GARDEN VARIETY PAYMENT DISPUTE BETWEEN OWNER AND CONTRACTOR

Posted on May 8, 2014May 8, 2014 by Edward Garber

Payment disputes between owners and contractors are common. The recent case of Hibachi Grill, Inc. v. Arki Construction, Inc., 39 Fla. L. Weekly D954a (Fla. 3d DCA 2014), illustrates two common scenarios that exist in the payment dispute: (1) the contractor claims it is owed the full contract price for substantially performing the work and (2) the owner wants to setoff amounts that it paid directly to subcontractors.

This case turned on the contractor’s approximate $32,000 breach of contract claim against the owner for unpaid contract balance for building out leased space. Both the owner and contractor agreed that the owner paid approximately $14,000 directly to subcontractors. The owner argued that this amount should reduce the contractor’s $32,000 claim; however, the trial court entered a judgment for the contract balance that did not include this set-off. The Third District agreed that the owner’s direct payment to subcontractors should reduce the contractor’s claim; otherwise, the contractor would receive a windfall since it no longer has to pay those subcontractors.

The owner further argued that the contractor’s unpaid contract balance claim should be further reduced by “lost profit” that was included in the contractor’s unpaid contract balance claim. To support this argument, the owner relied on inapplicable cases where contracts were breached BEFORE substantial performance of the contract was achieved. However, when the contractor substantially performs, it is entitled the full contract price subject to appropriate deductions. In the instance case, the deduction was the payment the owner made directly to subcontractors. In other situations, the owner could deduct deficient work from the contract price. See, e.g., Wm. Dejon Developers, Inc. v. Panhandle Grading & Paving, Inc., 538 So.2d 88 (Fla. 1^st DCA 1989) (deducting from full contract price of roadwork the amount of the contractor’s deficient work); Oven Development Corp. v. Molisky, 278 So.2d 299 (Fla. 1^st DCA 1973) (discussing that contractor that substantially performs is entitled to full contract price subject to proper deductions from the owner supported by competent evidence of the contractor’s breaches).

This case would support an owner’s position that it can pay subcontractors directly to reduce the amount owed to the contractor. In many situations, this is totally acceptable. The contractor may agree to the payment owed to the subcontractors either through a direct payment or joint check. In other situations, such as when the subcontractor properly preserved lien rights, the owner may want to preserve its right to pay those subcontractors in consideration of releases of lien to ensure its property does not get liened by the subcontractor. However, what about the situation where the owner pays a subcontractor that otherwise has no lien rights? According to this case, the owner could do so to reduce its payment to the contractor since the contractor would owe that money to the subcontractor. Yet, by the owner doing so, especially if it does so unilaterally, it prevents the contractor from potentially resolving a dispute with the subcontractor that the owner is not fully informed about (and which could include work that formed a basis as to the owner’s dispute with the contractor). And, it prevents the contractor from negotiating a final payment amount with the subcontractor so that it can, in turn, negotiate a final payment amount with the owner that is less than its contract balance. So, while this case explains the windfall to the contractor without the deduction for the owner’s direct payment to subcontractors, that windfall may not always be the case.

And, this case demonstrates the importance of how a contractor that substantially performed should present its damages. A contractor that substantially performs is entitled to the contract price subject to applicable deductions that the owner proves with competent evidence (e.g., deficient work, payment to subcontractors, etc.).

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

AN OWNER’S “INTENDED THIRD PARTY BENEFICIARY” STATUS UNDER A SUBCONTRACT

Posted on March 29, 2014March 29, 2014 by Edward Garber

Sometimes, during a dispute, there are arguments as to whether an owner is an INTENDED third party beneficiary of the subcontract by and between the general contractor and the subcontractor. There are instances where an owner desires to be an intended third party beneficiary of a subcontract so that it could pursue a breach of contract claim directly against the subcontractor. (These instances can relate to concerns over the solvency of the general contractor and/or the insurance coverage limits of the general contractor.)

“A party is an intended [third party] beneficiary only if the parties to the contract clearly express, or the contract itself expresses, and intent to benefit the third party or a class of persons to which that party claims to belong.” Dingle v. Dellinger, 2014 WL 470679, *1 (Fla. 5th DCA 2014). In other words, an intended third party beneficiary is not a signatory or party to the contract. Rather, it is expressly clear from the contract that the contract’s intent is to directly benefit that third party. Dingle, 2014 WL at *1 (finding to assert a breach of an intended third party beneficiary contract, the third party must show an intent that the contract was to directly and primarily benefit the third party). Because the intent of the contract is to directly benefit the third party, the third party is entitled to enforce the contract and, thus, sue for a breach of that contract.

