum. Therefore [the buyer’s] only hope is to show it had (3) a binding commitment from a financially able third party.

[The buyer] argues that it was ready, willing, and able to perform under the contract, first, because [the ultimate principals of the members of the buyer limited liability company] could command credit from a bank in excess of $5 million and, second, because [the principals] each had over $5 million in cash. As [the buyer] is relying upon the resources of third parties, namely [principals], to show it was ready, willing, and able to close, [the buyer’s] arguments properly go to the third possible showing, i.e., that it has a binding commitment from a financially able third party. [The buyer] argues that its principals’ personal resources are sufficient to show the company had a “reasonable certainty” of being able to complete the purchase, but this falls short of the “binding commitment” the law requires.

M&M Realty Partners at Hagen Ranch, supra, at *2 (internal citations omitted).

The Eleventh Circuit agreed that the fact that the buyer’s ultimate principals had the funds is of no moment. There was no evidence to support that either of the principals made a binding commitment (or any commitment, for that matter) to give or lend the money to the buyer to close on the land. The Eleventh Circuit was not going to disregard corporate formalities of setting up a limited liability company for purposes of insulating liability simply because the principals of the two members of the limited liability company independently had money to close.

HOW THE CUMULATIVE IMPACT THEORY HAS BEEN DEFINED

Posted on November 1, 2020November 1, 2020 by Edward Garber

Largely in the federal contract arena, there is a theory referred to as “cumulative impacts” used by a contractor to recover unforeseeable costs associated with a multitude of changes that have an overwhelming ripple effect on its efficiency, particularly efficiency dealing with its original, base contract work. In other words, by dealing with extensive changes, there is an unforeseeable impact imposed on the contractor relative to its unchanged or base contract work. Under this theory, the contractor oftentimes prices its cumulative impact under a total cost approach with an examination on its cost overrun. However, this is not an easy theory to prevail on because there needs to be a focus on the sheer number of changes, causation supporting the impact, and whether there were concurrent impacts or delays that played a role in the ripple effect. See, e.g., Appeals of J.A. Jones Const. Co., ENGBCA No. 6348, 00-2 BCA P 31000 (July 7, 2000) (“However, in the vast majority of cases such claims are routinely denied because there were an insufficient number of changes, contractor-caused concurrent delays, disruptions and inefficiencies and/or a general absence of evidence of causation and impact.”).

To best articulate how the cumulative impact theory has been defined, I want to include language directly from courts and board of contract appeals that have dealt with this theory. This way the contractor knows how to best work with their experts with this definition in mind–and, yes, experts will be needed–to persuasively package and establish causation and damages stemming from the multitude of changes. While many of these definitions are worded differently, you will see they have the same focus dealing with the unforeseeable ripple effect of the extensive changes.

Any contractor seeking an equitable adjustment from the Government must prove liability, causation, and resultant injury. An impact claim—often characterized using other names, such as, “cumulative impact,” “ripple effect,” “loss of labor efficiency,” or “loss of productivity”—is based upon the theory that individual compensable changes to a Contract, taken as a whole, can have such a disruptive effect on the contractor’s performance that the contractor has a compensable claim for costs in addition to the amounts of its individual change orders.

In order to recover on an impact claim, a contractor must do more than present evidence of the sheer number or scope of changes. Nor is it sufficient to compare the cost of the work, as changed, to the original contract price. A contractor must also present evidence of causation and impact. Cumulative impact claims are fact-intensive and require the contractor to substantiate its claims that its work was delayed or was performed in an inefficient, unproductive, or more costly manner as a result of the individual changes to the Contract. As one board observed, “[t]here must be testimony and contemporaneous documents evidencing the type and extent of disruption to the work, and a showing that the disruption resulted from Government actions.”

Jackson Const. Co. v. United States, 62 Fed.Cl. 84, 103–04 (2004) (internal quotations omitted).

Or:

Because contractors are required to include known and generally foreseeable impacts on unchanged work in pricing the cost of a change, the term “cumulative impact” has come to mean, in a generic sense, the impact on unchanged work which is not attributable to any one change but flows from the synergy of the number and scope of changes issued on a project. The underlying theory is that numerous changes cause a cascading ripple-type of impact on performance time and efficiency which is too uncertain or diffuse to be readily discernable at the time of pricing each individual change.

***

Mcmillin Bros. Constructors, Inc., EBCA No. 328-10-84, 91-1 BCA P 23351 (Aug. 31, 1990).

Or:

Cumulative impact is the unforeseeable disruption of productivity resulting from the “synergistic” effect of an undifferentiated group of changes. Cumulative impact is referred to as the “ripple effect” of changes on unchanged work that causes a decrease in productivity and is not analyzed in terms of spatial or temporal relationships. This phenomenon arises at the point the ripples caused by an indivisible body on two or more changes on the pond of a construction project sufficiently overlap and disturb the surface such that entitlement to recover additional costs resulting from the turbulence spontaneously erupts. This overlapping of the ripples is also described as the “synergistic effect” of accumulated changes. This effect is unforeseeable and indirect. Cumulative impact has also been described in terms of the fundamental alteration of the parties’ bargain resulting from changes.

