CONTRIBUTION CLAIMS TO PASS-THROUGH LIABILITY

Posted on October 7, 2013November 8, 2024 by Edward Garber

In lawsuits, there are times the defendant elects to sue a third-party defendant to pass-through its liability to the plaintiff to the third-party defendant. For example, in a construction defect scenario where the owner sues the general contractor, the general contractor will often sue subcontractors (third-party defendants) in order to pass-through its liability to the owner to subcontractors that performed the scopes of work at-issue. In other situations, a defendant may assert a cross-claim against another defendant to, among other things, pass-through any liability it has to the plaintiff to the other defendant. For example, in a construction defect scenario where the owner sues both the general contractor and subcontractors, the general contractor will often assert a cross-claim against the subcontractors to pass through its liability to the subcontractors.

A claim for contribution used to be a common claim asserted to pass-through liability in negligence-related actions. Contribution claims were routine in negligence actions when there used to be joint and several liability, i.e., a party could be responsible for all of the plaintiff’s damages irrespective of its percentage of fault with other defendants. “To state a claim for contribution, the claimant must allege a common liability to the injured party [plaintiff].” Horowitz v. Laske, 855 So.2d 169, 174(Fla. 5th DCA 2003). In other words, the defendant and third-party defendant must be jointly liable / negligent to the plaintiff for the injuries the plaintiff sustained. Therefore, by asserting a contribution claim, the defendant ensures that fault is allocated to another party that is jointly liable for the damages sustained by the plaintiff.

However, Florida abolished joint and several liability in negligence actions and, now, a defendant can only be liable based on its determined percentage of fault. See Fla. Stat. s. 768.81; see also T&S Enterprises Handicap Accessibility, Inc. v. Wink Indus. Maintenance & Repair, Inc., 11 So.3d 411 (Fla. 2d DCA 2009) (affirming dismissal of defendant’s third party claim for contribution in underlying negligence action due to abolishment of joint and several liability). Because of this, third-party defendants or cross-claim defendants that are sued for contribution should argue that the contribution claim is moot because the party suing it can only be held liable for its percentage of fault or negligence. Some judges will dismiss a contribution claim for this reason on a motion to dismiss, but others will still allow the claim to proceed beyond a motion to dismiss for judicial efficiency and economy since it is easier to wrap up a dispute in one litigation instead of many (considering contribution claims have been routine claims to pass-through liability).

The opinion in Martinez v. Miami-Dade County, 2013 WL 5434159 (S.D.Fla. 2013) is a non-construction case that illustrates how a claim for contribution can proceed. In this case, a plaintiff sued Miami-Dade County and a bar for injuries the plaintiff sustained by off-duty police officers providing security for the bar. The claims against Miami-Dade Couty were sounded in intentional tort theories and not negligence theories. Miami-Dade County asserted a cross-claim against the bar and included a claim for contribution. The bar moved to dismiss the contribution claim arguing that contribution claims are obsolete under Florida law since there is no more joint and several liability. The Southern District Court disagreed expressing that because the plaintiff’s theories against Miami-Dade County were sounded in intentional tort and not negligence, section 768.81 did not apply. (Notably, section 768.81 section does not apply to intentional tort theories of liability.)

Under section 768.81, a negligence action means “without limitation, a civil action for damages based upon a theory of negligence, strict liability, products liability, professional malpractice whether couched in terms of contract or tort, or breach of warranty and like theories. The substance of an action, not conclusory terms used by a party, determines whether an action is a negligence action.” Fla. Stat. s. 768.81(1)(c). Therefore, even if the claims asserted are not labeled negligence claims, this section still applies to bar joint and several liability to ensure a party is only liable for their percentage of fault. It is designed so that substance over form is analyzed to determine whether the plaintiff’s underlying action is a negligence action even if it is not labeled as such.

This opinion in Martinez, however, could support the argument that a contribution claim could be asserted outside of a negligence claim such as a breach of contract action (since, in the case, a contribution claim was still allowed to proceed in an intentional tort action). And, even though section 768.81 shifts the focus from the label of the plaintiff’s claims to the actual substance underlying the claims, the objective is to argue that plaintiff’s claims are not based in negligence, but based in a material breach of a contractual provision. For example, in a construction defect setting, when the general contractor is sued for breach of contract, there may be strategic reasons why the general contractor would want to attempt to assert a contribution claim in addition to an indemnification claim against subcontractors to pass-through liability. The general contractor would argue that the plaintiff’s claims are not based in negligence but based in contract since the plaintiff is asserting that the project was not constructed per the contract documents (or in a workmanlike manner) per contractual provisions.

