ECONOMIC WASTE DOCTRINE AND CONSTRUCTION DEFECTS / NONCONFORMING WORK

Posted on January 21, 2023January 21, 2023 by David Adelstein

I recently did a presentation on the economic waste doctrine. It is an applicable doctrine dealing with construction defects and nonconforming work. When it comes to construction defects and nonconforming work, EVERYTHING starts with your measure of damages. How are you going to prove your damages? Next, what evidence are you going to use to prove your damages? Or, what are the defenses and how do you prove those defenses to a construction defect and nonconforming work claim including the economic waste doctrine?

If you are interested in learning more, the below presentation can shed detail. However, don’t rely on the presentation in a vacuum. Work with knowledgeable construction counsel (like me!) that can best position your case whether you are the one proving construction defects and nonconforming work or the one defending against such a claim. This way, if you are arguing economic waste, you are not just throwing it out there, but you are arguing it to actually mean it!

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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.

MEASURE OF DAMAGES FOR BREACH OF CONSTRUCTION CONTRACT

Posted on September 26, 2021September 26, 2021 by Edward Garber

How do you determine damages for a breach of a construction contract? If you are interested in pursing a breach of a construction contract action, this is something you NEED TO KNOW!

The recent Fourth District Court of Appeal’s decision in Cano, Inc. v. Judet, 46 Fla. L. Weekly D2083b (Fla. 4^th DCA 201) explains:

Where a contractor breaches a construction contract, and the owner sues for breach of contract and the cost to complete, the measure of damages is the difference between the contract price and the reasonable cost to perform the contract. See Grossman Holdings Ltd. v. Hourihan, 414 So. 2d 1037, 1039-40 (Fla. 1982). In Grossman, the supreme court adopted subsection 346(1)(a) of the Restatement (First) of Contracts (1932), which it concluded was “designed to restore the injured party to the condition he would have been in if the contract had been performed.” Id. at 1039. In other words, the owner will obtain the benefit of his bargain [and this is known as benefit of the bargain damages]. But where there is a total breach of the contract as opposed to a partial breach, an injured party may elect to treat the contract as void and seek damages that will restore him to the position that he was in prior to entering into the contract or the party may seek the benefit of his bargain. See McCray v. Murray, 423 So. 2d 559, 561 (Fla. 1st DCA 1982).

In Judet, an owner entered into a fixed price contract with a contractor to repair damage from a lightning strike. The contract amount was $300,000 payable in $30,000 installments. A few months after the contractor commenced performance, the owner terminated the contractor because the owner learned the contractor had not obtained required electrical and plumbing permits. At this time, the owner had paid the contractor $90,000. The contractor recorded a $40,000 lien for an amount it claimed it was owed and filed a lawsuit to foreclose its construction lien. The owner counter-sued the contractor to recover a claimed over-payment and a disgorgement of monies for unpermitted work. The owner was NOT claiming benefit of the bargain damages, but rather, damages for the contractor’s total breach “to restore him to the position that he was in prior to entering into the contract.”

After a bench trial, the trial court found the contractor committed the first material breach by failing to obtain the required electrical and plumbing permits. Thus, the trial court held that the contractor was only entitled to the value of the work it performed, an amount of $49,150 as determined by the owner’s expert. The trial court then entered a judgment in favor of the owner for $40,850 which was the difference between the value of the work performed ($49,150) and what the owner had paid the contractor prior to termination ($90,000). This was affirmed by the appellate court: “The trial court entered judgment for [the owner] to place him in the position immediately prior to the contract by returning the payments he made to [the contractor] less the quantum meruit value of [the contractor’s] work.” Judet, supra.

MEASURE OF DAMAGES FOR A CHATTEL INCLUDING LOSS OF USE

Posted on October 10, 2020October 10, 2020 by Edward Garber

In a non-construction case, but an interesting case nonetheless, the Second District Court of Appeals talks about the measure of damages when dealing with chattel (property) including loss of use damages. Chattel, you say? While certainly not a word used in everyday language, a chattel is “an item of tangible movable or immovable property except real estate and things (such as buildings) connected with real property.” Equipment, machinery, personal items, furniture, etc. can be considered chattel.