However, if a third party is not an intended third party beneficiary of the contract, it will be deemed an incidental beneficiary that maintains no rights whatsoever to enforce the contract. McKinney-Green, Inc. v. Davis, 606 So.2d 393, 396 (Fla. 1st DCA 1992).

Now, a property owner is typically not regarded as an intended third party beneficiary of a subcontract between a general contractor and subcontractor. See J.W. Hodges Drywall, Inc. v. Mizner Falls, LLP, 865 So.2d 681 (Fla. 4th DCA 2004) (owner could not enforce arbitration provision in subcontract between general contractor and drywall subcontractor); accord Lillibridge Health Care Services, Inc. v. Hunton Brady Architects, P.A., 2010 WL 3788859 (M.D. Fla. 2010) (owner not intended third party beneficiary of mechanical engineer’s subconsultant agreement with architect); City of Tampa v. Thornton-Tomasetti, P.C., 646 So.2d 279 (Fla. 2d DCA 1994) (public owner not intended third party beneficiary of subconsultant’s agreement between subconsultant and architect); Vogel Bros. Bldg. Co. v. Scarborough Constructors, Inc., 513 So.2d 260 (Fla. 2d DCA 1987) (public owner not intended third party beneficiary of subcontract). Indeed, the Fifth District of Florida maintained: “As one court put it, ‘[a]lthough the work performed by subcontractors ultimately accrues to the property owner, the owner is ordinarily regarded as only an incidental beneficiary of the subcontract.” Publix Super Markets, Inc. v. Cheesbro Roofing, Inc., 502 So.2d 484, 488 (Fla. 5th DCA 1987) (superseded on other grounds) quoting National Cash Register Co. v. Unarco Indus., Inc., 490 F.2d 285, 286 (7th Cir. 1974). In addition, a subcontractor is not going to be deemed an intended third party beneficiary between the prime contract between the owner and the general contractor that would entitle it to assert a breach of contract claim against the owner. Esposito v. True Color Enterprises Const., Inc., 45 So.3d 554 (Fla. 4th DCA 2010).

If an owner wants to be an INTENDED third party beneficiary of the subcontracts, it should require the general contractor to include certain buzz language in the subcontracts that expressly sets forth this intent. Such buzz words would be something to the effect:

“It is understood and agreed that this subcontract is to primarily and directly benefit the Owner; therefore, the Owner is deemed an intended third party beneficiary of the subcontract and can enforce the subcontract as an intended third party beneficiary.”

This language clearly indicates the required intent for the intended third party beneficiary status that will enable the owner to enforce the subcontract. Without such language that clearly articulates this intent, an intended third party beneficiary status should not be extended to all situations where an owner decides to sue a subcontractor for breach of subcontract when the subcontractor was not hired by the owner. Although the owner will make the argument that the subcontractor’s work is to benefit the owner under the subcontract, the subcontractor could make a similar argument that the owner’s payment obligations to the general contractor under the prime contract is to benefit the subcontractors since the owner knew that the general contractor was not self-performing the work. If however the owner is an intended third party beneficiary of the subcontract and enforces the subcontract, it should be deemed bound by all of the terms, conditions, and burdens of the subcontract. See Woods v. Christensen Shipyards, Ltd., 2005 WL 5654643 (S.D.Fla. 2005); accord Consolidated Bathurst, Ltd. v. Rederiaktiebolaget Gustaf Erikson, 645 F.Supp. 884, 886 (S.D.Fla. 1986).

STAYING LITIGATION AGAINST A PAYMENT BOND SURETY PENDING THE OUTCOME OF ARBITRATION INVOLVING THE GC AND SUB

Posted on February 27, 2014February 27, 2014 by Edward Garber

The all-too-common dilemma: If the subcontract includes an arbitration provision, but the payment bond does not, can the subcontractor pursue a simultaneous lawsuit against the payment bond surety while there is an arbitration proceeding involving the general contractor? And, can the general contractor or the payment bond surety stay the litigation pending the outcome of the arbitration involving the subcontractor?

Hofer, Inc. v. Fidelity and Deposit Co. of Maryland, 2014 WL 644598 (N.D. Fla. 2014), is an interesting opinion that involves this very dilemma. In this case, a payment dispute arose where the subcontractor claimed it was owed money for work it performed for an apartment project and the general contractor claimed the subcontractor was not owed money for deficient work. A familiar fact pattern! The subcontract contained an arbitration provision. Before arbitration came into play, the subcontractor filed a lawsuit against the payment bond. (The payment bond was not an unconditional payment, but rather, a conditional payment bond meaning that if the owner did not pay the general contractor, the subcontractor would have lien rights, not payment bond rights.) After the lawsuit was filed, the general contractor demanded arbitration with its subcontractor pursuant to the subcontract. The payment bond did not contain an arbitration provision nor did it incorporate by reference the subcontract’s arbitration provision. Thus, there was no way the surety could be compelled to arbitration. After the arbitration proceeding commenced, the payment bond surety moved to stay the lawsuit pending the outcome of the arbitration proceeding involving the subcontractor and general contractor. Naturally, the subcontractor contested this motion–it was the party that initiated the dispute first.

