More Reminders that the Specific Contract Terms Matter

Christopher G. Hill | Construction Law Musings

If there is a theme I have pounded upon here at Construction Law Musings in the over 13 years of posting, it is that the specific terms of your construction contracts will make a huge difference.  While there have been reminders galore, a case from the Eastern District of Virginia presented another wrinkle on this theme.  The wrinkle? A factoring company.

In CJM Financial, Inc. v. Leebcor Services, LLC et. al., the Court examined this scenario (though it went into more detail than I will here):  Leebcorp hired a subcontractor, Maston Creek Services to provide certain construction services under two separate contracts.  Maston then hired CJM, a factoring company, and assigned CJM its receivables and the right to collect those receivables.  We wouldn’t be discussing this case if all had worked out as planned, so you likely anticipate at least some of what came next.  The short story is that Matson failed to pay some of its suppliers and Leebcorp exercised its termination rights under those contracts when Matson refused to cure.  In the interim, CJM had paid part of certain payment applications to Matson in compliance with the factoring agreement.  When Leebcorp failed to pay CJM for Matson’s work, CJM exercised its assigned rights to collect the receivables and sued Leebcorp for breach of contract.  In response, Leebcorp counterclaimed for, among other counts including civil conspiracy, breach of contract based on Matson’s failure to perform.  CJM moved to dismiss the counterclaims.

While I recommend the discussion of the declaratory judgment and conspiracy claims found in the opinion (linked above), I will focus here on the breach of contract claims.  After analyzing the choice of law on the diversity claim and holding Virginia law applicable and then setting forth the elements of breach of contract, the Court granted CJM’s motion to dismiss reasoning as follows after finding an enforceable contract between CJM and Leebcorp based upon the assignment and proper notice of that assignment by CJM to Leebcorp:

Leebcor has not pled sufficient facts to satisfy the second element showing that CJM breached the contract. Specifically, Leebcor alleges that CJM ”had an affirmative duty to ensure that Maston Creek met the terms of the Hurlburt Field Subcontract.” Yet, Leebcor does not allege any facts which show that CJM knew that it had this duty, agreed to it, or that it was part of its consideration in forming a contract. Rather, Leebcor merely alleges that CJM had the duty to ensure that Maston “performed in accordance with the terms of the Hurlburt Field Subcontract,” which included confirming that Maston obtained the proper “partial waivers and release of liens for all labor, materials, and equipment before it submitted a pay application.”

The Court went on to state that even if CJM knew about Matson’s breach that knowledge did not provide an affirmative duty to assure performance by Matson.  Because CJM had no affirmative contractual duty to assure performance by Matson, it could not breach such a duty, and therefore no breach of contract occurred. In sum, the Court did not find there to be a term in the contract between the parties that required the factoring company to assure compliance of a third party to the contractual duties that would have allowed it to collect in the first place.

The lesson on breach of contract?  Be sure that you have all of the duties that you want to enforce spelled out or you could end up like Leebcorp without a counterclaim to assist in defraying the costs of a non-compliant subcontractor.  I highly recommend that you read the entire opinion to obtain the nuance that is not available in a short post such as this one and that you consult with an experienced Virginia construction lawyer early in the contracting process and beyond when entering into such complex agreements as that involved here.

If one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.

Where Breach of Contract and Tortious Interference Collide

Christopher G. Hill | Construction Law Musings

Claims for breach of contract are numerous in the construction law world.  Without these claims we construction attorneys would have a hard time keeping the doors open. A 2021 case examined a different sort of claim that could arise (though, “spoiler alert” did not in this case) during the course of a construction project.  That type of claim is one for tortious interference with business expectancy.