With respect to the measure of damages for a chattel:

“Where a person is entitled to a judgment for harm to chattels not amounting to a total destruction in value,” the plaintiff may make an election out of two theories of recovery in addition to compensation for the loss of use. Badillo v. Hill, 570 So. 2d 1067, 1068 (Fla. 5th DCA 1990) (quoting Restatement of Torts § 928 (Am. Law Inst. 1939)). In addition to compensation for the loss of use, the plaintiff may elect either “the difference between the value of the chattel before the harm and the value after the harm” or “the reasonable cost of repairs or restoration where feasible, with due allowance for any difference between the original value and the value after repairs.” Id. (quoting Restatement of Torts § 928).

Sack v. WSW Rental of Sarasota, LLC, 45 Fla.L.Weekly D2306a (Fla. 2d DCA 2020).

Sack is a good example of a case dealing with the measure of damages with a chattel, here, an aircraft, including loss of use damages.

An owner rented its aircraft to a pilot. The pilot had an accident landing the aircraft causing damage to the aircraft and resulting in it resting in mud. The owner of the aircraft and its managing member sued the pilot for damage to the aircraft including loss of use of the aircraft. At trial, there was evidence that the aircraft incurred $219,106.81 in damages of which $40,000 remained unpaid (the balance being paid by insurance). Furthermore, there was evidence that the value of the aircraft before the accident was $550,000 and the value of the aircraft after repairs was $350,000. Thus, the appellate court held the measure of damages was $240,000 ($40,000 in unpaid repair costs + $200,000 associated with the diminution in value of the pre-accident aircraft to the repaired post-accident aircraft) plus loss of use damages. (Loss of use damages was awarded at trial of $165,000 calculated “by multiplying the reasonable hourly rate of renting the [a]ircraft ($1500) by the reasonable length of time [the owner] was without the [a]ircraft (11 months) by the reasonable number of hours per month [the owner] used the [a]ircraft (10).” Sack, supra.)

Of interest, loss of use damages were properly awarded “despite the fact that [the owner] testified that he had never chartered or rented another aircraft while this aircraft was out of use.” Sack, supra. Hence, the fact that the owner did not rent or charter another aircraft during the eleven months its aircraft was out of use did NOT preclude the owner from pursuing and being awarded loss of use damages. The Second District did, however, state that loss of use damages was properly awarded to the owner—the entity that owned the aircraft—but not the managing member that was not the registered owner.

CONSTRUCTION DEFECT DAMAGES: BENEFIT-OF-THE-BARGAIN OR RELIANCE RECOVERY

Posted on July 27, 2020July 27, 2020 by Edward Garber

In the preceding article, I discussed a case where an owner sued its contractor and design professional for construction defects and design defects that contributed to the same damage. There was a valuable discussion in this case as to the measure of damages in a construction defect dispute. It is a discussion that construction defect parties and practitioners need to know. A plaintiff needs to know for purposes of proving damages at trial and working with an expert in furtherance of proving their damages. A defendant needs to know for the same reasons and to work with experts in establishing defenses to an owner’s construction defect and design defect damages.

“The proper measure of damages for construction defects is the cost of correcting the defects, except in certain instances where the corrections involve an unreasonable destruction of the structure and a cost which is grossly disproportionate to the results to be obtained.” Stated another way, “the measure of damages for breaching a construction contract is the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste.” However, “[i]f in the course of making repairs the owner elects to adopt a more expensive [i.e., a better] design, the recovery should be limited to what would have been the reasonable cost of repair according to the original design.” [This measure of damages is known as benefit-of-the-bargain damages.]

***

As an alternative to benefit-of-the-bargain damages, an injured party has a right to damages based on its reliance interest, including expenditures made in performance or in preparation for performance, the recovery of which will place the injured party in the position it occupied before entering into the contract. However, “[a]ny benefit retained from the expenditures made in reliance on the contract must be offset against the injured party’s damages.” In other words, a reliance recovery may be reduced to the extent that the breaching party can prove that a “deduction” is appropriate for any benefit received by the injured party. [This measure of damages is referred as a reliance recovery to damages.]

