IMPLIED COVENANT OF GOOD FAITH & FAIR DEALING ATTACHES TO EVERY CONTRACT

Posted on December 5, 2015November 8, 2024 by Edward Garber

There is an implied covenant of good faith and fair dealing in every contract. Meruelo v. Mark Andrews of Palm Beach, Ltd., 12 So.3d 247, 251 (Fla. 4^th DCA 2009). “Its purpose is to protect the reasonable expectations of the contract parties.” Snow v. Ruden, McClosky, Smith, Schuster & Russell, P.A., 896 So.2d 787, 791 (Fla. 2d DCA 2005).

A breach of this implied covenant of good faith and fair dealing is not really an independent cause of action. This is because the implied covenant of good faith and fair dealing attaches to the performance of a contractual provision. Snow, 896 So.2d at 791. Thus, if a contractual provision has not been breached, there has not been a breach of the implied covenant of good faith and fair dealing. Id. The implied covenant of good faith and fair dealing cannot override the express terms the parties agreed to in a contract. Id.

For example, in Avatar Development Corp. v. De Pani Const., Inc., 834 So.2d 873 (Fla. 4^th DCA 2002), a developer terminated a stucco subcontractor. The subcontractor sued the developer. The trial court held that the developer violated the implied covenant of good faith and fair dealing by terminating the subcontractor. The Fourth District reversed because the implied covenant is not a tool to override the agreement of the parties:

The trial judge found that Avatar[developer] violated the implied covenant of good faith and fair dealing in terminating the contract pursuant to Article 67. However, the covenant of good faith cannot be used to create a breach of contract on Avatar’s part, where there was no breach of any express term of the contract. As this Court explained in Indian Harbor Citrus, Inc. v. Poppell, 658 So.2d 605 (Fla. 4th DCA 1995), an implied covenant of good faith cannot be used to vary the unambiguous terms of a written contract and when parties negotiate “a fully specified, unambiguous contract, this court is not at liberty to change their bargain.” Id. at 607. The “duty of good faith must relate to the performance of an express term of the contract and is not an abstract and independent term of a contract which may be asserted as a source of breach when all other terms have been performed pursuant to the contract requirements.” Hosp. Corp. of Am. v. Fla. Med. Ctr., Inc., 710 So.2d 573, 574 (Fla. 4th DCA 1998). The language of Article 67 was plain and unambiguous: Avatar could terminate the contract at any time for any reason. It was a valid contract with an enforceable termination clause.

Avatar, 834 So.2d at 875.

Typically, the implied covenant of good faith and fair dealing comes into play “when a question is not resolved by the terms of the contract or when one party has the power to make a discretionary decision without defined standards.” Speedway SuperAmerica, LLC v. Tropic Enterprises, Inc., 966 So.2d 1, 3 (Fla. 2d DCA 2007) quoting Publix Super Markets, Inc. v. Wilder Corp. of Del., 876 So.2d 652, 654 (Fla. 2d DCA 2004).

For example, in Speedway SuperAmerica, a landlord refused to give its tenant consent to assign a commercial lease. The lease provided that the tenant could not assign the lease without the prior written consent of the landlord and that any assignment without the landlord’s consent would be void allowing the landlord, at its discretion, to terminate the lease. Here, the tenant assigned the lease even after the landlord refused to provide its written consent to the assignment. The trial court ruled that the landlord had the unfettered right to refuse to provide its written consent and the tenant’s assignment constituted a material breach of the lease entitling the landlord to retake possession of the leased space. The Second District reversed because the discretion the landlord had in providing its written consent (without any defined standards as to when the landlord would or would not provide such consent) was subject to the implied covenant of good faith and fair dealing to protect the contracting parties reasonable commercial expectations.

