Tag Archives: breach of contract

THE CARDINAL CHANGE DOCTRINE

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The cardinal change doctrine is a doctrine that originated from government contract work in the United States Court of Federal Claims and, until recently, was not really discussed or applied in a Florida case. This changed when the Southern District of Florida in Hartford Casualty Insurance Co. v. City of Marathon, 825 F.Supp.2d 1276 (S.D. Fla. 2011), applying Florida law, discussed the cardinal change doctrine and used it to relieve a performance bond surety of obligations under a performance bond. While the specific facts of this case will not be discussed in detail, the Court’s discussion of the cardinal change doctrine will be because it is a doctrine that contractors on very difficult projects (i.e., completed project is substantially different than original plans, there were never-ending or wholesale, material changes, and the completed project cost substantially more than original contract amount) may want to argue under.

 

In this case, the Court held:

 

“To determine whether a change order is outside the general scope of the underlying construction contract so as to qualify as a cardinal change, courts look to the following factors:

 

(i) whether there is a significant change in the magnitude of work to be performed; (ii) whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract; and (iii) whether the cost of the work ordered greatly exceeds the original contract cost.”

 

City of Marathon, 825 F.Supp.2d at 1286 citing Becho, Inc. v. United States, 47 Fed.Cl. 595, 601 (Fed.Cl.2000).

 

The Court expressed that these factors are all fact-intensive analyzed on a case-by-case basis and the party utilizing this doctrine must prove the factors with particularity. Id. citing PCL Const. Serv., Inc. v. United States, 47 Fed.Cl. 745, 804 (Fed.Cl. 2000).

 

Regarding the first factor—whether there is a significant change in the magnitude of work to be performed—the Court will look to see whether the completed project is substantially different than the project called for in the original plans and specifications. Id. citing Wunderlich Contracting Co. v. United States, 173 Ct.Cl. 180 (1965). For instance, in City of Marathon, the Court found this factor applied because the government gave the contractor a change order that added a new water treatment plant to the contract that was to be built on a separate location with different plans and specifications. Additionally, the cost of the new water treatment plant was more than 100% of the contract amount.

 

Regarding the second factor—whether the change is designed to procure a totally different item or drastically alter the quality, character, nature or type of work contemplated by the original contract—the Court will look to see whether the change is contemplated by the contract. City of Marathon, supra, citing Becho, 47, Fed.Cl. at 601. In City of Marathon, the Court found that while the contract contemplated changes (as most construction contracts do), the magnitude of the change from both a scope and cost standpoint was not contemplated.

 

And, regarding the third and last factor—whether the cost of the work ordered greatly exceeds the original contract cost—the Court will look to see the total increase of the original contract amount due to the change or changes. In this regard, the Court noted that increases of the original contract amount of 100% or more tend to suggest a cardinal change whereas increases less than this percentage tend not to. In City of Marathon, as previously stated, the change increased the original contact amount by more than 100%, thus satisfying this factor.

 

Although the application of this doctrine carries a heavy burden, there are certain projects where it may apply. Contractors that end up constructing a project substantially different then the plans and specifications their contract is based on which results in extensive change orders / wholesale, material changes and massive cost increases may, depending on the circumstance, want to argue under this doctrine in order to circumvent harsh contractual provisions to recoup their costs, etc. for performing additional work.

 

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.

MORE ON PRECONSTRUCTION AGREEMENTS AND DEPOSITS (an update to 7/16/11 post)

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Craigside, LLC v. GDC View, LLC, 36 Fla. L. Weekly d1577e (Fla. 1st DCA 2011) is another case dealing with a buyer of a preconstruction condominium unit trying to recover its deposit from a developer/seller.  In this case, the preconstruction contract was entered on September 2, 2004.  The buyer tendered an initial deposit and then paid the balance of the purchase price  on a later date.  The purchase price of the unit was paid prior to the commencement of construction on the unit.  The contract required the developer  “to complete the condominium unit…within two (2) years of the date of this Agreement but in no event later than May 1, 2007.”  The contract allowed for extensions only for “delays caused by events which would support a defense based on impossibility of performance for reasons beyond [the seller’s] control.”

 

The seller sent the buyer a letter advising that closing was anticipated for May 1, 2007.  In response, the buyer sent the seller a letter on April 16, 2007 (notably, more than two years from the date of the contract)  notifying the seller that the seller failed to complete the condominium unit per the agreement and further demanding a return of the purchase price.   The seller refused to return the initial deposit, although it returned the additional deposit (balance of purchase price).