Broward County, Florida v. CH2M Hill, Inc., 45 Fla. L. Weekly D1736a (Fla. 4^th DCA 2020) (internal citations omitted).

In this case, the appellate court held that the trial court erred in its measure of damages because the owner’s damages were based on a redesign that was a different, better design than the bargained for original design (as there was evidence that the original design was doomed from the get-go even if constructed correctly). Thus, benefit-of-the-bargain damages did not apply–the owner did not present damages to correct defects per the original design but put on damages associated with its different and better redesign. Yet, the appellate court maintained that if the public owner could not repair the defects in the original design, “a viable alternative measure of damages [under the reliance recovery] was the [owner’s] out-of-pocket costs, less any benefits the [owner] received from the contracts.” Broward County, supra. For this reason, the Fourth District remanded back to the trial court to enter judgment based on the owner’s reliance recovery based on the evidence already presented at trial relating to the owner’s out-of-pocket costs for the original design and construction and a potential deduct for the benefit the owner received relative to the original design and construction.

CONTRACTOR WALKS OFF JOB. WHAT ARE THE OWNER’S DAMAGES?

Posted on September 14, 2018April 24, 2020 by Edward Garber

What are your damages as the result of a breach of the construction contract? This is an important question, right? It is probably the most important part of your case. If you didn’t have damages, you wouldn’t be in a dispute. So, I repeat, what are your damages as the result of a breach of the construction contract? The below case explains dealing with a contractor that elected to walk off the job mid-construction.

In Forbes v. Prime General Contractors, Inc., 43 Fla.L.Weekly D20194a (Fla. 2d DCA 2018), owners hired a contractor to perform a residential renovation job for $276,000. The owners were to pay the contractor in five draw payments (common for residential jobs) where the third draw payment was due upon the contractor’s completion of the dry-in (as defined in the contract). After the contractor received the first two draw payments totaling $138,000 plus an additional $6,000 for updated architectural plans, the contractor claimed the job doubled in price and demanded that the owners pay the contractor the third draw payment immediately (before it was due) plus an additional $31,450. The contractor refused to continue unless the owners agreed to its terms, and then walked off the job when the owners would not agree to these terms (nor should the owners agree to those terms). At the time the contractor walked off the job, the owners’ home was not habitable due to the construction.

The owners sued the contractor for breach of the construction contract and had two damages methodologies they could employ:

(1) they could deem the contract a total breach, treat the contract as void, suspend their own performance under the contract, and look to be placed in the position they would have been in prior to entering the contract (i.e., had they not hired the contractor); or

(2) they could seek the damages that would place them in the position had the contractor completed the contract. This damages methodology is more common and would result in the owners seeking the difference between the total amount to complete the contract and the amount owed under the original contract. For example, if the owners were all in at $376,000 to complete the contract, the contractor would be liable for $100,000, since the owners were always planning on the original contract amount of $276,000.

In this case, however, the owners chose the less common first damages methodology. The reason being is that the owners could not find another contractor that was reasonably willing to complete the contract. Also, because the home was uninhabitable, the owners were forced to buy another house versus indefinitely renting. This resulted in the owners losing the uninhabitable house to foreclosure and their $45,000 equity in the house. Accordingly, the owners, seeking to be put in the position had they never hired the contractor, sought to recover, among other damages (i) the first two draw payments totaling $138,000 plus the additional $6,000 for updated architectural drawings, (ii) $5,600 in rent, and (iii) $45,000 in lost equity. These were permissible recoverable damages under the first damages methodology:

They [owners] sought to be put in the position they would have occupied had they never contracted with Prime [contractor]. It was clear at trial that the Forbeses [owners] regarded the breach as total; indeed, they were explicit that they were entitled to suspend their own performance under the contract. And the damages they asked the court to award — return of payments made under the contract and the equity in their home at the time of contracting — were of a type that regarded the contract as void and attempted to restore the Forbeses to their precontractual situation.

Forbes, supra.