For Breach of Contract Claim, There Needs to be a Breach of a Contractual Duty

David Adelstein | Florida Construction Legal Updates

Remember this law (and I mean: remember this law!):

An essential element of a claim for breach of contract is the existence of a material breach of a contractual duty.”  JD Development I, LLC v. ICS Contractors, LLC, 2022 WL 4587083, *3 (Fla. 2d DCA 2022) (citation and quotation omitted).

This law is important because how can another party breach of a contract if there is no contractual duty you claim they breached?  This question, and, of course, the answer, should not be overlooked from a strategic standpoint because it may dictate what claims you assert, how you assert those claims, and how you present your case from a theme and evidentiary standpoint.

JD Development provides an example of why this law is important and how this can play out.

In this case, a site contractor’s written bid formed the parties’ contract.  The site contractor sued the owner for non-payment of work it performed under the bid.  The owner claimed that the alleged unpaid invoices did not fall within the scope of the work in the bid; therefore, the trial court should have granted a directed verdict in favor of the owner on the contractor’s breach of contract claim.  The appellate court agreed!

The site contractor’s bid was a unit cost bid made up of 8 work categories and included exclusions in a notes section that were not included in its bid price.  The owner accepted the bid.  The site contractor performed 3 of the 8 categories in its bid and then was terminated. The site contractor claimed it was owed in excess of $100,000.  This amount represented additional work the site contractor testified it was asked to perform based on site plan revisions.  “No testimony was elicited during direct examination connecting the work activities set forth in the disputed invoices to any express provision of the bid.”  JD Development, supra, at *2.

The owner moved for directed verdict stating the contractor “failed to present any evidence establishing that the work activities identified in the disputed invoices correlated to any express provision of the bid.” JD Development, supra, at *3.  The contractor argued that the unpaid work was contemplated by the exclusions in the bid.  For this reason, the trial court denied the motion for directed verdict.  The jury returned a verdict in favor of the contractor finding that the owner breached the contract.

As mentioned above, the appellate court agreed that the trial court should have granted the directed verdict. Here is why:

It is undisputed that none of the work activities set forth in the unpaid invoices fell within the scope of the three work categories of the bid actually completed by [the site contractor] prior to termination…Finally, [the site contractor’s] testimony that the activities referenced in the disputed invoices fell within the express exclusions in the “Notes”  section of the bid actually supports [the owner’s] position: if the work activities referenced in the disputed invoices are of the type that was expressly excluded from the bid, then clearly the bid did not reflect an agreement as to the performance of—and payment for—those work activities. Stated differently, the bid did not require [the site contractor] to perform those work activities and in turn it did not require [the owner] to compensate [the site contractor] for performing those work activities. Whether the parties may have orally agreed to the performance of those work activities or whether a written document other than the bid reflects the parties’ agreement as to the performance of those work activities has no bearing on whether the trial court properly denied the motion for directed verdict on the breach of contract claim. [The site contractor] pleaded a claim for beach of the written bid and proceeded under that legal theory at trial.  And since no reasonable view of the evidence could sustain a verdict in favor of [the site contractor] on its breach of contract claim—even when viewing testimony and evidence in the light most favorable to [the site contractor]—we hold that the trial court erred in denying [the site contractor’s] motion for directed verdict with respect to this claim.

JD Development, supra, at *3.


When 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.

Violation of Prompt Payment Statutes is Not a Breach of Contract. But That’s Not the Most Interesting Part

Garret Murai | California Construction Law Blog

While construction projects can get messy, they don’t get much messier than the next case, which, while involving a fairly limited legal issue, has such jaw dropping facts it’s worth a read if only to make you feel a bit better about your own project.

The Clark Bros. Case

In Clark Bros, Inc. v. North Edwards Water District, 77 Cal.App.5th 801 (2022), general contractor Clark Bros., Inc. was awarded over $3 million in damages against a local water district on a water treatment facility project.

The Project

The North Edwards Water District serves approximately 220 customers in the Mojave Desert. It has one employee, Dollie Dimples Kostopoulos. Seriously, you can’t make this stuff up. The drinking water it provides to its customers contains three times the legal limit of arsenic, a carcinogen. 

In 2010, the State of California funded a study to determine how to remove the excessive levels of arsenic from the District’s water supply. Three companies – Filtronics, Layne Christensen, and Pureflow – participated in the study. AECOM Technical Services, Inc., the engineering firm overseeing the study, found that Layne Christenson provided the best filtering system.

Although Layne Christenson was found to provide the best filtering system, the District insisted that all three companies be allowed to bid on the project, and threatened that if they weren’t given their way the District would scuttle the project and supply arsenic-laden water “forever.” Wow, just wow!