 

An issue at trial was the number of days the seller was entitled for delays to the completion date of the unit — these days allowed the seller to extend the completion date of the unit.   The trial court granted the seller 253 days of delay, but unfortunately, this case does not discuss the basis for the delays.  An understanding of these delays are critical because these delays allowed the seller to complete the unit more than two years from the date of the preconstruction contract.

 

The First District affirmed the trial court holding that the buyer committed an anticipatory breach of the contract by notifying the seller that it was not going to close on May 1, 2007 and demanding its money back.   The First District explained:

 

“In dealing with anticipatory repudiations the law is clear that a repudiation gives rise to a claim for damages by the nonbreaching party. As stated in Restatement (Second) of Contracts § 253 (1979):

(1) Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.

(2) Where performances are to be exchanged under an exchange of promises, one party’s repudiation of a duty to render performance discharges the other party’s remaining duties to render performance.

Therefore, the nonbreaching party is relieved of its duty to tender performance and has an immediate cause of action against the breaching party.”

 

In other words, because the buyer notified the seller that it was not going to close on the unit, the buyer committed a breach of the contract.  This decision provide crucial because it authorized the seller to keep a substantial initial deposit as liquidated damages associated with the buyer’s refusal to close on the unit.   This case reinforces the position that a buyer seeking to avoid closing on a unit takes a certain degree of risk by not closing (i.e, that risk being a loss of its deposit).   For this reason, it is important that this business decision is made with the input of an attorney to ensure all arguments are preserved and understood.  In this case, the fundamental issue was how many days the seller was given to extend the completion of the unit.  While the case did not discuss this issue in any detail, these days put the buyer in the position that when it notified the seller it was not going to close on the unit, the buyer breached the contract  allowing the seller to retain the deposit and resell the unit to another buyer.

 

For more information on preconstruction contracts and recovering deposits, please see: https://floridaconstru.wpengine.com/preconstruction-and-purchase-sale-contracts-arguments-to-revoke-the-contract-and-recover-the-deposit/

 

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.

PRECONSTRUCTION AND PURCHASE-SALE CONTRACTS- ARGUMENTS TO REVOKE THE CONTRACT AND RECOVER THE DEPOSIT

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Upon the economic downturn, buyers of preconstruction condominiums have been looking for arguments to revoke their contracts and recover their deposit. Condominium developers have been trying to force buyers to close on the units they agreed to purchase through the contract or, alternatively, if the buyers are unwilling to close, keep the deposit money as compensation for their damages. In many instances, it is the buyer that initiates a lawsuit in order to recover their deposit and establish that the developer/seller breached the contract.

 

Two recent Florida appellate decisions involving preconstruction contracts touch upon creative arguments that buyers raise to recover the deposit money and establish that the developer/seller breached the preconstruction contract. In the first case, the buyer prevailed arguing that the seller failed to specifically comply with the terms of the contract. In the second case, the seller prevailed and the buyer lost his argument that the contract violated the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §1701, et seq. (the “ILSFDA”), which is a federal statute designed to prevent fraud in the sale of property by requiring full disclosure of material information.

 

In the first case, Lowe v. Winter Park Condominium Partnership, 36 Fla. L. Weekly D1522a (5th DCA 2011), the buyer entered into a preconstruction contract on April 17, 2006 to purchase a condominium unit and tendered a substantial initial deposit. The contract required the seller to close on the unit within two years from April 17, 2006 (or April 16, 2008). The contract contained the following pertinent provisions pertaining to the closing date:

 

“[Paragraph 4.] Seller will notify Buyer at least thirty (30) days prior to the date that the consummation of the sale of the Unit to Buyer shall take place (“Closing Date”). If Buyer fails to close on or before the Closing Date, then Seller may treat such failure as a default subject to the terms of…Addendum No. 1…or Seller may, in its sole discretion, determine to extend the Closing Date upon payment to Seller by Buyer of an extension equal to $350.00 per day, but in no event shall such extension extend beyond the twenty-four (24) month period….
***
[Paragraph II(B) of Addendum No. 1.] If Buyer asserts the existence of any…defect in title which renders title to the Unit unmarketable and which Buyer does not waive (all of which are called “Defects of Title”), Buyer shall give written notice of such Defects of Title to Seller within five (5) days after its receipt of the [title] Commitment or at least five (5) days prior to the Closing Date….If Seller attempts to remove or cure such Defects of Title, Seller shall be entitled to a postponement of the Closing for a period of up to thirty (30) days in which to remove or cure such Defects of Title….If Seller is unable or unwilling to remove or cure all Defects of Title within such period, Buyer may elect to waive such Defects of Title or to terminate this Agreement by written notice to Seller within five (5) days after the earlier of (i) the expiration of such thirty (30) days, or (ii) the date of notice from Seller to Buyer stating that Seller is unable or unwilling to cure any such Defects of Title.”