The Northern District maintained that it is has discretion whether to stay the litigation pending the outcome of the arbitration. It explained that there is a heavy presumption that litigation can proceed at the same time as arbitration when the litigation involves a nonarbitrable claim (a claim not subject to arbitration such as the payment bond claim), but “if the arbitrable issues are crucial for the determination of nonarbitrable claims, a court has discretion to stay the litigation.” Hofer, supra, at *1. In other words, if the arbitration is going to resolve issues that are important to the litigation, a court has the discretion to stay the litigation pending the outcome of arbitration.

A payment bond surety is entitled to most of the contractual defenses of its bond-principal general contractor. Therefore, it would be entitled to the same defenses / arguments that the general contractor was raising against the subcontractor pertaining to deficient work. So, if the general contractor prevails in its arbitration, the subcontractor’s claim against the payment bond surety could become moot. Because the payment bond was a conditional bond, the surety and general contractor could argue that the subcontractor does not have a payment bond claim because the owner never paid the general contractor for the subcontractor’s work and the subcontract contained a pay-if-paid provision. However, it does not appear this argument was asserted so perhaps the owner did pay the general contractor and the general contractor simply withheld the amount of the back-charge. To this point, the Northern District maintained, “Nothing in the record suggests that whether Apex [general contractor] has been paid for Hofer’s [subcontractor] work will be an issue in the arbitration process.” Hofer, supra, at *2. Indeed, the only issue in arbitration was whether the general contractor paid the subcontractor the proper amounts due under the subcontract. This means that the fact that the payment bond was a conditional bond instead of an unconditional payment bond was of no true significance in this dispute. This is important because since most payment bonds are unconditional payment bonds (that are not conditioned on the payment of the owner and where pay-if-paid is not a defense), the rationale in this case would apply to unconditional payment bonds.

The Northern District found that even though the subcontractor was not bound to arbitrate its dispute with the payment bond surety, the litigation should nonetheless be stayed because i) the subcontractor agreed to resolve its disputes with the general contractor through arbitration and ii) the predominant issue in the dispute, that being whether the general contractor owed the subcontractor money, was being decided by the arbitration proceeding.

Although the actual facts of the dispute were not discussed, it seems apparent that once the subcontractor filed the lawsuit against the payment bond, the general contractor affirmatively demanded arbitration pursuant to the subcontract in furtherance of having the dispositive facts of the dispute decided by an arbitrator instead of through litigation. This was a good strategy because the general contractor and subcontractor agreed to have such disputes decided by arbitration. Even though the payment bond surety was not bound by the arbitration provision, the surety is typically defended by the general contractor and is raising most of the same defenses the general contractor would raise such as deficient work. Now, because the court had discretion as to whether to stay the litigation or allow it to proceed simultaneously with the arbitration, this is a risk the general contractor took by virtue of the subcontract. It is a risk because if the Northern District denied the surety’s motion to stay, the general contractor could have likely had the facts of this dispute determined by litigation instead of arbitration (depending on which case was tried first) which could have made portions of the arbitration moot.

So, what could have been done to prevent this scenario? A couple of thoughts to create the argument to avoid a simultaneous litigation and arbitration:

In drafting the arbitration provision in the subcontract, ensure that it includes the general contractor’s surety. The provision could state something to the effect that if the subcontractor initiates a claim against the general contractor’s surety, the surety, at its option, can invoke and demand arbitration pursuant to this arbitration provision as the surety is an intended third party beneficiary of the right to demand arbitration in this provision. The key is that if the subcontractor files suit and the general contractor/surety prefer arbitration, they have a contractual provision that would make it compelling to dismiss the litigation or, more likely, stay it pending the outcome of arbitration.
The other option, although far, far less common, is to include in the bond that the dispute resolution procedure is the same as in the subcontract of the claimant. There may be arguments around such a provision and the surety may not want its fate determined in an arbitration where there are not any appellate rights (and, perhaps, it may have concerns over the indemnification it is receiving from the general contractor).

For more information on arbitration provisions, please see: https://floridaconstru.wpengine.com/deference-given-to-arbitration-agreements/ and https://floridaconstru.wpengine.com/appreciating-the-risks-or-frustrations-of-arbitration/.

