Contractor Entitled to Defense for Alleged Faulty Workmanship of Subcontractor

Tred R. Eyerly | Insurance Law Hawaii

    Applying Nevada law, the Federal District Court in Florida found that the general contractor was entitled to a defense of claims based upon alleged faulty workmanship of a subcontractor. KB Home Jacksonville LLC v. Liberty Mutual Fire Ins. Co, 2019 U.S. Dist. LEXIS 151235 (M.D. Fla. Sept 5, 2019).

    KB Home completed six residential developments utilizing various subcontractors. One subcontractor was Florida State Plastering, LLC (FSP) for installing stucco. Eighty-eight complaints against KB Home implicated FSP’s stucco work. Plaintiffs alleged that the stucco subcontractor’s work suffered from construction defects, causing damages not only to the exterior stucco, but also the underling wire lath, paper backing, house wrap, wood sheathing, interior walls, interior floors and other property. 

    Ironshore insured FSP under a CGL policy. KB Home was an additional insured for liability for property damage caused by “your work.” KB Home was also insured under its own CGL policy with Liberty Mutual. Both insurers refused to defend.

    KB Home filed suit for a declaratory judgment. Liberty Mutual then agreed to defend. Ironshore argued that KB Home was not entitled to partial summary judgment because there were material facts in dispute. The court concluded that the underlying complaints alleged “property damage,” caused by an “occurrence” of FSP’s allegedly faulty workmanship. Further, there were allegations of damage to property other than FSP’s own work. The underlying complaints alleged that FSP’s faulty stucco installation caused damage to paper backing, house wrap, wood sheathing, interior walls and interior floors. 

    Ironshore next argued it still had no duty to defend because Liberty Mutual was providing KB Home a defense. The court disagreed. The presence of multiple insurers did not excuse any single insurer from fully defending the insured. Therefore, KB Home’s motion for partial summary judgment was granted to the extent Ironshore had a duty to defend. 

Filling Out the Contractor’s Final Payment Affidavit

David Adelstein | Florida Construction Legal Updates

When preparing a contractor’s final payment affidavit, I always suggest for a contractor (or anyone in privity of contract with the owner) to identify the undisputed amounts their accounting reflects is owed to ALL subcontractors, etc., regardless of whether that entity preserved their lien rights.  If the contractor provided a payment bond, I footnote this simply to support that none of the lower-tiered subcontractors have lien rights or are the traditional “lienor.”   (Thus, there is no prejudice to the owner if an entity is inadvertently omitted from the affidavit.)

There are times, however, where a contractor does not identify a subcontractor that did not serve a notice to owner and, therefore, has no valid lien rights.  Or, a contractor omits a lienor that actually did serve a notice to owner and preserve its lien rights; this happens.

There was an older First District Court of Appeals case that harshly (and, quite, unfairly) held that the contractor must identify everyone in the final payment affidavit regardless of whether that entity timely served a notice to owner or their lien is invalid.  This case, however, predated, a 1998 statutory change to Florida’s Lien Law.

Today, the statute (in Florida Statute s. 713.06) currently provides:

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished….

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

Fla. Stat. s. 713.06(d)(1).

The Fourth District Court of Appeals in Fetta v. All-Rite Paving Contractors, Inc., 50 So.3d 1216 (Fla. 4th DCA 2010), claimed that the purpose of the statute is for the contractor to identify all lienors who have timely served a notice to owner that has not been paid in full.  (Hence, you do not need to identify those that did not timely serve a notice to owner even though, from a practical standpoint, identifying all makes sense as a just-in-case.). Further, even if there was an omission, that would not render a lien invalid unless the owner can prove prejudice and prejudice is not so easy to prove.

When in doubt, consult counsel when finalizing or filling out a contractor’s final payment affidavit.  Rights can be preserved and items footnoted as appropriate for clarification purposes, such as the fact that the amount in the affidavit may not include amounts that are not available under the lien law (i.e., delay damages).

Construction Defect Claim Not Timely Filed

Todd A. Macleod, Esq. | Florida Construction Law News

If construction defect claims are not timely filed, Florida Statutes provide design and construction companies with a formidable defense. As a case in point, a Miami-Dade Circuit Court Judge issued an Order granting summary judgment based on Fla. Stat. § 95.11(3)(c), Florida’s Statute of Limitations governing actions founded on alleged construction defects.

In Covenant Baptist Church, Inc. v. Vasallo Construction, Inc. and Lemartec Engineering & Construction Corporation, Plaintiff alleged multiple construction defects against two Defendants. The alleged defects were focused on water intrusion through the roofing systems and were known to the Plaintiff on August 13, 2006. However, four years and eleven months later, Plaintiff filed suit acknowledging that the building had “been plagued with water intrusion issues for a number of years,” and that Plaintiff’s complaints “regarding the water intrusion [had] been met largely with ‘band-aid’ type ineffective repairs.”