***

Appeal of Centex Bateson Const. Co., Inc., VABCA No. 4613, 99-1 BCA P 30153 (Dec. 3, 1998).

CONSTRUCTION DEFECT DAMAGES: BENEFIT-OF-THE-BARGAIN OR RELIANCE RECOVERY

Posted on July 27, 2020July 27, 2020 by Edward Garber

In the preceding article, I discussed a case where an owner sued its contractor and design professional for construction defects and design defects that contributed to the same damage. There was a valuable discussion in this case as to the measure of damages in a construction defect dispute. It is a discussion that construction defect parties and practitioners need to know. A plaintiff needs to know for purposes of proving damages at trial and working with an expert in furtherance of proving their damages. A defendant needs to know for the same reasons and to work with experts in establishing defenses to an owner’s construction defect and design defect damages.

“The proper measure of damages for construction defects is the cost of correcting the defects, except in certain instances where the corrections involve an unreasonable destruction of the structure and a cost which is grossly disproportionate to the results to be obtained.” Stated another way, “the measure of damages for breaching a construction contract is the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste.” However, “[i]f in the course of making repairs the owner elects to adopt a more expensive [i.e., a better] design, the recovery should be limited to what would have been the reasonable cost of repair according to the original design.” [This measure of damages is known as benefit-of-the-bargain damages.]

***

As an alternative to benefit-of-the-bargain damages, an injured party has a right to damages based on its reliance interest, including expenditures made in performance or in preparation for performance, the recovery of which will place the injured party in the position it occupied before entering into the contract. However, “[a]ny benefit retained from the expenditures made in reliance on the contract must be offset against the injured party’s damages.” In other words, a reliance recovery may be reduced to the extent that the breaching party can prove that a “deduction” is appropriate for any benefit received by the injured party. [This measure of damages is referred as a reliance recovery to damages.]

Broward County, Florida v. CH2M Hill, Inc., 45 Fla. L. Weekly D1736a (Fla. 4^th DCA 2020) (internal citations omitted).

In this case, the appellate court held that the trial court erred in its measure of damages because the owner’s damages were based on a redesign that was a different, better design than the bargained for original design (as there was evidence that the original design was doomed from the get-go even if constructed correctly). Thus, benefit-of-the-bargain damages did not apply–the owner did not present damages to correct defects per the original design but put on damages associated with its different and better redesign. Yet, the appellate court maintained that if the public owner could not repair the defects in the original design, “a viable alternative measure of damages [under the reliance recovery] was the [owner’s] out-of-pocket costs, less any benefits the [owner] received from the contracts.” Broward County, supra. For this reason, the Fourth District remanded back to the trial court to enter judgment based on the owner’s reliance recovery based on the evidence already presented at trial relating to the owner’s out-of-pocket costs for the original design and construction and a potential deduct for the benefit the owner received relative to the original design and construction.

BASIS TO RESCIND A CONTRACT UNDER EQUITABLE REMEDY OF RESCISSION

Posted on July 18, 2020July 18, 2020 by Edward Garber

When a seller of residential real property fails to knowingly disclose defects that are not readily observable and materially affects the value of the real property, this gives rise to a fraudulent nondisclosure or concealment claim, otherwise known as a Johnson v. Davis claim. (See this article that discusses this claim.). This is not the easiest claim to prove because a seller rarely will concede they knew of a hidden defect that they failed to disclose. Thus, discovery is warranted to show they evidently knew but elected not to disclose because doing so would have impacted the sale or the value of the sale. If you believe you have a fraudulent nondisclosure claim, make sure to consult with counsel so that you understand your rights relative to the facts associated with the claim.

In a recent case, Rost Investments, LLC v. Cameron, 45 Fla. L. Weekly D1717a (Fla. 2d DCA 2020), a lessee/potential buyer of residential property entered into a lease with an option to purchase contract. The option to purchase needed to be exercised by the lessee. Immediately after entering into this contract, the lessee claimed the contract should be rescinded based on the lessor’s fraudulent nondisclosure of defects that materially affect the value of the real property and the seller’s refusal to complete warranty-type items on an intake sheet.

First, the lessee claimed that when they moved into the house, the lessor agreed it would repair certain items that were identified on an intake sheet – hot water in the showers, low water pressure, two remote controls for the garage, and the refrigerator needed to be replaced. The lessor did not.

Second, the lessee claimed there were latent defects with the property that the lessor knew about but failed to disclose.

After trial, the trial court granted rescission in favor of the lessee. The Second District Court of Appeals reversed.

Rescission of a contract is an equitable remedy if the party seeking rescission has no adequate remedy at law (such as with a breach of contract claim where monetary damages would be awarded for the breach). Rost Investments, supra (citation omitted).

“[A] party who voluntarily executes a document . . . is bound by its terms in the absence of coercion, duress, fraud in the inducement or some other independent ground justifying rescission.”

***

“While an agreement may be rescinded for fraud relating to an existing fact, as a general rule, rescission will not be granted “for failure to perform a covenant or promise to do an act in the future, unless the covenant breached is a dependent one.” “A covenant is dependent where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered as destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted.”