PAY-WHEN-PAID AND THE PREVENTION OF PERFORMANCE DOCTRINE

Posted on February 23, 2014June 26, 2024 by Edward Garber

The pay-when-paid doctrine is a standard provision in subcontracts to shift the risk of the owner’s nonpayment to the subcontractor. The owner’s payment to the contractor is a condition precedent to the contractor’s payment to the subcontractor. However, if there is a payment bond in place, a surety in Florida cannot rely on this contractual defense to defeat a subcontractor’s claim. (Notably, in other jurisdictions, a surety can rely on this defense.) The pay-when-paid doctrine has been discussed numerous times in the following articles: https://floridaconstru.wpengine.com/pay-when-paid-provisions-and-payment-bonds/ and https://floridaconstru.wpengine.com/subcontractors-and-unjust-enrichment-claims/ and https://floridaconstru.wpengine.com/careful-drafting-of-pay-when-paid-provisions/.

Sometimes, there is not a payment bond in place and the subcontractor is forced to assert a direct claim against the contractor. Or, perhaps, the subcontractor may not have properly preserved its lien / bond rights and its best recourse is to assert a claim against the contractor. In this situation, the contractor will be able to rely on the pay-when-paid provision in its subcontract assuming it can prove that it was not paid for the subcontractor’s work that is the subject of the dispute. This defense, however, may not be absolute. There is a legal doctrine known as the “prevention of performance” doctrine.

Florida law provides:

“Under the doctrine of prevention of performance, one who prevents the happening of a condition precedent upon which his liability is made to depend, cannot avail himself of his own wrong and thereby be relieved of his responsibility to perform under the contract.” Florida Ins. Guar. Ass’n v. Somerset Homeowners Ass’n, Inc., 83 So.3d 850, 852, n.1 (Fla. 4th DCA 2011) (internal quotation omitted).

This doctrine really has not been analyzed in the context of a pay-when-paid defense under Florida case law. Yet, now and again, a case outside of Florida addresses interesting points that are worthy of discussion.

In Moore Brothers Co. v. Brown & Root, Inc., 207 F.3d 717 (4th Cir. 2000), the Fourth Circuit (interpreting Virginia law) analyzed the prevention of performance doctrine in the context of a contractor raising the pay-when-paid defense. In this case, the contractor entered into a contract to build a private toll road in Virginia. (The contractor was also an equity partner in the ownership group.) During the drafting of the prime contract, several design issues were referenced that would result in additional payment to the contractor. One of those issues was changing the thickness of the pavement subbase material. There was strong uncertainly over the initial pavement design and it was anticipated that the thickness of the pavement subbase material would change. The construction lenders wanted to contain construction costs and insisted on certainty in determining the costs. The lenders did not want to authorize a prime contract that did not provide this certainty and the draft prime contract with examples of additional costs the lenders may have to fund did not sit well with them. To appease the lenders, the owner and the contractor agreed to remove examples of design changes or issues that would result in increased construction costs. The owner and contractor further assured the lenders that they did not anticipate substantial changes in the work (such as a change in the pavement subbase thickness). Of course, what the contractor and owner assured the lenders was not really what they believed because they anticipated a design change regarding the thickness of the pavement subbase material. Thus, the owner and contractor entered into a side agreement that was not shared with the lenders concerning the design changes / issues that would result in increased costs to the contractor.

The contractor then hired subcontractors to perform scopes of work relative to the road construction. The subcontracts contained pay-when-paid provisions. The contractor did not advise the subcontractors that design changes such as a potential change in the thickness of the pavement subbase material were hidden from the lenders and that such a change would likely not be funded by the lenders. The contractor did not seem as concerned with this because it had pay-when-paid language shifting the risk of nonpayment to the subcontractors (although the contractor did have a payment bond in place). Naturally, there was a design change that changed the thickness of the pavement subbase material and this work was performed by the subcontractors. A payment dispute originated in arbitration involving the owner, contractor, and subcontractors regarding this additional work. The arbitrator ruled that the owner must pay the contractor for this additional work and the contractor, after receiving payment, must pay the subcontractors. The owner did not pay so the contractor never paid the subcontractors contending that the pay-when-paid language does not contractually require it to pay.

Since the arbitration award was never paid, the subcontractors filed suit in federal district court which was appealed to the Fourth Circuit. Among other issues discussed in the case, the Fourth Circuit analyzed whether the contractor was required to pay the subcontractors for the additional work associated with the pavement subbase thickness in light of the pay-when-paid provision. The Fourth Circuit found that the trial court correctly applied the prevention of performance doctrine to hold the contractor responsible for the payment of the additional work. The Fourth Circuit agreed that the contractor could not rely on the pay-when-paid language in the subcontract because it was responsible for the non-payment or non-occurrence of the condition precedent (i.e., owner’s payment). Specifically, the contractor knew that the additional work would most likely need to be performed which is why this design change was called out in the draft prime agreement. However, because of lender issues, it removed this language from the final prime contract and assured the lenders that additional work was not anticipated. It then contemporaneously entered into a side agreement with the owner that was not shared with the lenders regarding the same anticipated additional work (that it assured the lenders it was not anticipating). The Fourth Circuit held:

“The prevention [of performance] doctrine does not require proof that the condition would have occurred ‘but for’ the wrongful conduct of the promisor; instead it only requires that the conduct have ‘contributed materially’ to the non-occurrence of the condition.” Moore Brothers, 207 F.3d at 725.