Lemartec Engineering & Construction Corporation (“Lemartec”), filed a Motion for Summary Judgment as to multiple counts and rested its Motion squarely on the shoulders of Florida’s four-year statute of limitations. Importantly, the statute begins to run “where there has been notice of an invasion of legal rights or a person has been put on notice of his right to a cause of action” Snyder v. Wernecke, 813 So.2d 213,216 (Fla 4th DCA 2002) (citing City of Miami v. Brooks, 70 So.2d 306 (Fla. 1954)). Plaintiff attempted to bypass the four-year nature of the statute by trying to classify the defects in question as latent.

If Plaintiff could show the defect was latent, the statutory time period is delayed and begins to run “from the time the defect is discovered or should have been discovered with the exercise of due diligence.” Fla. Stat. § 95.11(3)(c). However, “Latent defects are generally considered to be hidden or concealed defects which are not discoverable by reasonable and customary inspection, and of which the owner has no knowledge.” In this case, Plaintiff was complaining about roof leaks as early as June, 2006 which was acknowledged in correspondence from Plaintiff on August 13, 2006. The substantial delay in filing a suit allowed Lemartec the opportunity to invoke the four-year limitation statute and succeed with its Motion.

In a related and more recent case, Florida’s Fifth District Court of Appeal affirmed the trial court’s order granting summary judgment on untimely claims of water intrusion. Osceola Brownstones Condo. Ass’n v. Andrew Constr. Servs., L.L.C., 2018 Fla. App. LEXIS 15662, 2018 WL 5778703. In Osceola, similar facts relating to roofing leaks were known to the Plaintiff and litigation was discussed and documented during a condominium board meeting. This open, documented discussion occurred more than four years prior to litigation commencing and the causes of action were properly found to be time barred by Fla. Stat. § 95.11(3)(c).

Proper analysis of a construction defect case should always include a thorough analysis of all defenses and certainly of statutory defenses relating to claims that are time barred. Cole, Scott & Kissane, P.A. will continue to analyze the legal landscape as it relates to all matters impacting our clients.

Delays Caused When Government (Owner) Pushes Contractor’s Work into Rainy/Adverse Weather Season

David Adelstein | Florida Construction Legal Updates

There are a number of horizontal construction projects where a contractor’s sequence of work and schedule is predicated on avoiding the rainy season (or certain force majeure events).  The reason is that the rainy season will result in delays due to the inability to work (and work efficiently) during the adverse weather (including flooding caused by the weather).   If the work is pushed into the rainy season, is such delay compensable if the government (or owner) delayed the project that pushed work out into the rainy season?  It very well can be.

For example, in Meridian Engineering Co. v. U.S., 2019 WL 4594233 (Fed. Cl. 2019), a contractor was hired by the Army Corps of Engineers to construct a flood control project for a channel in Arizona. Due to delays, including those caused by the government, the project was pushed into the monsoon season, which caused additional delays largely due to flooding caused by the heavy rain.  One issue was whether such delays were compensable to the contractor – the government raised the argument that the contractor assumed the risk of potential flooding from the rainy season.  The Court found this argument unconvincing:

[The contractor’s] initial construction schedule planned for a completion of the channel invert work, a necessary step in protecting the site from flooding, to be completed by late June 2008…[M]any issues arose in the project’s early stages that led to cumulative substantial delay, including those caused by the government’s failure….The government cannot now claim that [the contractor] assumed the risk of flooding from monsoon season when the government was largely responsible for [the contractor’s] inability to complete the project prior to the beginning of the monsoon season.  Simply put, the government cannot escape liability for flood damages when the government is responsible for causing the contractor to be working during the flood-prone season.

Meridian Engineering, 2019 WL at *7 (internal citations omitted)

In other words, but for delays caused by the government, the contractor’s work would not have been pushed into the monsoon season.  The Court’s outcome, perhaps, would have been different if the contractor was the sole cause of delays that pushed the project into the monsoon season or the contractor’s original schedule was unrealistic to begin with.

It very well can be.

For example, in Meridian Engineering Co. v. U.S., 2019 WL 4594233 (Fed. Cl. 2019), a contractor was hired by the Army Corps of Engineers to construct a flood control project for a channel in Arizona. Due to delays, including those caused by the government, the project was pushed into the monsoon season, which caused additional delays largely due to flooding caused by the heavy rain.  One issue was whether such delays were compensable to the contractor – the government raised the argument that the contractor assumed the risk of potential flooding from the rainy season.  The Court found this argument unconvincing:

[The contractor’s] initial construction schedule planned for a completion of the channel invert work, a necessary step in protecting the site from flooding, to be completed by late June 2008…[M]any issues arose in the project’s early stages that led to cumulative substantial delay, including those caused by the government’s failure….The government cannot now claim that [the contractor] assumed the risk of flooding from monsoon season when the government was largely responsible for [the contractor’s] inability to complete the project prior to the beginning of the monsoon season.  Simply put, the government cannot escape liability for flood damages when the government is responsible for causing the contractor to be working during the flood-prone season.