Finally, if a general contractor elects to assert a contribution claim, it is important to remember that the claim will only survive if it asserts and can establish that it and the subcontractor(s) share a common liability to the owner. This is challenging.

In Helmet House Corp. v. Stoddard, 861 So.2d 1178 (Fla. 4th DCA 2003), a contractor was sued by an owner for breach of contract and breach of warranty for defective construction of a roof. The contractor asserted a third party party complaint against its roofing subcontractor for contribution. The Fourth District held that the contractor could not pursue a contribution claim against its subcontractor because the subcontractor did not share a common obligation / liability to the owner. The Fourth District found that parties share a common liability if they are joint tortfeasors or co-obligors on an obligation. Importantly, many subcontracts contain flow-down provisions that bind the subcontractor to the general contractor to the same extent the general contractor is bound to the owner. Flow-down provisions attempt to impose the exact same liability on the subcontractor that the general contractor assumes towards the owner. With this type of provision, or an alternative provision that would make the owner an intended third-party beneficiary of the subcontract, there may be an argument that subcontractors do indeed share a common liability to the owner with the general contractor for defects with their scopes of work. From the general contractor’s perspective, the objective is to pass-through liability for defective construction with arguments based on the plaintiff’s allegations in the complaint.

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.

STATUTE OF LIMITATIONS ON PERFORMANCE BOND CLAIMS

Posted on October 1, 2013November 8, 2024 by Edward Garber

Owners need to understand the benefit of a performance bond before deciding they do not want to reimburse the contractor for the premium associated with the bond. The performance bond is designed to guarantee the contractor’s faithful performance of the contract. There are numerous ways the bond can come into play. If the contractor goes bankrupt during construction, the owner can assert a claim against the bond. If the contractor gets terminated for default, the owner can assert a claim against the bond. And, if there are construction defects, particularly latent defects, the owner can assert a claim against the bond. Naturally, a benefit of the performance bond is that the contract is presumably guaranteed by a solvent surety (insurance company), which is important based on the value of the contract and/or perceived solvency of the hired contractor.

Importantly, performance bonds have a five year statute of limitations irrespective of the ten year statute of repose period in Florida. See Federal Ins. Co. v. Southwest Retirement Center, Inc., 707 So.2d 1119 (Fla. 1998). The Florida Supreme Court in Southwest Retirement Center held that the statute of limitations on a performance bond in a case involving latent defects accrues (begins to run) “on the date of acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” Id. at 1121. Thus, the statute of limitations begins to run on this date and expires five years thereafter—no matter when the defect was discovered.

A factual issue can arise based on parties’ differing interpretations as to the meaning of “acceptance of the project as having been completed according to terms and conditions set out in the construction contract.” The opinion in GBMC, LLC v. Proset Systems, Inc., 2013 WL 1629162 (N.D.Fla. 2013), illustrates this factual issue. In this case, the performance bond surety moved for summary judgment arguing that the statute of limitations began to accrue on the date of substantial completion. To support this position, the surety pointed to the construction contract that maintained that the statute of limitations accrues no later than the date of substantial completion. (Notably, this is common language in construction contracts, particularly the AIA Document A201 which appears to be the general conditions of the contract executed by the parties.) The Northern District of Florida, however, did not buy this argument because it is illegal under Florida law for parties to contractually shorten the statute of limitations. See Fla. Stat. s. 95.03. In other words, if substantial completion occurred before the “acceptance of the project has having been completed according to the terms and conditions set out in the contract,” then the parties were illegally agreeing to shorten the limitations period. Because there were material facts in dispute as to when the contract was accepted as completed, the surety’s motion for summary judgment was denied.

Owners that plan on asserting a claim against a performance bond for latent defects need to understand when the statute of limitations accrues for purposes of their claim. Based on the project’s completion, the owner will want to create a factual issue as to when it accepted as completed the contract since this date is arguably later than the substantial completion date and, thus, the certificate of occupancy date. This language is a benefit to the owner asserting a latent defect claim on the cusp of five years from the date it started using the project for its intended purpose, particularly if the owner did not release retainage until well after occupancy. Contractors (indemnifying their surety) and sureties need to recognize this so they can start framing a statute of limitations defense based on facts supporting when the contract was accepted as completed by the owner. The contractor should do this by tracking the temporary and/or final certificate of occupancy dates and when final payment was made to argue that the owner accepted the project when it started occupying the project for its intended purpose. A contractor or surety will need to persuasively make this argument if the certificate of occupancy was issued more than five years from the lawsuit but the owner’s final payment to the contractor for retainage was within five years from the lawsuit. The reason being is that language “accepted as completed” allows the owner to argue that they never accepted the project as completed by virtue of not issuing the final payment until an extended period after the certificate of occupancy.