The bottom line is that a claim that a party violated the implied covenant of good faith and fair dealing will fail without proving that the party actually violated an express contractual provision. This claim, however, is not a vehicle to rewrite contractual performance obligations and will not be used to supersede what the parties agreed to. It can be used when the contract gives a party a discretionary obligation (such as to act reasonably, or gives the party the power to do something at its option) that has no defined standards. In such circumstance, a party can argue the other party breached the contract by breaching the implied covenant of good faith and fair dealing by not exercising or exercising such discretionary obligation in good faith, thereby impacting the reasonable expectations of the contracting parties.

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

A LETTER OF INTENT CAN FORM THE BASIS OF AN ENFORCEABLE CONTRACT

Posted on December 2, 2014November 8, 2024 by Edward Garber

Just because there is not an executed subcontract, does not mean there is not an enforceable written contract between a contractor and subcontractor. While it is good practice for there to be an executed contract in place, this does not always occur. But, this lack of occurrence does not necessarily mean a performing subcontractor can escape contractual obligations merely because it never signed the subcontract. Indeed, many times a subcontractor starts performing based on a letter of intent that it received from the contractor. The letter of intent may indicate that a formal subcontract will be furnished to the subcontractor such as when the contractor is awarded the project or after the subcontractor starts performing under the letter of intent. If the subcontractor starts performing based on the letter of intent that it received, this letter of intent can certainly form the basis of an enforceable contract!

The decision in Sealevel Construction, Inc. v. Westcoast Corp., 2014 WL 3587264 (E.D.La. 2014) exemplifies how a letter of intent can form the basis of a written contract. Here, a subcontractor on a federal project solicited bids from sub-subcontractors to perform aspects of its work based on the plans and specifications for the project. The specifications, among other things, contained a liquidated damages section. A sub-subcontractor submitted a bid to install concrete piles. The subcontractor accepted the bid and issued the sub-subcontractor a letter of intent. The letter of intent was signed by both the subcontractor and sub-subcontractor and referenced the specifications. The letter of intent further stated that a formal subcontract would be entered between the parties; however, a subcontract was never executed.

The sub-subcontractor started to perform its scope of piling work based on the letter of intent. Thereafter, the subcontractor notified the sub-subcontractor of delays with the sub-subcontractor’s scope of work. The sub-subcontractor was unable to cure the delays and the subcontractor hired another entity to supplement its sub-subcontractor’s work. Nevertheless, as a result of delays to the sub-subcontractor’s scope of work, the government assessed liquidated damages against the prime contractor. The prime contractor, in turn, withheld the amount of the liquidated damages from the subcontractor in addition to the prime contractor’s own extended general conditions. The subcontractor then withheld this money from its sub-subcontractor in addition to its own extended general conditions.

The Eastern District of Louisiana found that the letter of intent served as an enforceable contract between the subcontractor and sub-subcontractor and the sub-subcontractor breached the letter of intent through its delayed performance. As a result, the subcontractor was entitled to withhold / back-charge the sub-subcontractor for (i) the costs spent on the supplemental entity to mitigate the sub-subcontractor’s delay and (ii) the portion of liquidated damages attributable to the sub-subcontractor’s delay. The court did not, however, allow the subcontractor to back-charge the sub-subcontractor for other delay-related costs (such as the prime contractor’s and the subcontractor’s extended general conditions) since the sub-subcontractor never contractually agreed to these types of damages unlike the liquidated damages section that was included in the specifications referenced in the letter of intent.

Take-aways:

If a letter of intent is issued, the letter of intent should identify the subcontract amount, the applicable scope of work, and reference the plans and specifications. The more detail in the letter of intent the better so that if the subcontractor starts performing based on the letter of intent there is a strong argument that the detailed letter of intent served as the contract between the parties (such as if the subcontractor refuses to sign the subcontract, the parties are unable to agree on the formal written subcontract, or if the subcontract is never issued).

It is good practice to have both the contractor and subcontractor sign the letter of intent.

An unexecuted contract does not mean there is not a written contract between the parties. Parties need to consider this before taking an extreme position that a contract does not exist or that they are not bound by certain requirements.