In Clark Nexsen, Inc. et. al v. Rebkee, the U. S. District Court for the Eastern District of Virginia gave a great explanation of the law of this type of claim in analyzing the following basic facts:

In 2018, Clark Nexsen, Inc. (“Clark”) and MEB General Contractors, Inc. (“MEB”) responded to Henrico County’s (“Henrico”) Request for Proposals (“RFP”) for the design and construction of a sport and convocation center (the “Project”). Henrico initially shortlisted Clark and MEB as a “design-build” team for the Project, but later restarted the search, issuing a second RFP. Clark and MEB submitted a second “design-build” proposal, but Henrico selected Rebkee Co. (“Rebkee”) for certain development aspects of the Project. MEB also submitted proposals to Rebkee, and Rebkee selected MEB as the design-builder for the Project. MEB, at Rebkee’s request, solicited proposals from three design firms and ultimately selected Clark as its design partner. From December 2019 to May 2020, Clark and MEB served as the design-build team to assist Rebkee in developing the Project. In connection therewith, Clark developed proprietary designs, technical drawings, and, with MEB, several cost estimates. In February 2020, MEB submitted a $294,334.50 Pay Application to Rebkee for engineering, design, and Project development work. Rebkee never paid MEB. Henrico paid MEB $50,000.00 as partial payment for MEB’s and Clark’s work. MEB then learned that Rebkee was using Clark’s drawings to solicit design and construction proposals from other companies. On July 23, 2020, Rebkee told MEB that Henrico directed it to cancel the design-build arrangement with MEB and Clark and pursue a different planning method. MEB and Clark sued and Rebkee for, among other claims, tortious interference with a business expectancy. Rebkee moved to dismiss the tortious interference claim.

After a good examination of the law and elements of a tortious interference claim (that I commend to your reading), the Court looked at the particular facts of the claim by MEB and Clark. Along with disagreeing with the plaintiffs that their relationship with the County of Henrico was one that supported an objective business expectancy, the Court further stated as follows in denying the claim by the Plaintiffs.

[a]lthough MEB and Clark Nexsen allege that Henrico encouraged Rebkee to work with them on the Project, they do not allege that Henrico selected them for the Project. Instead, they say that MEB submitted proposals to Rebkee, and Rebkee selected them for the Project. In tortious interference claims, “[t]here must be a ‘triangle’-a plaintiff, an identifiable third party who wished to deal with the plaintiff, and the defendant who interfered with the plaintiff and the third party.” Here, the facts in the Complaint seem to indicate a linear relationship: MEB and Clark Nexsen reported to Rebkee, and Rebkee reported to Henrico. (citations omitted)

In short, the Court stated what may seem obvious, namely that a party cannot interfere with its own business expectancy.  A third “leg” is necessary that was not present here.  Without it, all that remains is the seemingly everpresent breach of contract action.

There is much more to read in the opinion so I encourage you to read it in depth.  I further encourage you, as I often do, to discuss any potential construction clams with an experienced Virginia construction lawyer before deciding what legal path to take.

If one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance dispute – please call Advise & Consult, Inc. at 888.684.8305.

Homeowner’s Claims Defeated Because “Gravamen” of Complaint was Fraud, not Breach of Contract

Garret Murai | California Construction Law Blog

Be careful what you wish for or, as in the next case, what you plead. In Vera v. REL-BC, LLC, Case Nos. A155807, A156823, and A159141 (June 30, 2021) 1st District Court of Appeal, a the buyer of a remodeled home who asserted breach of contract and fraud claims against a developer discovered that her claims, including her breach of written contract claim, was subject to a shorter 3 year statute of limitations because the “gravamen” of her complaint was fraud.

The REL-BC Case

Homeowner Adriana Vera purchased a remodeled home in Oakland, California from developers REL-BC, LLC and SNL Real Estate Solutions, LLC. The developers had purchased the home in July 2011, remodeled it, and sold it to Vera in November 2011.

As is typical in such transactions, the purchase agreement for the house required that the sellers disclose known material facts and defects affecting the property. In their disclosure, the sellers stated that they were not aware of any significant defects or malfunctions with respect to the property. The disclosure also stated that the sellers were not aware of any water intrusion issues with respect to the property.

Vera hired a property inspector prior to purchasing the property. The property inspector noted that the basement was well below the exterior grade and that several areas showed a history of water intrusion. The property inspector’s report stated, “[e]xpect moisture and water intrusion during periods of wet weather!!” 