MAKE SURE CONSTRUCTION LIENS ARE PROPERLY PREPARED AND DO NOT CONTAIN ERRORS

Posted on September 29, 2013November 8, 2024 by Edward Garber

If a construction lien is improperly filed or contains errors, an owner will try to capitalize on the improper filing or errors in order to get the lien discharged from his property. This is what an owner should do, although he should not lose sight over the difference between a ministerial error in the lien that you do not bank your entire defense on versus a truly substantive error under Florida’s Lien Law that could give the owner leverage in the dispute (e.g., not recording the claim of lien within 90 days from final furnishing, a subcontractor/supplier not serving a notice to owner, a lien from an unlicensed contractor, or a lien that includes improper amounts for nonlienable items).

The recent case of Premier Finishes, Inc. v. Maggirias, 2013 WL 5338052 (Fla. 2d DCA 2013), illustrates an error in a lien (that appears ministerial at first glance) that resulted in the lien being discharged by the trial court. However, although not discussed in the opinion, this case addresses much more than an error in a lien, but an interesting licensing issue.

In this case, a contractor was engaged to build a house. The contractor entered into the contract under a fictitious name. However, from reviewing the case, it does not appear that the fictitious name was a registered fictitious name, nor does it appear that the fictitious name was registered as a licensed contractor. Rather, it was simply an acronym used by the licensed contractor.

A payment dispute arose when the owner terminated the contractor, and the contractor recorded a claim of lien and moved to foreclose the lien. However, the lien was recorded and lawsuit initiated by the contractor and not the fictitious name that entered into the contract. The owner argued that the contractor was not a proper lienor and therefore the lien should be discharged because it was not the entity that actually entered into the contract. The trial court agreed.

On appeal through a petition for a writ of certiorari, the Second District reversed for two main reasons.

First, the Court held that a contract entered into under a fictitious name is enforceable (even if that fictitious name is not properly registered). See Fla. Stat. 869.09(9). The Court explained: “[I]f Premier Finishes [contractor] was the real entity using the fictitious name when entering into the contract, it is the actual party to the contract or the contractor…and is entitled to proceed with a claim of lien against the Owner.” Premier Finishes, 2013 WL 5338052 at *3.

Second, under Florida’s Lien Law, a ministerial error does not invalidate a lien unless the owner can show he was prejudiced by the error. See Fla. Stat. 713.08(4). The owner will have to show how he was adversely affected / prejudiced by the error, which would require an evidentiary hearing and can be quite challenging to prove.

Now, what is interesting about this case is whether there was any argument that the lien should be unenforceable because the fictitious entity that signed the contract was an unlicensed contractor (assuming this is the case). Under Florida Statute s. 489.128, contracts entered into by an unlicensed contractor are unenforceable in law or in equity by the unlicensed contractor. Thus, an unlicensed contractor cannot properly lien. Instead of the focus being on the error in the lien due to the lien being recorded by the contractor instead of the fictitious entity, the argument could center on the fact that the contract was entered into by an unlicensed contractor and, therefore, the contract and corresponding lien are not enforceable. Perhaps, the owner plans on raising this argument to establish prejudice.

While the contractor can certainly raise arguments to address the fact that the fictitious name is properly licensed since the contractor that owns the fictitious name is properly licensed, a contractor that is required to be licensed by the state (e.g., general contractor, mechanical contractor, electrical contractor, plumbing contractor, etc.) is technically supposed to register and identify the fictitious name it is doing business under. See Fla. Stat. 489.119. Although, notably, there is an older case, Martin Daytona Corp. v. Strickland Const. Services, 881 So.2d 686 (Fla. 5th DCA 2004), that held that a subcontractor’s failure to obtain a license under its fictitious name did not render the contract unenforceable. However, this case was decided under a previous version of Florida Statute s. 489.128 and, importantly, the current version of this statute likely would not have applied to this case since the subcontractor (a mason) is not required to obtain a state license like a general contractor. It is uncertain how this case would be decided under current law.

The key is to double check your liens to ensure they are accurate and do not contain errors. Naturally, it is always a good thing to work with an attorney to prepare your lien so that if you know that if an error will likely exist you can game plan accordingly. For example, if you entered into contracts in the name of an unregistered fictitious name, the decision in Premier Finishes can support your argument that the fictitious name would not render the contract or lien unenforceable especially if the fictious name is used by a properly licensed contractor. Also, contractors needs to be sure they maintain proper licenses to remove any argument that the contract or lien is unenforceable. Keep in mind that under the law, a contract with an unlicensed contractor is unenforceable one-way by the unlicensed contractor; the other party to the contract can still seek recourse.

