Category Archives: Damages

PROVING & DEFENDING LOST PROFIT DAMAGES

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I have written numerous articles regarding the challenge in proving lost profit damages.  Yes, lost profits are a form of damages in business disputes, but they are a form of damages that are subject to a certain degree of conjecture and speculation.   For this reason, lost profit evidence is oftentimes precluded from being presented at trial or lost profit damages are reversed on appeal.   This is why it is imperative to ensure i’s are dotted and t’s are crossed when it comes to proving lost profit damages.  It is also imperative, when defending a lost profit claim, to put on evidence and establish the speculative nature of the lost profit damages.

  

In the recent decision of Arizona Chemical Company, LLC v. Mohawk Industries, Inc., 41 Fla. L. Weekly D1213a (Florida 1st DCA 2016), the First District Court of Appeals held that the plaintiff’s lost profit evidence was sufficient and affirmed the lost profit damages.  In this case, a flooring / carpet manufacturer sued the manufacturer of resin utilized for a particular brand of broadloom commercial carpet claiming that the resin was defective. This resulted in spikes in consumer complaints and warranty claims relating to the particular brand of carpet.  The plaintiff utilized a forensic accountant (expert witness) to testify as to lost profit damages. The expert determined the average annual profits from the sale of the particular carpet brand before 2008, which is when the manufacturer became aware of the defects with the brand.  The expert then used this data along with market data for broadloom commercial carpet to project the revenue the manufacturer would have gained from the sale of the specific carpet brand between 2008 and 2017, but for the defects.  The expert testified he factored in the economic recession on the demand for broadloom commercial carpet brands and market trends to determine the projected revenue.

 

The defendant challenged the speculative nature of the lost profit testimony because the plaintiff’s expert failed to consider competition in the flooring marketplace, a shift in the market from broadloom commercial carpet towards carpet tile, and reputational damage to the manufacturer due to the failure of another of the manufacturer’s brands that failed.  The First District, however, held that such issues did not render the lost profit damages insufficient or speculative because nothing in the record established that such factors had a substantial effect on the sale of the particular brand of broadloom commercial carpet.  

 

The defendant needed to put on evidence and establish that other factors had an actual impact and link on the sale of the particular brand of carpet such that the plaintiff’s expert’s failure to consider these factors rendered his testimony speculative. Had the defendant done so and established this link, the appellate court may very likely have reversed the lost profit damages awarded to the plaintiff based on their speculative nature.  

 

When it comes to lost profit damages, the First District explained:

 

A plaintiff can recover lost profits as damages if the defendant’s actions caused the damage and there is some standard by which the amount of damages may be determined.  The plaintiff need not show that the defendant’s action was the sole cause of the damages sought; instead, the plaintiff’s burden is to show that the defendant’s action was a substantial factor in causing the lost profits and establish the amount with reasonable certainty.  However, where the plaintiff’s evidence reflects a mere assumption that the defendant’s action caused its lost profits without consideration of other factors shown by the record to be significant, the evidence is legally insufficient to support a claim for lost profits. 

Arizona Chemical Company, supra (internal quotations and citations omitted).

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

THE DEFENSE OF BETTERMENT IN CONSTRUCTION DEFECT DISPUTES

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There is an affirmative defense referred to as betterment in construction defect cases.  This is a defense raised to challenge the amount of damages incurred by the plaintiff when the plaintiff performs repairs BETTER than the original design / contract documents.  See Grossman v. Sea Towers, Ltd., 513 So.2d 686, 688 (Fla. 3d DCA 1987) (“It is significant on this point that neither the architectural specifications nor the structural design was deficient for the original intended purpose. The proper measure of damages, therefore, should have been the amount necessary to restore the deck to its original condition….”).

 

Say the contract documents called for cpvc water piping and as a result of an installation failure, the cpvc piping was replaced with copper piping.  A claim was asserted against the plumber for the costs incurred to replace cpvc piping with the copper piping.  But, the contract documents only called for cpvc piping which was an acceptable design requirement.  So that fact that this piping was replaced with copper piping constitutes betterment or a repair better than the contract documents.  The plumber should not be responsible for this betterment as it would give the plaintiff (such as an owner) a windfall since it is getting a repair better than what it originally bargained for in the contract documents.  Rather, the damages should be to restore the cpvc piping to its original planned condition.