It is easy to see how the facts in this case as presented by the Fourth Circuit warrant the application of the “prevent of performance” doctrine. It is uncertain from this case what the lenders would have done if construction costs were increased to specifically cover the highly anticipated design change to the pavement subbase thickness or why this change was not funded through any contingency funds / line item in the loan (perhaps there was none because the lenders insisted on certainty with the costs). It is also uncertain what the lenders would have done (or what they did) regarding the submission of these additional work costs since the parties could not dispute that the work was additional contractual work. And, it is uncertain why the contractor did not obtain bids for the additional work from the subcontractors before hiring them and try to negotiate perhaps a more palatable cost knowing this additional work was likely going to occur. Even though the contractor appeared to try to appease the lenders so this project could move forward, it knew funding for the additional work would be a huge concern and it was not up front with its subcontractors regarding this potential lack of funding. Had it been up front with the subcontractors, perhaps this risk could have been specifically accounted for in the subcontract through specific language or better pricing that could have been presented to the lenders.

Notwithstanding, in the event a contractor raises a pay-when-paid defense, a subcontractor may be able to rebut this defense by arguing the “prevention of performance” doctrine, that being that the contractor caused the very non-occurrence of the payment and, therefore, should not be entitled to rely on this defense. Although this argument seems like a tough hurdle for the subcontractor since not all facts will be as egregious as the facts in this case, the contractor should still take steps to eliminate this argument by showing that it took steps to obtain payment from the owner. Subcontractors, on the other hand, that may not have bond / lien rights or want to pursue substantial claims for additional work against the contractor, may want to rely on this argument in furtherance of trying to get around the expected pay-when-paid defense.

SUBCONTRACTORS AND UNJUST ENRICHMENT CLAIMS

Posted on August 24, 2013August 24, 2013 by Edward Garber

Unpaid subcontractors should not overlook unjust enrichment claims against an owner on a private construction project. There is Florida law that maintains that if it is proven that an owner has not paid the general contractor (or anyone) for the subcontractor’s scope of work, an unjust enrichment claim against the owner can survive. On the other hand, if it is proven that an owner has paid anyone for the subcontractor’s work, the unjust enrichment claim will not survive. See, e.g., 14th Henberg, LLC v. Terhaar and Conley General Contractors, Inc., 43 So.3d 877 (Fla. 1st DCA 2010); Commerce Partnership 8098 Limited Partnership v. Equity Contracting Company, Inc., 695 So.2d 383 (Fla. 4th DCA 1997); Zalay v. Ace Cabinets of Clearwater, Inc., 700 So.2d 15 (Fla. 2d DCA 1997); Zaleznik v. Gulf Coast Roofing Co., Inc., 576 So.2d 776 (Fla. 2d DCA 1991).

The case of Commerce Partnership demonstrates that a subcontractor’s unjust enrichment claim can survive if evidence proves that the owner never paid the general contractor or anyone for the subcontractor’s work:

“The judgment appealed is reversed, and the cause is remanded to the trial court to take additional evidence from the parties on whether Commerce [owner] made payment to or on behalf of its general contractor covering the benefits Equity [subcontractor]conferred on the subject property. Equity shall have the burden of proving is claim of contract implied in law that Commerce has failed to make such payment by the greater weight of the evidence. If the court shall determine that Commerce [owner] has not paid anyone for the benefits conferred by Equity, then it shall enter judgment for Equity; correspondingly, if the court shall determine that Equity has failed to prove that Commerce did not make such payment, then the court shall enter judgment for Commerce.”
Commerce Partnership, 695 So.2d at 390.

The reason this argument should not be overlooked is because subcontracts often have a pay-when-paid provision meaning the general contractor is not responsible for paying the subcontractor until it receives payment from the owner. Hence, if the general contractor has not been paid by the owner, then the subcontractor may not have good legal recourse against the general contractor. For this reason, exploring the possibility of pursuing an unjust enrichment claim against the owner may be worthwhile.

The question becomes whether the subcontractor has preserved any payment bond or lien rights. If it has, irrespective of the pay-when-paid provision, these arguments should definitely be explored and perhaps pursued. But, sometimes, a subcontractor does not properly preserve lien or bond rights, or the subcontractor is owed amounts in which there are arguments as the lienability. In these circumstances, pursuing the unjust enrichment claim could be a worthwhile alternative especially if the subcontractor has a good feeling that the general contractor was not paid the amounts it is seeking.