The property inspector also noted that there appeared to be repair work to the front stairs leading to the house but that because it was inaccessible that further inspection should be conducted. The property inspector recommended that the permit history of the house be obtained because there were various areas that appeared peculiar or imperfectly done.

Vera also hired a sewer inspection company who noted a major disconnect at the house cleanout that was leaking a large amount of water into the crawlspace and a sump pump that was not operating correctly. REL-BC and SNL agreed to repair the sewer disconnect and the sump pump.

Escrow closed on December 2, 2011. In January 2012, a large amount of water flooded the basement because the repair to the sewer line had been done incorrectly. REL-BC and SNL later admitted that the sewer line work had been done without a permit and that the person who corrected the sewer line was unlicensed. Later, in May 2014, the front stairs leading to the house began to collapse. Upon investigation, it was determined that the stairs had no support. 

On December 5, 2014, three years and three days following the close of escrow, Vera filed a complaint against REL-BC and SNL alleging causes of action for negligence, breach of contract, fraud, breach of warranty and negligent misrepresentations.

REL-BC and SNL later filed a motion for summary judgment claiming that Vera’s complaint was time-barred because the complaint was not brought within the three-year statute of limitations for fraud. The trial court granted the motion and awarded SNL attorneys’ fees based on the purchase and sale agreement, but not REL-BC, because REL-BC had been dissolved at the time of the judgment.

Vera and REL-BC appealed.

The Appeal

On appeal, Vera argued that trial court erred in applying the three-year statute of limitations applicable to fraud to all of her causes of action, including her cause of action for breach of written contract, which has a four-year statute of limitations. 

The 1st District Court of Appeals disagreed explaining:

To determine the statute of limitations which applies to a cause of action it is necessary to identify the nature of the cause of action, i.e., the `gravamen’ of the cause of action. “[T]he nature of the right sued upon and not the form of action nor the relief demanded determines the applicability of the statute of limitations under our code.” In determining whether an action is on the contract or in tort, . . . it is the nature of the grievance rather than the form of the pleadings that determines the character of the action. If the complaint states a cause of action in tort, and it appears that this is the gravamen of the complaint, the nature of the action is not changed by allegations in regard to the existence of or breach of a contract. In other words, it is the object of the action, rather than the theory upon which recovery is sought that is controlling.

And, here, explained the Court of Appeals:

Vera alleged that Sellers promised in the purchase agreement to provide her a disclosure statement listing all material facts known to the Sellers. She alleged the Sellers failed to disclose and misrepresented defects with the property including prior water intrusion, structural defects, and the fact that the renovations and remodeling work were not permitted or performed by a licensed contractor. She further asserted that Sellers performed labor and installed materials in the project in a negligent manner, which deprived her of the full use and enjoyment of the property after purchase. After alleging causes of action for negligence and breach of warranty based on these facts, Vera incorporated all prior allegations by reference into her cause of action for breach of contract. She claimed that Sellers agreed in the purchase agreement to provide a disclosure statement, and the agreement’s implied covenant of good faith and fair dealing required Sellers to disclose defects. She finally alleged, “In breach of the express provisions of the contract and the implied covenant of good faith and fair dealing, [Sellers] concealed defects, failed to make repairs of items they knew were deficient, and otherwise misrepresented the condition, desirability, and value of the . . . property.”

“These allegations,” concluded the Court of Appeal, “state in essence that Sellers harmed Vera by failing to disclose material facts to her . . . fraud is the gravamen of this claim.” And because Civil Code section 338(d) provides a three-year statute of limitations for fraud claims, explained the Court of Appeal, it also applied to Vera’s breach of contract claim: 

It makes no difference that the breach of contract claim rests on a contractual duty to disclose material facts, while her fraud claim rests on the same duty under tort law. It is black letter law that section 338(d) applies regardless of the form of the action a plaintiff chooses or legal theory she advances. Section 338(d)’s “language is comprehensive and the statute, with its favorable accrual rule, is accordingly applied to any form of action, for any kind of relief. In other words, if fraud or mistake is the basis of the legal injury (the `ground’ of the action), the section applies regardless of whether the complaint seeks legal or equitable relief or pleads a cause of action in tort or contract.”  