 

The theory is the repairs are not intended to constitute a windfall to the plaintiff with repairs better than what the contract documents called for.  The defendant is only required to perform work pursuant to the contract documents because that is what it was paid to perform.  It was not paid to perform work that exceeds the contract documents; thus, costs of repair work that exceeds the contract documents are “unreasonable” and should constitute betterment.  The magic word is “unreasonable”  as the plaintiff will and should establish in its case-in-chief that the repairs it performed were reasonable and cost effective in light of the given defect or failure.

For example, in Arch of Illinois, Inc. v. S.K. George Painting Contractors, Inc., 288 Ill.App.3d 1080 (Ill. 5th DCA 1997), a factory owner sued a painting contractor for defective painting. The painter was only to apply one coat of primer and one coat of enamel for a contract price of $59,000.   After completion, the paint started to peel.  The owner put on evidence that the bids to repair the work were between $120,000 to $248,000 to sandblast the peeling paint, prime the surface, and repaint the factory.   The painter argued betterment.  The appellate court, however, applied this logic: “If a paint job is substantially or completely defective and peeling, then completely undoing the faulty work so that the structure can be repainted does not amount to unreasonable destruction of the contractor’s work.” Arch of Illinois, supra, at 1084.

In construction defect disputes, whether a plaintiff or defendant, consider the affirmative defense of betterment.  This consideration will help a plaintiff in putting on its case-in-chief and a defendant in putting on evidence to specifically challenge unreasonable / better repair costs.

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.

 

TENDERING UNDISPUTED SUMS TO CUT OFF ACCRUAL OF INTEREST

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Disputes over the quantum of money owed are not uncommon.  For instance, say a subcontractor claims it is owed $500,000 from the general contractor and the general contractor disputes this amount.   Say that of this $500,000, $300,000 is undisputed contract balance and $200,000 is disputed change orders.   In this situation, what should the general contractor do?

 

The issue in this hypothetical is the $300,000 in undisputed contract balance.  I am a strong believer in paying or tendering undisputed amounts so that the dispute is confined to the issues and amounts actually disputed between the parties.

 

Why tender undisputed funds?  An appropriate tender is a tender of money without any conditions tied to the depositing of the money; the tender must be absolute and unconditional.  See James A. Cummings, Inc. v. Young, 589 So.2d 950,955 (Fla. 3d DCA 1991) (finding that a written proposal to pay money after litigation commenced does not constitute a tender and a tender cannot include conditions on the money).

 

The check should be cash or a cashier’s check and should include interest on the undisputed money owed.  “[T]he tender of a mere check does not constitute payment of cash or its equivalent and it thus makes such a tender of payment merely conditional.”  See Enriquillo Export & Import, Inc. v. M.B.R. Industries, Inc., 733 So.2d 1124, 1127 (Fla. 4th DCA 1999). 

 

The objective of the tender is to relieve the paying party from any subsequent accrual of interest owed on the money.  See Morton v. Ansin, 129 So.2d 177, 182 (Fla. 3d DCA 1961); see also Ismark v. W.G.Mills, Inc., 899 So.2d 1213 (Fla. 2d DCA 2005) (“[A] tender of sums due on a date certain under a contract will stop the accrual of prejudgment interest only when the tender is absolute and unconditional.”).  The effect of an appropriate tender is to cut off additional interest owed on the money from the date of the tender. 

 

“A tender of less than the full amount due, however, is insufficient.  Thus, if the amount of the tender does not include the interest to which a creditor is entitled, the tender is nugatory.”  Dade County v. American Re-Insurance Co., 467 So.2d 414 (Fla. 3d DCA 1985)  (internal citations omitted) (finding that tender was insufficient since it failed to include interest due on owed amount).

 

There is authority that a party can tender a disputed or protested amount as long as there are no conditions tied to the depositing of the money. See Gascoyne v. Bay Towne Property Owners Ass’n, Inc., 575 So.2d 671, 672 (Fla. 2d DCA 1991) (“A tender under protest will only be conditional if acceptance is predicated on the recipient being required to take some action.”).  The reason to do this would be to cut off the accrual of interest on the money.  However, in my opinion, tendering protested or disputed amounts should be carefully done to avoid the appearance that it is indeed a conditional payment or an insincere tender. 

Whether to tender money should ideally be done under the guidance of your attorney.  And, if a tender is considered, it is important that it is done properly so that you get the value of the reason for the tender–to cut off the accrual of interest.