It is good practice for a party subcontracting work to be able to flow-down damages such as liquidated damages and their own extended general conditions. In this case, the subcontractor would have been able to flow-down the prime contractor’s and its extended general conditions attributable to the sub-subcontractor’s delay had this been identified in the letter of intent or clarified by an executed written subcontract.

THE CLEVER ACCORD & SATISFACTION DEFENSE

Posted on August 31, 2014November 8, 2024 by Edward Garber

A dispute concerning amounts owed (whether owed from an owner to contractor, a contractor to subcontractor, a subcontractor to supplier, etc.) is routine on a construction project. Even in these disputes, the party responsible for owing money may recognize there is an undisputed amount actually owed to the other party, although not the amount the other party claims. While I am a believer in tendering undisputed funds, sometimes there are clever and strategic ways to tender that money.

For instance, the defense of accord and satisfaction is a defense that the party receiving the money deposited the money in full satisfaction of a disputed claim. The decision in St. Croix Lane Trust & M.L. Shapiro, Trustee, v. St. Croix at Pelican Marsh Condominium Association, 2014 WL 3882458 (2d DCA 2014), while not a construction dispute, illustrates strategy in tendering money in full satisfaction of a claim and then relying on the defense of accord and satisfaction. In this case, a condominium association foreclosed on a unit for unpaid assessments. The unit was sold at a foreclosure sale to a Trust for $100. The $100 was insufficient to pay the association the amount of its foreclosure judgment so the association sent a letter to the Trust advising that the Trust owed the association unpaid assessments that accrued on the unit prior to the foreclosure sale (in excess of $30,000). The Trust disputed the amount it owed and thought it owed $840. In this regard, the Trust sent a letter to the association (through counsel) stating, “[I]n a good faith effort to resolve this matter I have enclosed herewith a check in the amount of $840.00….Be advised and warned, this check is tendered in full and final satisfaction of all claims made against the Trust and the property….” Despite this letter accompanying the check, the association negotiated the check and then threatened to foreclose a lien it recorded against the Trust’s unit due to the dispute. The Trust filed a lawsuit seeking declaratory relief whether it owed the association any money. An argument it raised was accord and satisfaction since the association negotiated the $840 check clearly sent in full satisfaction of all claims.

On appeal, the Second District agreed with the Trust that accord and satisfaction applied to discharge the Trust of any more monies owed relating to the dispute. The Second District relied on Florida Statute s. 673.3111 that provides:

“(1) If a person against whom a claim is asserted proves that that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, that the amount of the claim was unliquidated or subject to a bona fide dispute, and that the claimant obtained payment of the instrument, the following subsections apply.

(2) Unless subsection (3) applies, the claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.”

Furthermore, Florida case law defines an accord and satisfaction as follows:

“An accord and satisfaction results as a matter of law when the creditor accepts payment tendered on the expressed condition that its receipt is deemed to be a complete satisfaction of a disputed issue. This court has long held that cashing a check containing language that it is in full payment of the debtor’s obligations creates an accord and satisfaction with regard to the claim for which payment was tendered.”

United Auto Ins. Co. v. Palm Chiropractic Center, Inc., 51 So.3d 506, 509 (Fla. 4^th DCA 2010) (internal citation omitted)

If you are trying to devise clever strategy to set up an accord and satisfaction defense, you can send undisputed money with an accompanying letter clearly expressing that the money is in full and final satisfaction of the claim / dispute. Or, clearly delineate this point on the check. The recipient should not negotiate the check and should instead return it. If the money is truly undisputed, the paying party can always re-tender that money to take that undisputed amount off the table without conditioning it as a full settlement of the claim. But, if the check is negotiated, as it was in this case, the party has just set up an accord and satisfaction defense!

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

Posted on May 17, 2014November 8, 2024 by Edward Garber

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

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

Id. (internal quotations and citations omitted).

Stated similarly:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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