Ouch.

The Court of Appeals also rejected Vera’s argument that she did not become aware of the defective construction until 2012 and 2014, stating that “[a] fraud claim will accrue even without actual knowledge if a plaintiff knows facts that should revise suspicion and trigger a further investigation,” and that Vera knew or should have known that there were construction defects when she purchased the property.

Finally, the Court of Appeals rejected Vera’s argument that did not suffer damages until 2012 2014, stating that “[I]f the last element to occur in a tort action is damages, ‘the statute of limitations begins to run on the occurrence of “appreciable and actual harm, however uncertain in amount,” that consists of more than nominal damages,’” and that Vera could have sued REL-BC and SNL immediately upon close of escrow because at that point she paid more for the property than she now alleges it is worth.

Double, triple, ouch.

But that’s not the end of it. The Court of Appeals also held that REL-BC, despite having been dissolved, was entitled to recover its attorneys’ fees, because under Corporations Code section 17707.06 a limited liability company can continue to prosecute and defend actions in order to collect and discharge its obligations even after it has been dissolved.

Conclusion 

REL-BC is one of those head snapping cases for attorneys, where, on the face of things, it would appear that Vera, while she might lose on her fraud claim, would be able to continue to pursue her breach of contract claim. It’s also head snapping (I’m not even sure if that’s a phrase, but it appears appropriate) because the Court of Appeal affirmed an award of attorneys’ fees based on a contractual attorney’s fees provision although, as stated by the Court of Appeals, the “gravamen” of the complaint was fraud not breach of contract. It’s the equivalent of the unexpected upper cut.

Recovering Attorneys’ Fees for Breach of Contract

Saira S. Siddiqui and Ryan T. Kinder | Buildsmart

Texas lawyers finally have the ability to recover attorneys’ fees on behalf of their clients in all breach of contract matters, regardless of whether the other party is an individual, corporation, limited partnership, or limited liability company. The Texas Legislature has expanded the scope of Chapter 38 of the Texas Civil Practices and Remedies Code, which currently only allows for recovery of attorneys’ fees from an individual or corporation, for actions arising out of breach of contract (Tex. Civ. P. & Rem. Code Ann. § 38.001 (West)).

The current language of Chapter 38 has perplexed attorneys because it omits a plethora of business entities that are often parties to a contract. As a result of the literal language of Chapter 38, Texas courts have offered little to no relief to those parties seeking to recover attorneys’ fees from other business entities. In Fleming & Assocs., L.L.P. v. Barton, the 14th Court of Appeals explained that neither the term “individual” nor “corporation” is defined in Chapter 38, and thus the ordinary meanings of these terms should be applied (425 S.W.3d 560, 575 (Tex. App. —Houston [14th Dist.] 2014, pet. denied)). Further, there was no dispute that Fleming & Associates was neither an individual nor a corporation, but a limited liability partnership —precluding the applicability of Chapter 38 and leaving Barton with no avenue for recovery of attorneys’ fees for breach of a joint venture agreement (see also Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 214 (Tex. App.—Houston [1st Dist.] 2016, no pet.) (holding  Section 38.001 of the Civil Practice and Remedies Code does not permit recovery against a limited partnership Hoffman v. L & M Arts, No. 3:10-CV-0953-D, 2015 WL 1000838, at *1 (N.D. Tex. Mar. 6, 2015), aff’d, 838 F.3d 568 (5th Cir. 2016) (limited liability company is not a person under Chapter 38)).

The Texas Legislature has finally taken notice of these decisions and passed H.B. No. 1578. Under H.B. No. 1578, Chapter 38 will be revised to the following language:

(a) In this section, “organization” has the meaning assigned by Section 1.002, Business Organizations Code.