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.

 

USING THE YARDSTICK TEST TO PROVE LOST PROFIT DAMAGES

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It’s all about proving your damages! One category of consequential damages that parties sometimes seek is lost profit damages. Lost profits, though, are one of the most difficult damages to prove. If a party is interested in pursuing lost profit damages (such as when the opposing party materially breaches their contract) it is important to understand the burden and expert testimony needed to support these damages with a reasonable degree of certainty.

 

In a prior article, I discussed a tenant supporting a lost profit claim against its landlord due to the landlord’s breach of the lease.  Recently, in Victoriana Buildings, LLC v. Ft. Lauderdale Surgical Center, LLC, 40 Fla.L.Weekly D1169b (Fla. 4th DCA 2015), the Fourth District found that a tenant did not properly support its lost profit damages even though the landlord breached the lease. The Court affirmed that the tenant’s lost profits claim was speculative and, therefore, not recoverable. In reaching this determination, the Court explained:

 

Lost profits are typically proven by one of two methods: (1) the before and after theory; or (2) the yardstick test. The yardstick test is generally used when a business has not been established long enough to compile an earnings record that would sufficiently demonstrate lost profits and compares the profits of businesses that are closely comparable to the plaintiff’s.  Here, the tenant’s expert consultant, in analyzing the viability of the tenant’s proposed facility, did not evaluate any comparable facility’s profitability as a “yardstick,” and the tenant’s expert CPA acknowledged that his report, which was based on the consultant’s report and forecast, was only as good or as bad as [the consultant’s] forecast. Thus, the tenant’s proof was insufficient.

Victoriana Buildings, supra (internal quotation and citation omitted).

 

Without a true proven history of profitability, the tenant should have used the yardstick test supported by sufficient expert testimony.  Under this yardstick test, the expert would analyze closely comparable businesses to render an opinion as to the lost profits caused by the defendant’s breach.  Because the tenant’s expert failed to properly perform this yardstick analysis, the tenant was denied lost profit damages since these damages became purely conjectural.

 

If you have incurred damages, it is important to consult with counsel to ensure the damages you have incurred can be sufficiently proven.  Whether those damages are lost profit damages or another category of damages, it is crucial to sufficiently prove these damages in accordance with applicable law. Otherwise, you can wind up in the position of not properly presenting your damages at trial.  In the case of a business that does not have a sufficient track record to prove lost profitability, a yardstick needs to be established to prove lost profits with a reasonable degree of certainty.

 

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.

 

 

WALKING THAT MEASURED MILE TO PROVE AND CALCULATE LOST PRODUCTIVITY / INEFFICIENCY

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What is a lost productivity / inefficiency claim?  These are claims where a contractor claims it incurred increased labor (and, perhaps, equipment usage) because an event  (referred to as an impact) caused it to work inefficiently.  There needs to be a causal link between the cause of the impact and the increased labor costs.  See Appeals of—Fox Construction, Inc., ASBCA No. 55265, 08-1 BCPA 33810 (March 5, 2008).   Numerous factors can contribute to a contractor working inefficiently.  Oftentimes these claims are asserted by subcontractors associated with a delay to their scope of work or due to the manner in which the subcontractor’s work was sequenced.  The bottom line is that some impact (not attributable to the contractor asserting the claim) caused the contractor to work inefficiently and incur unplanned, increased labor cost (and/or equipment usage).

 

Lost productivity / inefficiency claims are very challenging claims to prove and calculate.  They require expert testimony to analyze cost reports, labor hours, and project documentation such as daily reports, etc. to determine the performance or production rate for a given scope of work.   But, remember, lost productivity / inefficiency claims also require a causal link between the impact and the increased costs meaning an expert needs to analyze project documentation to determine the impact and the causal link to the contractor’s increased costs.  Probably the most well received method to prove lost productivity / inefficiency is the measured mile methodology.

 

Measured Mile

 

The measured mile compares a period of productive work (the good period) with an unproductive period of the same work (bad period). “The measured mile approach provides a comparison of a production period that is impacted by a disruption with a production period that is not impacted.” Appeal of Bay West, Inc., ASBCA No. 54166, 07-1 BCA 33569 (April 25, 2007).  The period of productive work forms the contractor’s benchmark period of productivity.  Typically, this benchmark productivity is based on the number of man-hours during the productive period divided by the performance or production rate in that period to determine a productivity ratio.  This productivity ratio is compared to the productivity ratio during the impacted period in order to determine an unproductivity ratio that is multiplied by the unproductive performance or production rate to determine the number of unproductive man-hours.  Without determining a benchmark, the measured mile cannot be performed because there is nothing to compare the unproductive period of work to.