For more information on unjust enrichment claims, please see: https://floridaconstru.wpengine.com/legal-complexities-when-there-is-a-failed-development-project/

CARVING OUT EXCEPTIONS IN RELEASES

Posted on August 16, 2013August 16, 2013 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.

SUBCONTRACTORS – READ AND UNDERSTAND THE IMPLICATIONS OF VENUE PROVISIONS

Posted on May 15, 2013May 15, 2013 by Edward Garber

Subcontracts often have venue provisions. However, these are often overlooked until a dispute arises. In many instances, the venue provision requires disputes to be brought in a court in a different venue than where the project is located. This could have the adverse effect of exposing a subcontractor, in particular, to disputes in multiple forums. The recent case of East Coast Metal Decks, Inc. v. Boran Craig Barber Engel Construction Co., Inc., 38 Fla. L. Weekly D1061a (Fla. 2d DCA 2013), explains the undesirable dynamics of venue provisions.
In East Coast Metal Decks, the general contractor hired the subcontractor on two public projects in Brevard County and Sarasota County. The general contractor, however, sued the subcontractor in Collier County due to a venue provision in the subcontract. The subcontractor brought the general contractor’s payment bond surety into the fold and then tried to transfer the venue to Brevard County because the subcontractor was being sued by material suppliers in that County. The trial court denied the transfer of venue because of the Collier County venue provision in the subcontract.

On appeal, the Second District affirmed the trial court’s ruling. The Second District found that (i) the parties were bound by the subcontract venue provision as there was not a compelling reason not to enforce the provision and (ii) because the payment bond was a public payment issued under Florida Statute s. 255.05, venue for a claim against the bond did not have to lie in Brevard County (where the project was located).

What does this case mean? Well, it means that the subcontractor needs to litigate with the suppliers in Brevard County and litigate with the general contractor in Collier County even though the disputes are related. Most likely, the suppliers sued the subcontractor because they were not paid and the general contractor did not pay the subcontractor due to the facts related to the general contractor’s claim against the subcontractor in Collier County.
Litigation in different counties over a related dispute can become expensive and undesirable. It is important to understand and consider the impact of venue provisions in contracts. Sometimes, it makes sense to argue the compelling reasons why the venue provision should not be enforced. However, courts do favor venue provisions because that is what parties negotiated and agreed to on the front-end. Other times, it makes sense to resolve the smaller lawsuits or lawsuits where the facts may not be in your favor (such as a subcontractor’s lawsuit with a supplier) to focus on the lawsuit with more upside (the subcontractor’s lawsuit with the general contractor or payment bond surety).

SUPPORTING CONSTRUCTION DEFECT DAMAGES WITH AN ESTIMATE

Posted on April 25, 2013April 25, 2013 by Edward Garber

One of the issues in construction defect disputes is whether the owner can prove damages with an estimate, which is often the case. Recently, in Kritikos v. John T. Anderson d/b/a Anderson Builders, et al., 38 Fla. L. Weekly D931a (Fla. 4th DCA 2013), the Fourth District Court of Appeals confirmed that an estimate as to the costs to repair construction defects can support a plaintiff’s (owner) damages. In other words, the plaintiff does not actually have to incur the costs to repair in order to be entitled to recover damages to correct a construction defect.

In this case, the contractor recorded a construction lien. The owner asserted, as a defense, that it is entitled to set-off the amount of the lien due to construction defects and delay-related damages. (The owner in this case ended up terminating the contractor when the project was substantially over budget and behind schedule.) It was the owner’s position that the defective work was subject to a design change so the measure of damages needed to be based on an estimate of what it would cost to complete the work (i.e., repair the defects) according to the original design / contract. The owner’s argument, as supported by the Fourth District, was based on precedent discussing an owner’s measure of damages when there is a construction defect, particularly the Florida Supreme Court decision of Grossman Holding Limited v. Hourihan, 414 So.2d 1037 (Fla. 1982) and the Second District Court of Appeals’ decision of Temple Beth Shalom & Jewish Center, Inc. v. Thyne Construction Corp., 399 So.2d 525 (Fla. 2d DCA 1981). Both the cases of Grossman and Temple Beth Shalom maintain that the measure of damages when dealing with construction defects / unfinished construction contract is the reasonable cost to complete / repair per the original design / contract provided this does not result in economic waste. Kritikos, supra.

The key is that whether using an estimate or actual costs to support damages from a construction defect, the measure of damages is the reasonable cost to complete per the original design / contract (versus a subsequent and better design to repair the defects) provided that the repair costs do not amount to economic waste.