The Pureflow Single-Source Requirement

For reasons unknown, although Layne Christenson had the least expensive waste treatment system, Filtronics offered the least expensive operation and maintenance over 20 years, and Pureflow had the highest capital costs, the District selected Pureflow. The District’s selection of Pureflow was even more puzzling because Pureflow does not manufacture anything. Rather, everything Pureflow sells is made and installed by others.

After Pureflow was selected, Pureflow demanded an advance of $600,000, which the State rejected, countering that no payments would be made until at least half of the equipment was delivered to the project site. Pureflow and the State later compromised and the State agreed that Pureflow would be paid for each major piece of equipment when it was manufactured and passed inspection at the manufacturing facility. This agreement was incorporated into the project specifications. 

In December 2013, Clark was awarded the bid. Under the terms of the contract, Clark was to complete the project by January 2015. Six days later, Pureflow complained about cash flow problems and demanded that it be paid in advance although the State had earlier rejected that proposal and Pureflow’s quote, which was accepted just two weeks earlier, provided that Pureflow would be paid as equipment was manufactured and passed inspection. The State once again rejected Pureflow’s request for money up-front.

Other Problems on the Project

This, however, was just the beginning of the problems. Although the site was located on mostly vacant land, two power poles and overhead electrical lines ran through the middle of the site, and relocating them was an important first task as they were located right over the area of construction and posed a danger to workers using heavy equipment. It was the District’s responsibility to move the poles and power lines. The poles and power lines were ultimately moved to a private property resulting in a 230 working-day extension because of the District’s delay in moving the power poles.

Consistent with common practice, the contract allowed Clark to use the job site for laydown, staging and construction. However, the District refused to allow Clark’s equipment on site, insisting instead that Clark lease a nearby vacant lot. That lot was owned by James Allen who, by no coincidence, was in a relationship with Kostopoulos. When Clark learned of the relationship it refused to pay Allen who replied that Clark was “poison” and should “get the hell out of here.”

As work began, Clark discovered underground gas lines that were not depicted on the plans. The plans also called for the construction of a second water well located about 20 feet away from an existing water well. However, when the well driller arrived, he refused to construct the new well because it was too close to the existing well and could resulted in a cave in that could have further contaminated the drinking water. These issues caused an additional 85 working-day delay on the project.

Pureflow Once Again

In the meantime, Pureflow again demanded a cash advance and, in a related move, notified Clark that Pureflow would deliver filter media to the site (triggering a $149K progress payment) although there was no place to put it. The District refused to agree to the early filter media delivery. Pureflow delivered it anyway. And Clark was forced to bear the cost of storing it.

Clark later asked AECOM to identify which Pureflow-supplied equipment it had inspected. AECOM did not identify any and instead stated that Pureflow was Clark’s problem. When Clark brought this to the attention of the District, the District, like AECOM, stated that Pureflow was Clark’s problem, even though the District had selected Pureflow and negotiated the payment terms with it before Clark even bid on the project. Shortly, thereafter, Pureflow asked Clark for $503K in “working capital” so that it could “move forward,” Pureflow’s fourth request for advance payment.

Now six months into the one-year project, the District directed Clark to “dump” Pureflow. Shortly thereafter, Clark sent a notice of breach of contract to Pureflow, and asked AECOM to identify another filter vendor, noting that Pureflow had already caused a 120 working-day delay on the project. However, three weeks later, the District reversed position and told Clark, “[Y]ou cannot replace Pureflow.” In an email to Kostopoulos, Pureflow’s Vice President, Archie MacDonald, thanked Kostopolous for her “tremendous effort” and stated “Enjoy your weekend and go for a drive in your [Audi] A8. You deserve it.”

Clark’s Termination and Other, Well, Eyebrow Raising Events

Later that month, at a District board meeting, board member Clifford Moyle told the Board that he had consulted with a lawyer who agreed “to write two very strong letters, one to Clark, one to AECOM, and make them know they have to shit or get off the pot” and informed the Board that he told the lawyer to “kick their ass.” The District later terminated Clark although it still had three months left to complete the project. 

The District later hired an engineer to determine what needed to be done to complete the project. In an unusual turn of events, the engineer in his report asked: “Given the very real possibility that in the event of litigation against the district, [Clark] may prevail with regards to various issues it raises[,] . . . [i]s there any desire by [the District] to deescalate the matter and determine if there is any possibility of resolving the existing situation without litigation?”

When the report was read at a District board meeting, Kostopoulos asked her fellow Board members, “In other words, do we want to kiss Clark’s ass and take him back.” The answer, was apparently no, and the District fired the consulting engineer. At that same board meeting, Kostopoulos reported that the District’s attorney had “strongly urge[ed]” it to “immediately reconsider its position and attempt to resolve the matter with [Clark.]” Kostopoulos called the District’s attorney “a little weasel” who did not have “balls enough to fight this thing.” The District also fired the lawyer.