 

The facts in Lowe were not in dispute. The seller notified the buyer on November 1, 2007 that closing would take place on December 6, 2007. The buyer realized that the seller never recorded the Declaration of Condominium (the legal instrument that creates the condominium and renders the units marketable) and notified the seller on November 29, 2007 that title was defective. The seller recorded the Declaration of Condominium on December 20, 2007 and notified the buyer that closing would now take place on February 3, 2008. The buyer, however, refused to close arguing that the seller breached Paragraph II(B) of Addendum No. 1 by failing to close within thirty days after receiving notice that there was a defect in title. The seller, conversely, argued that it had the unilateral right to set the closing date pursuant to Paragraph 4 of the Contract and, therefore, Paragraph II(B) of Addendum No. 1 never came into effect.

 
The Fifth District Court of Appeal held that although the seller had the absolute right to set the closing date through April 16, 2008, once the seller notified the buyer of its intent to close on a set date, Paragraph II(B) of Addendum No. 1 came into effect. Because the buyer notified to seller after the closing date was set that there was a defect in title, the seller was required to comply with the terms of Paragraph II(B). In this case, the seller failed to comply with these terms because it failed to close within thirty days from receiving the buyer’s notice. Accordingly, the Fifth District held that the buyer is entitled to recover his deposit and recoup attorneys’ fees as the prevailing party pursuant to the contract.

 
In the second case, Boynton Waterways Investment Associates, LLC v. Bezkorovainijs, 2011 WL 2694522 (4th DCA 2011), the buyer sought to revoke the preconstruction contract and recover his deposit by arguing that the seller violated the ILSFDA .  Specifically, the buyer argued that because the preconstruction contract failed to include the appropriate legal description of the condominium unit it violated §1703(d) of the ILSFDA, which provides:

 

“Any contract or agreement which is for the sale or lease of a lot . . . which does not provide

(1) a description of the lot which makes such lot clearly identifiable and which is in a form acceptable for recording by the appropriate public official responsible for maintaining land records in the jurisdiction in which the lot is located…

may be revoked at the option of the purchaser or lessee for two years from the date of the signing of such contract or agreement.”

 

Regarding the identification of a condominium unit, §718.109 of the Florida Condominium Act provides, “Following the recording of the declaration, a description of a condominium parcel by the number or other designation by which the unit is identified in the declaration, together with the recording data identifying the declaration, shall be a sufficient legal description for all purposes.” Fla. Stat. §718.109.

 

The buyer argued that because the contract did not contain any recording data for the unit, the contract did not clearly identify the unit in a form acceptable for recording under the ILSFDA.

 

The seller argued that §718.109 does not apply to a preconstruction contract that predates the recording of the Declaration of Condominium. (In this case, no different than most preconstruction condominium transactions, the buyer did receive an unrecorded copy of the Declaration included in the prospectus.)

 

The Fourth District Court of Appeal, agreeing with the Middle District in Taplett v. TRG Oasis (Tower Two), Ltd., L.P., 755 F. Supp. 2d 1197 (M.D. Fla. 2009), averred that Florida allows the sale of condominium units prior to the recording of the Declaration; thus, §718.109 does not apply until the recordation of the Declaration. Since the Buyer received an unrecorded copy of the Declaration with the prospectus which just so happened to be incorporated into the preconstruction contract, the condominium unit was clearly identifiable and in a form acceptable for recording.

 

These cases exemplify some of the arguments that are raised by buyers to revoke preconstruction and purchase-sale contracts.   These cases, however, are a snipet of the many cases involving arguments from buyers to revoke their contracts and recover their deposits.  Before a buyer makes a decision to revoke the contract to recover their deposit, the buyer should discuss their options and arguments with an attorney.  Based on the amount of the deposit (and/or loss of value in the unit from the date of contract), discussing the arguments based on the specific facts of your transaction may be worthwhile. Sellers should also be cognizant of these arguments in order to protect their interests and preserve their right to the deposit.

 

 

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.