Interestingly, this case also discussed the owner’s set-off for delay damages. It is uncertain in this case whether the owner utilized any expert to establish delay damages, which is often and properly the case, or how the owner specifically presented the delay damages (as there is no discussion that there was a liquidated damages provision in the contract). The Fourth District simply stated: “Delay damages were properly presented to the jury. By their very nature, delay damages may not be subject to exact calculation, making the owner’s opinion of the value of his loss of use of his property admissible and relevant.” Kritikos, supra. Based on this limited statement, it would seem that these damages are not referring to liquidated damages or delays to the critical path of a construction schedule, but rather an owner (without any expert testimony) testifying as to “loss of use damages,” i.e., an owner testifying that due to the circumstances of the case, he/she was damaged by being not being able to utilize his residence. But, it is uncertain what the owner did to support these damages.

For more information on loss of use damages, please see: https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/

A CONTRACTOR’S RIGHT TO SET-OFF AMOUNTS FROM A SUBCONTRACTOR

Posted on February 18, 2012February 18, 2012 by Edward Garber

Oftentimes, subcontractors perform trade work for the same contractor on multiple projects. Because of this, it is practical for contractors to include in the subcontract a provision that authorizes them to set-off the subcontract amount due to any defects, breaches, etc. by the subcontractor that occur on another project. On the other hand, subcontractors that understand the ramifications of this provision, want to delete this provision from any subcontract in order to keep their receivables from one project completely separate from another project.

In Carolina Consulting Corp. d/b/a Barrier Wall of South Florida v. Ajax Paving Industries, Inc. of Florida, 2012 WL 163927 (2nd DCA 2012), a roadway contractor subcontracted the paving work on two separate projects (in two different counties).

After the subcontractor completed its work for the first project (“Project One”), a payment dispute arose whereby the subcontractor asserted it was owed more money than it was paid. At this time, the second project (“Project Two”) had not begun and was severely delayed.

When Project Two was ready to commence, the paving subcontractor advised the contractor that it would not perform until it was paid in full for Project One and was issued a change order for the increase in material price due to the severe delay to the start date. The subcontractor later stated that it would not perform until it received adequate assurances from the contractor of the contractor’s ability and willingness to pay for Project Two. The contractor then terminated the subcontractor and hired another subcontractor to perform the paving work for Project Two at an increased rate and lawsuits between the contractor and paving subcontractor were initiated.

The trial court held the subcontractor was entitled to suspend its performance on Project Two until it received adequate assurance that it would be paid for the work. The trial court further found that the subcontractor should be awarded approximately $119,000 for unpaid work for Project One and approximately $105,000 for the contractor wrongfully terminating the subcontractor on Project Two.

The contractor appealed to the Second District Court of Appeal maintaining that the subcontractor breached the subcontract for Project Two when it decided to condition its performance on the receipt of adequate assurances of the contractor’s ability to pay. The Second District agreed and reversed the trial court.

In examining this issue, the Second District looked at Florida’s Uniform Commercial Code, particularly Florida Statute s. 672.609(1), dealing with the sale of goods. This statute, in short, provides that “a merchant has the right to demand adequate assurance of performance ‘[w]hen reasonable grounds for insecurity arise with respect to the performance of’ the other party.” Carolina Consulting, 2012 WL at *2.

The Second District, however, noted that it previously declined to address whether this right under the Uniform Commercial Code applies in the context of construction contracts. The Court further declined to address this issue in this case. Rather, it stated that under the facts of the case, the subcontractor did NOT have a reasonable basis to demand adequate assurances from the contractor because the contractor had a payment bond (which is designed to guarantee payment to subcontractors and suppliers, etc.). For this reason, the Court maintained that the subcontractor breached the subcontract for Project Two and the contractor had the right to set-off amounts for the breach for Project Two for any amounts the contractor may have owed the subcontractor for Project One.

On this point, the Second District stated:

“Under the terms of both subcontracts, upon Ajax’s [subcontractor] breach of subcontract, the contractor had the right to hire another subcontractor to perform the work and then deduct the cost from any amount owed to Ajax in connection with the Pasco County subcontract [Project One].”

This bolded language seems to suggest that the contractor’s subcontract included a provision that allowed it to deduct or set-off amounts owed on one project due to defects or breaches on another project. However, even without this contractual language, it would seem that any amounts owed to the subcontractor for Project One would be offset by any amounts owed to the contractor for Project Two (due to the subcontractor’s breach of that subcontract). In this scenario, the outcome could be the same irrespective of the contractual language. Although, without the contractual set-off language, and assuming the contracts permitted prevailing party attorneys’ fees, it would seem that the subcontractor would be entitled to its fees for the contractor’s breach of the subcontract for Project One and the contractor would likewise be entitled to its fees for the subcontractor breaching the subcontract for Project Two. With the contractual set-off language, it is highly possible that the subcontractor would not be entitled to recover its fees for the contractor’s breach of the subcontract for Project One because the contractor had the contractual right to set-off such amounts due to any breaches associated with Project Two. This is a confusing but important distinction.