(b) A person may recover reasonable attorney’s fees from an individual or organization other than a quasi-governmental entity authorized to perform a function by state law, a religious organization, a charitable organization, or a charitable trust in addition to the amount of a valid claim and costs, if the claim is for:

(1) rendered services;

(2) performed labor;

(3) furnished material;

(4) freight or express overcharges;

(5) lost or damaged freight or express;

(6) killed or injured stock;

(7) a sworn account; or

(8) an oral or written contract.

Under the revised Chapter 38, a party can recover attorneys’ fees from an organization as defined in Section 1.002 of the Texas Business Organizations Code. The new revisions extensively expand the scope of Chapter 38, now allowing recovery against a corporation, limited or general partnership, limited liability company, business trust, real estate investment trust, joint venture, joint stock company, cooperative, association, bank, insurance company, credit union, savings and loan association, or other organization, regardless of whether the organization is for-profit, nonprofit, domestic, or foreign (Tex. Bus. Orgs. Code Ann. § 1.002 (West)). The newly expanded Chapter 38 will offer an avenue of recovery to parties seeking attorneys’ fees from entities other than corporations, as long as they file suit after September 1, 2021.

H.B. No. 1578 has been signed by the governor and will be effective September 1, 2021.

Anticipatory Repudiation of a Contract – the Prospective Breach

David Adelstein | Florida Construction Legal Updates

There are instances where a party can engage in the anticipatory repudiation of their obligations under a contract.  In essence, this is basically a party prospectively breaching the contract by repudiating their obligations in the contract.

prospective breach of contract occurs where there is absolute repudiation by one of the parties prior to the time when his performance is due under the terms of the contract.  Such a repudiation may be evidenced by words or voluntary acts but the refusal must be distinct, unequivocal, and absolute. Moreover, repudiation can be shown where one party makes additional demands not included in the initial agreement:

            The law is clear that where one party to the contract arbitrarily demands performance not required by the contract and couples this demand with a refusal to further perform unless the demand is met, the party has anticipatorily repudiated the contract, which anticipatory repudiation relieves the non-breaching party of its duty to further perform and creates in it an immediate cause of action for breach of contract.

24 Hr Air Service, Inc. v. Hosanna Community Baptist Church, Inc., 46 Fla. L. Weekly, D1344a (Fla. 3d DCA 2021) (quotations and citations omitted).

In 24 Hr Air Service, an air conditioning contractor agreed to perform repairs to a Church’s air conditioning unit.  However, when the contractor went into the attic to start the repairs, the wooden platform in the attic was unstable and a portion of the ceiling collapsed.  The Church repaired the ceiling.  However, the contractor refused to return to complete its repairs citing safety reasons.  The contractor requested proof the repairs to the ceiling were made before it returned to complete its contracted work and such proof was never provided.

Did the contractor’s refusal to complete its work amount to anticipatory repudiation of its contract by imposing the additional demand of proof of repairs to the ceiling before completing its contracted work?  Both the trial and appellate court believed so.

The Contractor’s request that the Church provide safety assurances of the ceiling repairs constitutes an additional demand that was not agreed to by the parties under the service contract.  Despite the Contractor’s argument that it never abandoned the job, its demand for safety assurances coupled with its refusal to complete the agreed repairs until such assurances were provided was an anticipatory breach of the contract. 

24 Hr Air Service, Inc., supra.

Based on the anticipatory repudiation or breach of the contract, what were the Church’s damages?

The proper measure of damages “would be either the reasonable cost of completion, or the difference between the value the repair would have had if completed and the value of the repair that has been thus far performed.”  24 Hr Air Service, Inc., supra (quotation and citation omitted).  This is referred to as benefit-of-the bargain damages, with the objective to place the damaged party in the position “he would have been in had the contract been completely performed.”  Id.    The party, however, cannot seek what is known as “betterment” or a better deal than what it originally bargained for—a party “can neither receive more than [it] bargained for nor be put in a better position than [it] would have been had the contract been performed.”  Id.

If you are dealing with a breach of contract, or even a prospective breach / anticipatory repudiation of an existing contract, it is advisable to seek legal counsel to assist you in preserving your arguments, the proper measure of damages for the breach, and any potential betterment associated with your damages.