PERSPECTIVES ON THE COMPETITIVE (OR NOT SO COMPETITIVE) PUBLIC PROCUREMENT PROCESS

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In most circumstances, public entities are required to competitively bid the construction of their projects. Sometimes, competitive bidding is as simple as the public entity publishing an Invitation To Bid (“ITB”) seeking to solicit the lowest, responsible, and responsive bidder. In this solicitation, assuming the bidder is responsible (qualified) and responsive (complies with the invitation to bid in all material respects), the public entity is seeking the lowest cost to perform the construction. The ITB process is commonly referred to as the hard bid process because the public entity knows exactly what it wants and seeks the lowest cost to construct per the plans and specifications.

 

However, seeking an ITB is not the only way a public entity selects a contractor to construct its project. Another common method is the public entity publishing a Request For Proposals ( “RFP”) whereby cost is a factor, but not the only factor in selecting the contractor. A RFP is typically the solicitation when the public entity wants to utilize the experience and sophistication of the contractor to help it determine what specifically it wants. In other words, the public entity wants to resolve a problem and relies on the contractor to submit proposals with the solution and the costs to implement the solution. The public entity then ranks the proposals based on scoring criteria and selects the contractor that has the preferred or highest ranking.

 

Contractors that participate in the public procurement process, whether through the ITB, RFP, or another approved method of procurement, can often feel frustrated with the process based on the wide latitude and discretion that are afforded to public entities in the process. This frustration is exemplified in Pensacola Builders, Inc. v. King, 36 Fla. L. Weekly D1304c (1st DCA 2011), which involved a 13 year old dispute over a public project that was not awarded to the plaintiff contractor. In this case, a public entity was soliciting a contractor to build and operate a concession stand on a pier through the RFP process. The plaintiff was the highest ranked contractor in the process and was in the process of negotiating the contract with the public entity. However, the defendant contractor that also participated in the RFP process wrote letters to the public entity threatening litigation (after apparently missing the deadline to file a bid protest) regarding the manner in which the public entity conducted the RFP. Due to the public entities apparent fear of the threatened litigation, it ceased negotiations with its highest ranked contractor, readvertised for proposals, and then ranked the defendant as its preferred contractor. This naturally was perceived as an injustice to the plaintiff.

 

The plaintiff filed suit against the public entity for breach of an implied covenant of fair dealing based on the public entity readvertising the proposals and selecting the defendant contractor as its preferred contractor. See Santa Rosa Island Authority v. Pensacola Beach Pier, Inc., 834 So.2d 261 (Fla. 1st DCA 2002). The plaintiff’s objective was to force the public entity to reengage in contract negotiations with it. The First District Court of Appeal shot down plaintiff’s lawsuit and objective holding, “Absent evidence of illegality, fraud, oppression, or misconduct, Appellee [plaintiff] is without a remedy for Authority’s [public entity] readvertising for proposals and rearranging the preference order of the parties.” Santa Rosa Island Authority, 834 So.2d at 263. Stated simpler, the plaintiff was out of luck as it is hard to establish the government committed a wrong, even though the public entity readvertised proposals due to threatened litigation from a bidder that apparently failed to timely protest!

 

The plaintiff, however, did not end its pursuit of seeking redress for what it perceived as injustice in the competitive bidding process. The plaintiff creatively asserted claims against the defendant contractor for, among other things, tortious interference with a business relationship and defamation. The plaintiff’s arguments were premised on letters that the defendant sent to the public entity when plaintiff was in the process of negotiating its contract threatening litigation due to the illegality of the RFP process and accusing plaintiff of certain illegal actions. The trial court ruled in favor of defendant on plaintiff’s claims and, unfortunately, because plaintiff did not properly preserve these issues on appeal, the First District Court of Appeal was not in a position to reverse the trial court’s ruling. (Notably, this case demonstrates the importance of preserving all issues and arguments for appeal.) However, had plaintiff preserved these issues for appeal, there may have likely been meat on the bone as to its arguments against the defendant that ultimately got the public entity not to award the contract to the plaintiff, but, instead, to defendant.

 

In an economy where private projects are not as booming as they once were and public projects being a main source of revenue for many contractors, bid protests and/or the threat of litigation are measures that are being strongly considered when a perceived injustice occurs in the public procurement process. Although this case did not work out well for the plaintiff, plaintiff’s arguments are still creative and worthy of merit against another bidder in a similar context that overtly hinders a contractor’s efforts in contracting with the public entity.

 

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.