As it relates to the subcontractor demanding adequate assurances, this case is important because it illustrates that if the contractor has a payment bond, it will be very difficult for a subcontractor to ever condition its performance on demanding adequate assurance of the contractor’s ability to pay (i.e., its creditworthiness). While, irrespective of the payment bond, such an argument seems extremely challenging if made under the Uniform Commercial Code–many times contracts (particularly prime contracts) will include language that allows a contractor to demand adequate assurance of the paying party’s creditworthiness. Even with this contractual language, it will still be a difficult argument to make if there is a payment bond in place. Also, expanding this rationale, because of lien rights, a court may find that because a contractor/subcontractor has the right to lien the project (a subcontractor can lien the project if there is not a payment bond), it is really never in the situation to reasonably condition its performance on adequate assurances because it could preserve or try to collateralize its payment claim by recording a lien on real property as well as pursue a breach of contract claim against the nonpaying party.

CAREFUL DRAFTING OF PAY-WHEN-PAID PROVISIONS

Posted on November 27, 2011November 27, 2011 by Edward Garber

The pay-when-paid provision is an important aspect of a contractor’s subcontract. Under this provision, the risk of an owner’s nonpayment to a contractor for a subcontractor’s scope of work is shifted to the subcontractor. In other words, a contractor is not responsible for paying the subcontractor unless the contractor was specifically paid by the owner for the subcontractor’s work–the owner’s payment to the contractor serves as an express condition precedent to the contractor’s payment to a subcontractor. However, for pay-when-paid provisions to be enforceable, they need to be clearly drafted so that it is unequivocal that the owner’s payment to the contractor for a subcontractor’s work serves as the express condition precedent to the contractor’s payment to the subcontractor.

Subcontractors oftentimes look for arguments to circumvent the pay-when-provision. If the contractor has a payment bond, then the subcontractor does not need to look to the contractor for payment, even if the owner has not paid the contractor for the subcontractor’s work. When there is a payment bond, the subcontractor can sue the bond and the surety that issued the bond cannot raise the pay-when-paid provision as a defense. See OBS Co. v. Pace Construction Corp., 558 So.2d 404 (Fla. 1990).

However, if there is no payment bond, or the subcontractor, for whatever reason, did not properly preserve its rights to pursue a payment bond claim, the recent case of International Engineering Services, Inc. v. Scherer Construction & Engineering of Central Florida, LLC, 2011 WL 5109306 (5th DCA 2011), provides another argument that a subcontractor can raise in an effort to escape the harsh effect of a pay-when-paid provision. In this case, the subcontract incorporated by reference the contractor’s prime contract with the owner. The prime contract provided:

“Neither final payment nor any remaining retained percentage shall become due until the Contractor submits to the Architect (1) an affidavit that payrolls, bills for materials and equipment, and other indebtedness connected with the Work for which the Owner or the Owner’s property might be responsible or encumbered (less amounts withheld by Owner) have been paid or otherwise satisfied.”

The subcontractor successfully argued that this provision in the prime contract, which was incorporated into its subcontract, created an ambiguity with the pay-when-paid provision. The reason being is that this provision maintained that the owner was not responsible for paying the contractor until the contractor paid its subcontractors. Well, this conflicts with a pay-when-paid provision which says a contractor is not responsible for paying a subcontractor until an owner has paid the contractor. By the subcontractor arguing that this provision in the prime contract conflicts and creates an ambiguity with the pay-when-paid provision, the Fifth District held that the pay-when-paid provision was unenforceable because it was ambiguous. Thus, the contractor was responsible for paying the subcontractor!

The outcome of this case is important for both contractors and subcontractors. For contractors, it is important to ensure that language in the prime contract does not conflict with language in the subcontract, particularly the pay-when-paid provision. Typically, all subcontracts incorporate by reference the prime contract. One thing a contractor can do is to include a provision in the subcontract that says something to the effect: “If anything in the subcontract conflicts or creates an ambiguity with anything in the prime contract, the terms of the subcontract shall govern. This includes anything that conflicts with the pay-when-paid provision included in this subcontract and subcontractor therefore understands that owner’s payment to contractor for subcontractor’s scope of work is an express condition precedent to contractor’s payment to subcontractor.”

For subcontractors, it is important to request a copy of the owner’s prime contract with the contractor since it is incorporated into the subcontract. By looking for a provision in the prime contract that may conflict with the pay-when-paid provision in the subcontract–a provision similar to the one referenced above that requires the contractor to pay its subcontractors before the owner is obligated to pay the contractor final payment–can allow the subcontractor to argue that the pay-when-paid provision should be deemed unenforceable thereby making the contractor liable to the subcontractor for payment even if the contractor was not paid by the owner.