Apparently, at that same board meeting, Moyle suggested posting “No Trespassing” signs to deter Clark from returning to the site and to “shoot” him if he did. Another board member commented, with “buckshot in their butts,” “[t]hey’ll think twice about coming back.” Like I said, you can’t make this stuff up.

The Lawsuit

After the above, it makes what us lawyers do sound downright boring. As one might expect, Clark filed suit against the District as well as the State for breach of contract. The District in turn filed a cross-complaint against Clark and the surety which issued the performance and payment bonds on the project. Before trial, the State settled with Clark for $2.7 million, and following trial, the jury awarded Clark $3,288,721 in damages. 

The District appealed

The Appeal

On appeal, the District argued that a jury instruction given by the trial court was erroneous. Specifically, the District argued that one of Clark’s contentions at trial was that the District failed to pay Clark within 30 calendar days of receipt of Clark’s pay applications and that the District was therefore liable for interest at the rate of 10% per annum under Public Contract Code section 20104.50.

According to the District, the Court erroneously instructed the jury that the District was contractually required to pay Clark within 30 calendar days and that this was in error, because Section 20104.50 does not require that local agencies to pay pay applications within 30 calendar days, but rather only that local agencies are subject to interest at the rate of 10% per annum for failing to pay pay applications within 30 calendar days.

The 4th District Court of Appeal agreed, kind of.

Public Contract Code section 20104.50(b), explained the Court, provides:

Any local agency which fails to make any progress payment within 30 days after receipt of an undisputed and properly submitted payment request from a contractor on a construction contract shall pay interest to the contractor equivalent to the legal rate . . .

Section 20104.50(b) does not, as the trial court stated in its jury instruction, require that local agencies to pay contractors within 30 days. Rather, explained the Court, Section 20104.50(b) provides only that if a local agency “fails” to pay within 30 days that it “shall pay interest” at the legal rate:

Here, the operative language in section 20104.50, subdivision (b) is that a local agency “which fails” to pay within 30 days “shall pay interest” at the legal rate. Giving these words their plain meaning, the statute does not compel payment within 30 days. What it compels is that interest be paid (at the legal rate) when payment is made after 30 days.

Of course, a 10 percent penalty for tardy payment is likely a strong incentive for local government to make progress payments within 30 days. But to incentivize payment within 30 days is not the same as to compel it. There may be a number of good reasons why a local agency might take longer than 30 days to pay. In this case, for example, the sheer bureaucracy in having payments approved by AECOM, North Edwards, and the State made payment beyond 30 days not only possible, but a near certainty.

Given the frequency with which even a good faith attempt to pay within 30 days may fail, section 20104.60 quite reasonably does not create a breach of contract every time a progress payment is made beyond 30 days. Rather, the legislative goal of prompt payment is effected by generously compensating the contractor for the time value of its money when delay occurs, and thus deterring tardy payments.

We accordingly hold that when section 20104.50 is incorporated into a local agency’s public works contract, as it was here, the agency does not breach that contract merely by making a progress payment after 30 days. The statute is violated, and a breach of contract occurs, if and when the agency fails to pay the requisite interest after a late payment is made.

In case your heart just fell to the pit of your stomach at the injustice, fret not. The Court of Appeals then turned to “whether the instructional error likely affected the outcome,” and here concluded the court, “we conclude it did not for two reasons”:

First, there was substantial evidence of numerous other (and much more serious) breaches by North Edwards, including its:

—Unwillingness to take responsibility, as the owner who chose Pureflow, for Pureflow’s “failings in moving the project and delivering.”

—Failure to extend Clark’s time to perform based on delay in (a) moving the power poles and lines, (b) dealing with undesignated high pressure gas lines, and (c) drilling the new well close to the existing one.

—Improper management of the Project.

—Termination of Clark when the general contractor still had three months to perform, even without any time extension.

And, second, explained the Court of Appeal:

Even more significant, North Edwards could not have been prejudiced by the instructional error because the record affirmatively demonstrates the jury did not base its damage award on tardy progress payments. Clark’s construction expert calculated damages by a simple formula that did not even consider late payment. He determined the amount Clark spent on the Project ($5,021,755), deducted what North Edwards paid Clark ($2,250,133), added a reasonable amount for profit ($377,230) and overhead ($139,869), resulting in $3,288,721 in claimed damage. The jury awarded this same $3,288,721. Thus, we are confident the verdict was unaffected by any instructional error regarding prompt payment obligations.

Conclusion

So, there you have it, a rather bland legal decision – A local agency’s violation of Public Contract Code section 20104.05(b) gives rise to a remedy (i.e., interest at the legal rate) but does not constitute a breach of contract – but one based on a sensational set of facts.

Note: Apparently, one of the District’s board members stated that he does not drink the water. Remind you of something? 


When 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.

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.