CONDO ASSOCIATIONS AND CONSTRUCTION LIENS

Posted on September 20, 2013November 8, 2024 by Edward Garber

Condominium associations hire contractors for capital improvements and repair / restoration work to common elements (painting, balcony/concrete/stucco restoration or repairs, etc.). When a condominium association hires a contractor to provide labor, services, or materials to the condominium, it needs to understand that nonpayment can lead to the contractor liening–recording a construction lien–the condominium units in the condominium.

Florida Statute s. 718.121(2) maintains: “Labor performed on or materials furnished to the common elements are not the basis for a lien on the common elements, but if authorized by the association, the labor or materials are deemed to be performed or furnished with the express consent of each unit owner and may be the basis for the filing of a lien against all condominium parcels in the proportions for which the owners are liable for common expenses.”

Furthermore, s. 718.121(3) maintains: “If a lien against two or more condominium parcels becomes effective, each owner may relieve his or her condominium parcel of the lien by exercising any of the rights of a property owner under Chapter 713 [Florida’s Lien Law], or by payment of the proportionate amount attributable to his or her condominium parcel. Upon payment, the lienor shall release the lien of record for that condominium parcel.”

Now, what does this mean? First, it means that when an association hires a contractor to perform construction-related work, the work is deemed authorized by all unit owners. Second, it means that because all unit owners are deemed to consent to the work, the contractor, if unpaid, can lien each condominium parcel / unit. Third, it means that the lien against each unit will be in the proportionate amount that the owner is liable for common expenses. And, last, it means that each owner has options to discharge the lien from his/her condominium unit- the owner can pay his/her proportionate share to discharge the lien or the owner can transfer the lien to a bond or other security.

If a contractor is not paid by the association and elects to lien and move forward with a lien foreclosure lawsuit, the contractor is not required to sue each individual owner. Rather, the contractor can simply sue the association since the association is deemed to represent the unit owners’ interests. See Trintec Construction, Inc. v. Countryside Village Condominium Association, Inc., 992 So.2d 277 (Fla. 3d DCA 2008) (finding that unpaid roofing contractor that filed lien foreclosure action against association was not required to join all of the unit owners in the action); Four Jay’s Construction, Inc. v. Marina at the Bluffs Condominium Association, Inc., 846 So.2d 555 (Fla. 4th DCA 2003) (finding that balcony contractor properly sued the association in breach of contract action as a class representative on behalf of the owners).

Contractors that are hired by associations need to understand their lien rights in the event of nonpayment. And, associations that hire contractors need to understand their options in the event they are involved in a payment dispute with a contractor so that owners can be best advised.

PROPERTY (INCLUDING ALL-RISK) INSURANCE POLICIES AND THE EFFICIENT PROXIMATE CAUSE DOCTRINE

Posted on September 19, 2013November 8, 2024 by Edward Garber

An important new insurance coverage case came out dealing with “all risk” property insurance policies (such as homeowners or builders risk policies). The case, American Home Assurance Co. v. Sebo, 38 Fla. L. Weekly D1982a (2d DCA 2013), discusses when coverage applies when both excluded and covered perils contribute to a loss / damage. The case also discusses the application of anti-concurrent cause language in the policy. These are both important insurance coverage issues.

In this case, an owner purchased a four-year old home in 2005 and obtained an “all risk” homeowner’s property insurance policy. The policy was not a standard form policy but a manuscript policy specifically created for purposes of the house. Almost immediately after the purchase, rainwater started to intrude in numerous locations throughout the house. Then, Hurricane Wilma struck causing further damage to the house. The damage to the house was so extensive that it could not be repaired and the house had to be demolished.

The owner submitted an insurance claim to its carrier, but the carrier denied coverage except for tendering $50,000 based on language in the policy that provided for $50,000 worth of coverage for ensuing (resulting) damages caused by fungi, wet or dry rot, or bacteria. (This is often referred to as the mold exclusion and some policies allow for ensuing damages caused by mold up to a specified amount.)

The owner sued the sellers, the contractor, and the architect (arguing defective construction) and settled with each of them. The owner also sued its property insurance carrier in a declaratory action for insurance coverage.

An all risk policy, such as the policy in this case, starts out covering all risks except the numerous risks or perils that are excluded. As the Court explained:

“Property insurance is a contract between the insured and the insurer to cover property losses that are either caused by certain perils that are specifically named in the policy or are caused by “all perils” except for those specifically excluded from coverage. These perils are usually physical forces such as fire, rain, and wind.” Sebo, supra.

In this policy (like most property insurance policies), there was a faulty workmanship / design exclusion where the policy did not cover loss caused by faulty, inadequate, or defective planning, design, specifications, workmanship, repair, construction, etc.