 

For instance, let’s take a rough hypothetical: 

 

Good Period — A contractor during a productive period installs 2500 feet  (or select another unit of production or performance) of “x” (you select the scope).  It takes the contractor 4000 labor hours to install 2500 feet of “x.” The number of labor hours (4000) divided by the production (2500 feet of “x”) gives a productivity ratio of 1.6. 

 

Bad Period — The same contractor gets impacted performing the same scope of “x.”  During this impacted period, the contractor installs 1500 feet of “x” with 4600 labor hours.  The number of labor hours (4600) divided by the production (1500 feet of “x”) gives a productivity ratio of 3.07. 

 

Calculating Lost Productivity — Subtracting the productivity ratio during the bad impacted period (3.07) with the productivity ratio during the good unimpacted period (1.6) gives an unproductivity ratio of 1.47.  This unproductivity ratio now allows you to determine the number of unproductive man-hours by multiplying the unproductivity ratio (1.47) by the unproductive performance (1500 feet of “x”) to give you 2205 unproductive man-hours.  The number of unproductive man-hours would then be multiplied by a supported labor rate plus burden to give you your unproductivity costs.

 

If you are experiencing lost productivity / inefficiency, it is good practice to consult with a lawyer and expert in order to best prove and calculate your lost productivity / inefficiency.  Although this article focuses on the measured mile methodology, there are other methodologies that can be utilized based on the facts and circumstances of the project.    Just remember, these types of claims generally require expert testimony to prove.

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.

 

WAIVER OF CONSEQUENTIAL DAMAGES AND LOSS OF USE DAMAGES (IN CONSTRUCTION / DESIGN DEFECT DISPUTE)

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In construction / design defect cases, a plaintiff (party proving defect) may assert a category of damages referred to as loss of use damages.  Importantly, if your contract includes a waiver of consequential damages, these types of damages will not be recoverable.  This is a significant issue to consider when entering into a construction contract, especially when you are the owner of the project, because if you do not want to waive a party you hire of consequential damages (such as loss of use damages), then you do not want to include a waiver of consequential damages in your contract or, at a minimum, you want to carve out exceptions to the waiver of consequential damages.  Stated differently, this is an issue and risk you want to consider on the front end because even though construction / design defects are not anticipated, they do occur.

 

In a construction / design defect scenario, an owner’s consequential damages would generally be those damages unrelated to repairing the defect.  For instance, loss of use of the property or lost rental income to an owner during the implementation of the repairs would be a consequential damage that would be waived by a waiver of consequential damages provision in an owner’s contract.

 

An example of a waiver of consequential damages provision found in the AIA A201 (general conditions of the construction contract between an owner and contractor) is as follows:

 

The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes

.1  damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and

.2  damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

(See AIA A201-2007, s. 15.1.6)

 

Now, if loss of use damages are not contractually waived, the recent decision in Gonzalez v. Barrenechea, 40 Fla. L. Weekly D258a (Fla. 3d DCA 2015), illustrates how an owner can recover these types of damages when there is a construction / design defect.  In this case, an owner sued its architect for design errors with the HVAC system in a newly constructed home.  The owner was forced to engage a new design professional to address the deficiencies.  It took the owner 20 months to repair the deficiencies during which the owner claimed he could not live (or use) his new house.  Although the owner did not live in the house, there was evidence that the owner had some use of the house.  For instance, the owner’s son slept in the house on an intermittent basis, the owner docked his boat at the dock behind the house, furniture was stored in the house, and the owner had cars parked in the garage.

 

Notwithstanding some use of the house, the owner put on testimony of an expert real estate appraiser that testified that the owner incurred lost rental value of approximately $15,500 per month during the 20-month repair period.  The architect argued that this rate was flawed because the expert failed to factor in the use the owner had of the house during the 20-month period.  The trial court agreed and denied the owner the loss of use damages.