Rost Investments, supra (internal quotations and citations omitted).

The Second District held that the items on the intake sheet that the seller did not address “were [not] so essential to the bargain that [the lessor’s] failure to attend to them destroyed the contracts.” These are items that could have been resolved with money damages through a breach of contract claim, i.e., an action at law. Hence, the lessor’s failure to fix these items did not serve as a basis for the lessee to rescind the contract.

Next, the fraudulent nondisclosure claim for latent defects did not apply because the lessee was leasing the house as the option to purchase the real property had not been exercised. The fraudulent nondisclosure claim applies to buyers of real property. While perhaps the lessee had an argument for fraudulent misrepresentation, the trial court found that the lessor’s nondisclosure of certain defects was not intentional and, without the intent, there was no basis for a fraudulent misrepresentation claim. (Notably, in a fraudulent nondisclosure claim that applies to buyers of real property, a seller’s state of mind is not at-issue– what is at-issue is that the seller had knowledge of a defect not readily observable that materially affects the value of the real property and did not disclose it.) See Rost Investments, supra, n.7.

GUESSING AS TO YOUR CONSTRUCTION DAMAGES IS NOT THE BEST APPROACH

Posted on August 24, 2019August 24, 2019 by Edward Garber

Arbitrarily guessing as to your construction damages is NOT the best approach. Sure, experts can be costly. No doubt about it. Having an expert versus guessing as to your construction damages caused by another party’s breach of contract is a no brainer. Engage an expert or, at a minimum, be in a position to competently testify as to your damages caused by another party’s breach of contract. Otherwise, the guessing is not going to get you very far as a concrete subcontractor found out in Patrick Concrete Constructors, Inc. v. Layne Christensen Co., 2018 WL 6528485 (W.D. New York 2018) where the subcontractor could not competently support its delay-related damages or change orders and, equally important, could not support that the damages were proximately caused by the general contractor’s breach of the subcontract.

In this case, the concrete subcontractor entered into a subcontract to perform concrete work for a public project. The project was delayed and the general contractor was required to pay liquidated damages to the owner. Not surprisingly, the subcontractor disputed liability for delays and sued the general contractor for all of its delay-related damages “in the form of labor and materials escalation, loss of productivity, procurement and impact costs, field and home office overhead, idle equipment, inability to take on other work, lost profits, and interest.” Patrick Concrete Constructors, 2018 WL at *1.

The general contractor moved for summary judgment as to the plaintiff’s delay-related damages – the subcontractor’s damages were nothing but guesses and the subcontractor could not prove the general contractor was the cause of the subcontractor’s damages.

The portion of the deposition transcript of the subcontractor’s president that may have also been its corporate representative as to damages is telling:

Q: After today’s exercise, do you believe you’re entitled to [$]681,740 under those items [regarding change orders]?

A: No.

Q: What amount [are] you entitled to?

A: I don’t know. I’d have to work it up.

Q: So as of right now, with my one chance to depose you, the person on damages, you can’t give me a figure that you’re actually entitled to?

A: No. We just ripped all these figures apart, so now I got to go back and refigure.

With regard to the amount of damages sought for “extra costs,” Bell [the President of subcontractor] testified as follows:

Q: Okay. Then you have – you total everything here, total of everything except for the Amount Due on Contract and Outstanding Change Order heading. So that [$]915[,000] basically added up everything under Extra Costs Not Submitted all the way down to Extra Equipment?

A: Yes.

Q: You’re asking for [$]915[,000] in this. Do you believe that’s actually what you’re entitled to today?

A: Well, like I said, we were – like you said, we have to do some adjustments here.

Q: Okay. Adjustments downward, correct, sir?

A: Yes.

Q: Can you tell me today what you think you’re actually entitled to?

A: No.

And, there was more. The subcontractor could not locate its original estimate for the job, which is important for any loss of productivity or inefficiency claim – or any claim dealing with added labor and equipment usage. The subcontractor could not identify payroll records, time cards, vendor invoices, or anything to justify the damages it sought. The subcontractor guessed as to labor hours without the back-up substantiating the labor hours and, equally important, could not establish it incurred the guesstimated labor hours caused by the general contractor.

In essence, Plaintiff [subcontractor] concedes that it cannot provide the Court with an “intelligent estimate without speculation or conjecture,” for either category of damages. Because Plaintiff has failed to make a factual showing sufficient to establish that the “extra costs” and “change orders” damages are capable of being proved with reasonable certainty, summary judgment dismissing these claims is appropriate.

***

Here, Plaintiff asserts that Defendant [general contractor] breached the Subcontract by delaying the Project, and that Defendant’s delay caused it to sustain damages. However, Plaintiff has admitted that Defendant was not responsible for all of the delay, and that Plaintiff and its reinforcing bar subcontractor contributed to the delay as well. Because, by Plaintiff’s own admission, it contributed to the damage-causing delays, it is required to allocate the amount of delay and resultant damages between, at a minimum, itself and Defendant.

Patrick Concrete Constructors, 2018 WL at *4.