The coverage issue in the case centered on the undisputed fact that more than one cause (excluded and covered) contributed to the owner’s loss or damage, such as faulty construction, rain, and wind. When this occurs, what legal doctrine applies to determine whether the loss is covered?

The owners wanted the legal doctrine known as the concurrent cause doctrine to apply. Under this doctrine, insurance coverage applies “when multiple perils act in concert to cause a loss, and at least one of the perils is insured and is a concurrent cause of the loss, even if not the prime or the efficient cause.” Sebo, supra. In other words, if faulty workmanship (not covered) and rain (likely covered) concurrently contribute to a loss, the loss would be covered under the concurred cause doctrine.

The insurance carrier wanted the legal doctrine known as the efficient proximate cause doctrine to apply. Under this doctrine, “the finder of fact, usually the jury, determines which peril was the most substantial or responsible factor in the loss. If the policy insures against that peril, coverage is provided. If the policy excludes that peril, there is no coverage.” Sebo, supra. In other words, if faulty workmanship (not covered) is the most substantial factor in the loss, the loss would not be covered.

The trial court applied the concurrent cause doctrine. However, on appeal, the Second District reversed finding that the efficient proximate cause doctrine should apply to determine whether coverage exists. (For more on the application of the efficient proximate cause doctrine to all-risk property insurance policies, check out this article and this article.)

The Court additionally discussed what is known as anti-concurrent cause language that exists in many insurance policies. An example of this language in the policy would be under the pollution exclusion which provided that the policy did not “cover any loss, directly or indirectly, and regardless of any cause or event contributing concurrently or in any sequence to the loss” caused by pollutants / contamination. Sebo, supra. Thus, based on this language, the concurrent cause and efficient proximate cause doctrines would be moot based on this anti-concurrent cause language. The Court dismissed this argument because the anti-concurrent cause language was not specifically incorporated into the faulty workmanship exclusion whereas it was specifically incorporated in other exclusions such as the pollution exclusion. (Importantly, other states have found this language to be unenforceable so there may be an argument as to the enforceability down the road that the Court did not delve into but noted.)

All-risk property insurance policies and named-peril policies are complicated. When a loss occurs, it is important to understand your property insurance policies in order to present claims and arguments for coverage. The Sebo case’s application of the efficient proximate cause doctrine is an important case because it is not uncommon that both weather-related issues and defective workmanship / design related issues contribute to the loss. This raises the “what came first, the chicken or the egg argument” because when this issue is tried by a jury, the insurer will likely argue that the weather-events would not have contributed to the loss if not for the defective workmanship / design so the defective workmanship / design must have been the substantial factor. Conversely, the owner will likely argue that he purchased a four-year old home and the defect issues did not surface until severe weather-related events, so the weather-related events must have been the substantial factor.

A SURETY’S RIGHT TO DEMAND COLLATERAL SECURITY

Posted on September 17, 2013November 8, 2024 by Edward Garber

Before payment and performance bonds are issued by a surety, the bond principal-contractor is required to execute an indemnity agreement with the surety that is often personally guaranteed. The indemnity agreement is naturally written in favor of and for the benefit of the surety that is issuing bonds that are typically in the amount of the contracts that are awarded to the contractor. Contractors that execute indemnity agreements need to understand what the surety’s rights and remedies are in the event performance and/or payment bond claims are made that raise a concern to the surety. Not understanding these rights could put the contractor in a losing situation with the surety.

The recent Southern District of Florida opinion in Developers Surety and Indemnity Co. v. Bi-Tech Construction, Inc., 2013 WL 4563657 (S.D.Fla. 2013), exemplifies a surety’s options against its bond principal-contractor. In this case, the contractor was awarded a contract by a public owner to install a new generator system. The contractor was required to obtain public performance and payment bonds. Shortly after construction commenced, a payment dispute arose between the contractor and the public owner. The public owner refused to pay the first full payment application amount because it originally over-estimated the amount of trenching that the contract would require. The contractor contended that it bid its work on its own assessment of the trenching and needed to be paid in full to cover project costs. The contractor further argued that it could not complete the project without full payment; the public entity therefore elected to terminate the contractor from the project.

The public owner and the contractor’s surety entered into discussions as the public owner must have submitted a performance bond claim to the surety. They agreed that the public owner would pay the contractor in full and the contractor would be reinstated to complete the work. The surety then issued the contractor a memorandum of understanding that outlined the terms of its agreement with the public owner and needed the contractor to sign off on the memorandum of understanding. The contractor, however, refused because it objected to certain provisions in the memorandum of understanding that would have, among other things, required the public owner’s payments to the contractor to be held in a third party trust account until the surety authorized the disbursement of the funds.