 

The Third District Court reversed the trial court finding that the owner was entitled to loss of use damages:

 

Under Florida law, a homeowner that loses the use of a structure because of delay in its completion is entitled to damages for that lost use. Florida courts have held that “[d]amages for delay in construction are measured by the rental value of the building under construction during the period of delay.”

Gonzalez, supra, quoting Fisher Island Holdings, LLC v. Cohen, 983 So.2d 1203, 1204 (Fla. 3d DCA 2008).

 

Furthermore, because the architect failed to put on any evidence as to what the rental value of the house should have been during the 20-month period factoring in the owner’s use of the house during this period, there was nothing to refute the owner’s rental rate.

 

This case touches upon important take-aways:

 

  • Consider the risk of a waiver of consequential damages provision on the front end, especially if you are an owner.  Likewise, if you are a contractor or design professional, you want to consider the risk of not having such a waiver of consequential damages.
  • Loss of use damages are recoverable in a construction / design defect case absent a contractual waiver of consequential damages.
  • An owner can introduce evidence of loss of use damages through an expert real estate appraiser that can testify as to the rental rate of the property during the repair period.
  • A contractor or design professional defending a loss of use damages claim should engage its own expert to counter an owner’s expert.  In this case, if the design professional had an expert real estate appraiser, it would have put on evidence of a rental rate much lower than the $15,500 per month factoring in the owner’s limited use of the house during this time period.

 

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.

HOME OFFICE OVERHEAD (EICHLEAY) AND GOVERNMENT-CAUSED STANDBY

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JMR Construction Corp. v. United States, 2014 WL 3418445 (Fed.Cl. 2014) is a good federal government contracting case discussing a prime contractor’s challenging burden to support unabsorbed home office overhead damages caused by a government-caused delay.  The United States Court of Federal Claims described unabsorbed home office overhead damages and the required elements (under the Eichleay methodology) for a prime contractor to prove these damages:

 

The term “home office overhead” refers to the general administration costs of running a business, such as accounting and payroll services, general insurance, salaries of upper-level management, heat, electricity, taxes, and depreciation. These are indirect costs, expended for the benefit of the whole business, [and thus] by their nature cannot be attributed or charged to any particular contract.

***

Contractors typically recoup these indirect costs by allocating them to individual contracts in proportion to those contracts’ direct costs. But, in the event of a government-caused delay or suspension of work, the stream of direct costs against which to assess a percentage [of home office overhead] is decreased. The resulting shortfall is termed unabsorbed home office overhead.

***

The Circuit has held that the so-called Eichleay formula is the sole method through which contractors are able to recover unabsorbed home office overhead. The Eichleay formula requires that contractors satisfy several strict prerequisites. First, the contractor must demonstrate that there was a government-caused delay not excused by a concurrent contractor-caused delay. Second, the contractor must show that it incurred additional overhead expenses, either because the contract’s performance period was extended or because the contractor would have finished prior to the un-extended performance period’s close. Third, the contractor must establish that it was required to remain on standby for the duration of the delay. [Standby does not require the prime contractor to prove that it was completely idle but that its work was significantly slowed such that it was performing minor tasks.]

***

In order to establish standby, contractors must demonstrate three things. First, the contractor must show that the government caused delay was not only substantial but was of an indefinite duration. Second, the contractor must demonstrate that, during the delay, it was required to return to work at full speed and immediately [once the suspension period is over.  If the prime contractor is given a reasonable period of time to remobilize after the suspension is lifted, it will not be able to satisfy this requirement]. Third, the contractor must show a suspension of most if not all of the contract work. If the contracting officer has issued a written stop work order proving these elements the contractor can utilize that order to provide direct evidence of standby. Otherwise, these elements can be proven through indirect evidence.

***

If the contractor can make a prima facie showing of the standby elements, the burden of production shifts to the government to show either that it was not impractical for the contractor to obtain replacement work during the delay, or that the contractor’s inability to obtain or perform replacement work was caused by a factor other than the government’s delay.

JMR Construction, supra, at *5-7 (internal quotations and citations omitted); see also P.J. Dick, Inc. v. Principi, 324 F.3d 1364 (Fed.Cir. 2003) (finding that contractor could not support claim for unabsorbed home office overhead as it could not support it was on standby).