Meridian Engineering, 2019 WL at *7 (internal citations omitted)

In other words, but for delays caused by the government, the contractor’s work would not have been pushed into the monsoon season.  The Court’s outcome, perhaps, would have been different if the contractor was the sole cause of delays that pushed the project into the monsoon season or the contractor’s original schedule was unrealistic to begin with.

Performance Bond Surety Takeover – Using Terminated Contractor to Complete Work

David Adelstein | Florida Construction Legal Updates

When a contractor is defaulted under a performance bond, can its surety hire the same defaulted contractor to complete the work?  Stated differently, can the performance bond surety engage its defaulted bond-principal in taking over and completing the same work the contractor was defaulted under?   The answer is “yes” if you are dealing with a standard form AIA A312 performance bond (and other bond forms that contain analogous language), as demonstrated by the recent decision in Seawatch at Marathon Condominium Association, Inc. v. The Guarantee Company of North America, 2019 WL 4850194 (Fla. 3d DCA 2019).

In this case, a condominium association hired a contractor in a multi-million dollar contract to renovate condominium buildings.  The contractor provided the association, as the obligee, a performance bond written on an AIA A312 performance bond form.  During construction, the association declared the contractor in default and terminated the contractor. In doing so, the association demanded that the performance bond surety make an election under paragraph 4 of the AIA A312 bond form that gave the surety the following options:

4.1 Arrange for the CONTRACTOR, with consent of the OWNER, to perform and complete the Contract; or

4.2 Undertake to perform and complete the Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the OWNER for a contract for performance and completion of the Contract, arrange for a contract to be prepared for execution by the OWNER and the contractor selected with the OWNER’S concurrence, to be secured with performance and payment bonds executed by a qualified surety equivalent to the Bonds Issued on the Contract, and pay to the OWNER the amount of damages as described in paragraph 6 in excess of the Balance of the Contract Price incurred by the OWNER resulting from the CONTRACTOR Default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances;

4.4.1 After investigation, determine the amount for which it may be liable to the OWNER and, as soon as practicable after the amount is determined, tender payment therefore to the OWNER; or

4.4.2 Deny liability in whole or in part and notify the OWNER citing reasons therefore.

Seawatch at Marathon Condo. Ass’n, 2019 WL at *1-2.

The surety elected the option under section 4.2, underlined and bolded above.  The surety wanted to complete the construction contract and provided the association with a surety takeover agreementi.e., an agreement where the surety takes over the completion of the defaulted / terminated contractor’s contract.   The takeover agreement was predicated on the terminated contractor continuing to serve as the contractor to finish the contract.

The association rejected the takeover agreement largely because it was adamant that the terminated contractor cannot serve as the completion contractor under the takeover agreement.  The association also argued that the surety could not properly elect section 4.2 because it was not a licensed contractor and needed to be a licensed contractor in order to undertake the completion of the defaulted contract.  Because an agreement could not be reached, the association filed a lawsuit for declaratory relief on these issues seeking judicial intervention as to its rights under the performance bond.

A. The Performance Bond Surety Can Use the Defaulted Contractor to Complete the Work

The trial court, as affirmed on appeal, held that the surety was well within its rights under section 4.2 of the bond to complete the contract with the defaulted contractor (bond-principal).  Section 4.2 places NO restrictions on the surety in using the defaulted contractor or any other contractor, for that matter.   As noted by the appellate court:

Finally, “[i]t is common practice for a surety undertaking to complete the project itself to hire the original contractor, as [Guarantee] elected to do here.”  “By completing the project itself, the surety obtains greater control than it would have had if it elected to require the obligee to complete, because the surety can select the completing contractor or consultants to finish the project as well as control the costs of completion.”

Seawatch at Marathon Condo. Ass’n, 2019 WL at *4 (internal quotations omitted).

B. The Performance Bond Surety Does Not Need to be a Licensed Contractor to Enter into Takeover Agreement

The appellate court summarily rejected the argument by the association that the surety needed to be a licensed contractor to enter into a takeover agreement and undertake the completion of the defaulted contract.  Since the surety is not actually performing the completion, the court rejected this outright which would prohibit the surety from ever exercising rights under section 4.2 unless it was a licensed contractor.

One thing to consider after reading the outcome of the case is that there is nothing to prevent the obligee of a bond from modifying a standard form bond form, or my preference, creating its own manuscript performance bond form.  Creating your own performance bond form gives you more flexibility regarding rights to trigger a surety’s obligations under the bond and the recourse under the bond.