Meanwhile, subcontractors to the contractor remained unpaid. The electrical subcontractor was owed approximately $172,000 and filed a suit against the contractor’s payment bond. Additionally, another subcontractor was owed approximately $8,000. The surety decided to create a reserve account and deposited $205,000 into that account. The surety demanded that the contractor also deposit $205,000 into the reserve account as collateral security. The contractor refused prompting the surety to file suit against the contractor.

While the surety’s lawsuit against the contractor was pending, the surety immediately moved for a preliminary injunction asking the Court to order the contractor to provide the surety $205,000 as collateral security to be deposited into the reserve account.
“In order to obtain a preliminary injunction, the plaintiff [surety] must establish [the following elements:] (1) a substantial likelihood that it will prevail on the merits of the underlying cause of action; (2) a substantial threat that it will suffer irreparable injury if the injunction is not granted; (3) that the threatened injury to the plaintiff outweighs the threatened harm the injunction may have on the defendant; and (4) that the public interest will not be adversely affected by granting the preliminary injunction.” Bi-Tech, 2013 WL at *3. If the Court decides that an injunction is appropriate, it has the discretion to determine the amount of the bond the plaintiff (in this case, the surety) will have to post as security to cover damages in the event the injunction is wrongfully issued. Id. at *5 quoting Fed.R.Civ.P. 65.
The Court, in determining whether the elements for injunctive relief were satisfied, analyzed the terms of the indemnity agreement. (The Court would also do this when determining whether the contractor breached the terms of the indemnity agreement.) The indemnity agreement contained few applicable provisions:

“-Indemnitor [contractor and guarantors]…shall indemnify and hold harmless Surety from and against any and all liability…which Surety may sustain or incur by reason of or in consequence of the execution and delivery by Surety of any Bond on behalf of Principal [contractor].
-Indemnitor shall, immediately upon demand and whether or not Surety shall have made any payment therefor, deposit with Surety a sum of money equal to such reserve account and any increase thereof as collateral security on such Bond…If Indemnitor shall fail, neglect or refuse to deposit with Surety the collateral demanded by Surety, Surety may seek a mandatory injunction to compel the deposit of such collateral together with any other remedy at law or in equity the Surety may have.
-Principal and Indemnitor…agree to hold all money and all other proceeds for the Obligation, however received, in trust for the benefit of Surety and to use such money and other proceeds for the purposes of performing the Obligation and for discharging the obligations under the Bond, and for no other purpose until the liability of the Surety under the Bond is completely exonerated.”
Bi-Tech Construction, 2013 WL at *1.

Based on these provisions, the Court maintained that the surety has the contractual right to create the reserve account and demand for the contractor to post collateral security in the reserve account equal to the amount deposited by the surety. This contractual right exists irrespective of whether the contractor disputes the legitimacy of claims made against the surety’s bond. Once the Court recognized this contractual right, it recognized that the surety could suffer irreparable injury because it would be unsecured against claims (hence, the reason why the indemnity agreement allows the surety to request collateral security). Finally, finding that an injunction was appropriate, the Court did not require the surety to post a bond.

Indemnity agreements with sureties contain very similar provisions as the ones referenced above. The provisions applicable for purposes of the preliminary injunction are contained in many indemnity agreements which, among other things, give the surety the right to request collateral security. It is important to understand rights and remedies in connection with the indemnity agreement to hopefully avoid any situation or dispute where the surety pursues recourse against the bond principal-contractor and the guarantors that executed the indemnity agreement.

“ACTUAL DAMAGES” UNDER FLORIDA’S DECEPTIVE AND UNFAIR TRADE PRACTICES ACT

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

Under Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”), a party can only recover in principal what the statute refers to as “actual damages.” See Fla. Stat. s. 501.211(2) (“In any action brought by a person who has suffered a loss as a result of a violation of this part, such person may recover actual damages, plus attorney’s fees and court costs….”) However, the statute does not define the term actual damages and, thus, parties need to analyze Florida caselaw to understand the meaning of actual damages. This is important so parties know the damages covered under FDUTPA. A claim under FDUTPA is sometimes asserted in a construction-related dispute. Sometimes, it is asserted if a party is seeking an avenue to potentially recover attorneys’ fees.

Florida courts (or federal courts interpreting Florida law) have maintained that “actual damages” refer to the “difference in the market value of the product or service in the condition it was delivered and its market value in the condition in which it should have been delivered according to the contract of the parties. A notable exception to the rule may exist when the product is rendered valueless as a result of the defect-then the purchase price is the appropriate measure of damages.” Rollins, Inc. v. Butland, 951 So.2d 860, 869 (Fla. 2d DCA 2006) quoting Rollins, Inc. v. Heller, 454 So.2d 580, 585 (Fla. 3d DCA 1984).