 

The Federal Circuit Court of Appeals summarized these requirements by the following questions:

 

In short, a court evaluating a contractor’s claim for Eichleay damages should ask the following questions: (1) was there a government-caused delay that was not concurrent with another delay caused by some other source; (2) did the contractor demonstrate that it incurred additional overhead…; (3) did the government CO [contracting officer] issue a suspension or other order expressly putting the contractor on standby; (4) if not, can the contractor prove there was a delay of indefinite duration during which it could not bill substantial amounts of work on the contract and at the end of which it was required to be able to return to work on the contract at full speed and immediately; (5) can the government satisfy its burden of production showing that it was not impractical for the contractor to take on replacement work (i.e., a new contract) and thereby mitigate its damages; and (6) if the government meets its burden of production, can the contractor satisfy its burden of persuasion that it was impractical for it to obtain sufficient replacement work. Only where the above exacting requirements can be satisfied will a contractor be entitled to Eichleay damages.

P.J. Dick, Inc. v. Principi, 324 F.3d 1364, 1373 (Fed.Cir. 2003).

 

In JMR Construction, the prime contractor was hired to build an aircraft maintenance facility.  The prime contractor sued the government pursuant to the Contract Disputes Act for government-caused delays. The period of delay the prime contractor was seeking to recover damages for was January 16, 2009 (day after the government occupied the facility) through September 4, 2009 (completion).

 

 

The government took occupancy of the facility on January 15, 2009.  The prime contractor continued to perform work after this date, although its workforce slowed down.   On February 3, 2009, the prime contractor demobilized its jobsite trailer and was finishing the balance of its work including the manufacturing and installation of a permanent power converter and the installation of ceiling lights in one of the rooms.  Temporary stopgap measures had been implemented to address these electrical issues that likely allowed the government to utilize the facility.

 

The government moved for summary judgment as to the prime contractor’s entitlement to unabsorbed home office overhead damages. The Court broke the prime contractor’s unabsorbed home office overhead claim into two discrete periods: (1) January 16, 2009 (day after the government took occupancy) to February 3, 2009 (when the contractor demobilized jobsite trailer) and (2) February 4, 2009 to September 4, 2009 (period when the permanent power and room lighting were being installed).  Because the contracting officer never issued a standby notice, the prime contractor had the burden to prove by indirect evidence the factors (referenced above) supporting its entitlement to unabsorbed home office overhead.

 

First Period: 1/16/09-2/3/09

 

The Court did not grant summary judgment during this period because there was a disputed issue of fact as to materiality of the work the prime contractor was performing during this time period.  The prime contractor contended the work it was performing was minor whereas the government contended the work was material. If the work is deemed material (or more than just minor tasks) the prime contractor’s unabsorbed home office overhead claim will fail since it was never on standby or suspended.  If it was minor, the prime contractor would still need to prove the elements of standby. Although the Court declined to grant summary judgment based on this disputed factual issue, it seems from the Court’s ruling during the second time period (below) that the prime contractor will have difficulty proving the elements of standby.

 

Second Period: 2/4/09-9/4/09

 

The Court granted summary judgment on the prime contractor’s claim for unabsorbed home office overhead during this period because the prime contractor could NOT prove the elements of standby. In particular, the prime contractor could not prove it was required to resume work at full speed and immediately once the “suspension period” was over.  The prime contractor did not appear to maintain any personnel or equipment on site during this period that eliminated any argument that it was required to return to work with any degree of urgency once the suspension was lifted.  The prime contractor also utilized a subcontractor to perform the incomplete electrical work, and the use of subcontractors can limit a prime contractor’s ability to prove standby since it was only monitoring the work and not actually required to return to work at all.  And last, temporary stopgap measures were implemented relating to the lighting that negated the time sensitivity of the remaining work meaning there was no urgency for the contractor to resume work immediately.

 

Eichleay-formulaFinally, even assuming the prime contractor could support its entitlement to unabsorbed home office overhead, the Court did not go into any discussion regarding the Eichleay formula–the specific formula utilized to determine the allocable unabsorbed home office overhead associated with a government-caused delay.  The objective of the Eichleay formula is to obtain a daily rate for the home office overhead allocated to the specific contract and multiply the daily rate by the number of delay days to determine the contractor’s unabsorbed home office overhead caused by the government’s delay.

 

 

 

 

 

 

 

 

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.

GARDEN VARIETY PAYMENT DISPUTE BETWEEN OWNER AND CONTRACTOR

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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.

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

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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/

 

 

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.

PROVING LOST PROFIT DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY

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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/

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.