This is similar to benefit of the bargain damages – the market value of the product represented minus the market value of the product delivered. See Gastaldi v. Sunvest Resort Communities, LC, 709 F. Supp. 2d 1299, 1304 (S.D.Fla. 2010).
Based on the way Florida cases define actual damages under FDUTPA, a party needs to prove its damages in accordance with this definition by analyzing the market value of the product represented versus the market value of the product actually received / delivered.

Examples of cases discussing the measure of actual damages under FDUTPA are as follows:

– Rollins v. Heller, 454 So.2d 580, 585 (Fla. 3d DCA 1984) – measure of damages would be the market value of the alarm system and the services alarm company agreed to provide [as represented] minus the market value of the alarm system and services actually provided [as delivered];

–Ft. Lauderdale Lincoln Mercury, Inc. v. Corgnati, 715 So.2d 311, 315 (Fla. 4th DCA 1998) –measure of damages would be the market value of the used BMW that was never in an accident and with a remote infrared opener [as represented] minus the market value of the BMW which had been in an accident and without remote infrared opener [as delivered];

– H&J Paving of Fla., Inc. v. Nextel, Inc., 849 So.2d 1099, 1102 (Fla. 3d DCA 2003) –measure of damages “would be the value of the product at the time of the sale based upon a useful life of approximately eight years [as represented] and [minus] the value of the product which would become obsolete within a few years [as delivered];”

– Gastaldi v. Sunvest Resort Communities, LC, 709 F. Supp. 2d 1299, 1307 (S.D.Fla. 2010)– measure of damages would be the difference in the market value of the condominium units with the condominium having a luxury sports club in 2009 [as represented] minus the market value of the condominium units without the condominium having a luxury sports club in 2009 [as delivered].

Notably, actual damages under FDUTPA does not include consequential-type damages (or damages other than those established by the measure provided above). See Dorestin v. Hollywood Imports, Inc., 45 So.3d 819, 824-25 (Fla. 4th DCA 2010) (FDUTPA does not allow for consequential damages or any other damages outside of actual damages); Orkin Exterminating Co., Inc. v. DelGuidice, 790 So.2d 1158, 1162 (Fla. 5th 2001) (actual damages do not include actual consequential damages). For example, lost profits or interest on payments would not be a recoverable consequential damage. See Rodriguez v. Recovery Performance & Marine, LLC, 38 So.3d 178 (Fla. 3d DCA 2010) and Siever v. BWGaskets, Inc., 669 F.Supp.2d 1286, 1294 (M.D.Fla. 2009).

Understanding actual damages in a FDUTPA claim is important prior to asserting a claim so that a party knows what is recoverable and what is not recoverable under FDUTPA. It is also important so that a party knows how to prove actual damages.

For more information on FDUTPA, please see:

https://floridaconstru.wpengine.com/attorneys-fees-under-a-floridas-deceptive-and-unfair-trade-practices-act-and-b-offers-of-judgment/

CGL POLICIES AND THE “YOUR PRODUCT” EXCLUSION

Posted on September 10, 2013November 8, 2024 by Edward Garber

Understanding exclusions in insurance policies is important to understand what is and what is not covered under the policy. The recent case of Liberty Mutual Fire Insurance Co. v. MI Windows & Doors, 38 Fla. L. Weekly, D1890a (Fla. 2nd DCA 2013), discusses the “your product” exclusion that is found in CGL policies.

In this case, MI is a manufacturer of sliding glass doors. It sold its doors to All Seasons which installed the sliding glass doors in condominium projects. In some of the condominiums, All Seasons manufactured and installed transoms along the top of the sliding glass doors. Condominium associations sued MI and All Seasons when the condominiums experienced damage from tropical storms and hurricanes. MI settled the lawsuits. It then sued its CGL carrier to recover consequential damages and for the costs of replacing defective sliding glass doors in the condominiums.
The CGL carrier argued at the trial level that the “your product” exclusion barred coverage for MI’s damages to its products, i.e., sliding glass doors. The trial court found that the “your product” exclusion did not apply to the doors with transoms because adding the transoms to the top of the sliding glass doors significantly changed the doors. Thus, the doors were no longer MI’s product.

The “your product” exclusion in MI’s CGL policy provided that the insurance did not apply to:

“Damage to Your Product. ‘Property Damage’ to ‘your product’ arising out of it or any part of it.”

On appeal, the Second District reversed finding that “[t]he addition of transoms to the sliding glass doors did not fundamentally change the nature and function of those doors.” MI Windows & Doors, supra. In other words, because the sliding glass doors continued to operate as sliding glass doors even with the addition of the transoms, the doors remained MI’s product. For this reason, the Second District held that the “your product” exclusion applied to bar damages to replace the doors.

In MI Windows & Doors, the Court found that if alchemy alters the original product, then the “your product” exclusion may not apply based on cases outside of Florida that discuss this exclusion. Importantly, however, the Court footnoted Auto-Owners Ins. Co. v. American Building Materials, Inc., 820 F.Supp.2d 1265, 1272 (M.D.Fla. 2011), where the Middle District of Florida also discussed this exclusion. The Middle District in this case maintained that drywall that was incorporated into a house was not barred by the “your product” exclusion based on the language of the exclusion because the drywall, once incorporated, became real property and the exclusion did not apply to real property. Because this case or issue was not framed on appeal in MI Windows & Doors, the Court did not apply this case to the facts.

The “your product” exclusion can be found in CGL policies to bar coverage. Understanding the exclusion as written in the policy (as well as other exclusions) is important so that coverage is understood before or when a dispute arises.

CARVING OUT EXCEPTIONS IN RELEASES

Posted on August 16, 2013November 8, 2024 by Edward Garber

Releases in consideration for progress payments are a routine occurrence in the construction industry. The release language will typically include a release of lien and bond rights through a certain date and it may be broad enough to include a release of other rights through that date, such as a release of any and all claims, damages, costs, fees, amounts, etc. that are known about or incurred through the date of the release.

Contractors and subcontractors that have pending or disputed additional / extra work items and/or pending or disputed claims (whether for additional / extra work, delay, lost productivity or inefficiency, acceleration, etc.) need to be sure to carve out the subject matter of the pending items from the release language. It is ok if the specific amount of the carve-out for the additional / extra work or claim is not known as long as the carve-out clearly reflects that the entity is not releasing the amounts associated with the item.

If an owner (in the case of a contractor) or a contractor (in the case of a subcontractor) refuse to pay the progress payment after it receives the release with items carved out, there is really not much the entity can do because it needs the progress payment. However, to preserve its rights, it should absolutely save the release that was not accepted with the carve-out language and should follow-up with an e-mail or other letter that the owner or contractor, whatever the case may be, refused to pay the entity with the items carved out in the release. This way, if a dispute arises down the road, the entity has done what it can to preserve these items and prevent the opposing party from arguing that the entity waived and released its rights by virtue of the releases it executed in consideration of payment.

THE REALITY WHEN THE CONSTRUCTION LENDER FORECLOSES

Posted on August 15, 2013November 8, 2024 by Edward Garber

Sometimes, projects go bad and the developer’s (owner) lender forecloses on the real property, whether at some point during construction or after. When this happens, there are often unpaid contractors which may be named in the lender’s lawsuit so that their inferior interests to the property are foreclosed. Hopefully, the general contractor has a pay-when-paid provision in its subccontracts so that it is not responsible to pay subcontractors until it receives payment from the developer for the subcontractor’s work. While both the general contractor and subcontractors have lien rights (if the rights were preserved under Florida’s Lien Law), when the developer’s lender forecloses it more often than not means that the general contractor and its subcontractor’s liens are worthless since there will not be a surplus of funds after a foreclosure sale.

The recent case of CMH Homes, Inc. v. LSFC Company, LLC, 38 Fla. L. Weekly D1712a (Fla. 1st DCA 2013), illustrates a creative argument a general contractor tried to argue when the construction lender moved to foreclose on the construction loan and named the general contractor to foreclose its inferior interest to the property. In this case, a developer took out loans to finance a residential development. The lender recorded a mortgage.

Thereafter, the developer entered into a contract with a contractor. The contract provided that the contractor would construct a model home and would be paid for the model home when the model home was sold, but the model home could not be sold until other homes in the development were first built. (Also, in the contract, the contractor agreed that the developer possessed title to the lot in which the model home was built free and clear of all encumbrances except for the developer’s lender’s mortgage.)

The notes the developer executed and the mortgage were assigned to a new entity. The new entity filed a lawsuit to foreclose the mortgage and named the contractor as a defendant (in order to foreclose any interest the contractor may have relating to the real property). In defense, the contractor argued an unjust enrichment theory, that being it would be inequitable for the lender / new entity to take ownership of the model home without paying the reasonable value for the model home. The trial court rejected the contractor’s unjust enrichment defense. The First District Court of Appeal affirmed the trial court maintaining that the contractor conferred no benefit upon the new entity (or original lender) because the decision to loan money to the developer was made prior to the construction of the model home and prior to the developer defaulting on the loan. (Besides, the contractor contractually agreed that its interests in the real property the model home was built was inferior to the security interest of the lender’s mortgage.)