Construction Contract Statute of Repose

When does the statute of repose begin to run for construction contracts in Florida?

In Cypress Fairway Condominium v. Bergeron Construction, 2015 WL 2129473 (Fla. 5th DCA 2015), the Fifth District Court of Appeal held that the statute of repose commenced to run on the date of completion of the contract — which was the date that final payment was made under the terms of the contract.

Under Florida’s statute of repose (section 95.11(3)(c)), an action founded on the design, planning, or construction of an improvement to real property must be commenced within 10 years after the latest of: (a) actual possession by the owner; (b) the date of issuance of a certificate of occupancy; (c) the date of abandonment of construction if not completed; or (d) the date of completion or termination of the contract between the engineer, architect, contractor and his or her employer.  This is the last date that a party can bring an action for latent defects.

In Cypress Fairway, the parties were arguing about whether the date of completion or termination of the contract occurred when construction was completed (earlier date) or on the date final payment was made (later date).   If the earlier date was used the action was untimely; if the later date is used then it was timely. The court held that the statute states “completion . . . of the contract”.  Although construction completed on January 31, 2001, the statute of repose began on February 2, 2001 when the final payment was made.

Contractor Rights Against Construction Lender

When does a contractor have rights against a construction lender where the lender stops funding a project without fully disbursing all funds?

In Jax Utilities Management, Inc. v. Hancock Bank, the First District Court of Appeal held that a contractor only has rights against the lender for statutory claims under section 713.3471 for failing to provide the required notices to the contractor and not for common law claims.  40 Fla. L. Weekly D948 (1st DCA 2015).

Jax, the general contractor, sued Hancock Bank, the construction lender for equitable lien and unjust enrichment.  Hancock was the assignee of the construction lender on a failed housing development project.  When the project’s developer defaulted on the construction loan, Hancock Bank stopped funding the loan and foreclosed on the project.  In the litigation filed by Jax, the trial court entered summary judgment in favor of Hancock Bank on both claims.  The court held that the equitable lien claim was barred by the one year statute of limitations.  Additionally, the court held that the equitable lien claim and unjust enrichment claim were precluded by section 713.3471, Florida Statutes.

On appeal, the First District affirmed.  The one year statute of limitations on equitable lien claims ran from the last date Jax furnished labor, services or materials to the project and expired prior to Jax filing the lawsuit.  Additionally, the court held that 713.3471 precludes common law causes of action by a contractor against a construction lender for failing to make advances for construction work prior to distribution of all construction loan funds.  This statute requires that the lender provide certain notices to a contractor after it decides to stop making advances under the construction loan.  The statute also defines the lender’s liability when it fails to provide the notices.  If the lender provides the notices it has no liability to the contractor or lienor.  If it fails to provide the notices, the damages are those provided by the statute (actual value of work + 15% for overhead and profit for all work performed after the date the lender’s notice should have been served).  The court held that common law remedies are not permitted because the statute is clear and is “so repugnant to the existence of common law relief that they cannot exist.”

When Does a Contractor’s Liability to Third Parties Expire?

The recent case of McIntosh v. Progressive Design and Engineering, 2015 WL 1422590 (Fla. 4th DCA 2015), answered this question as follows: A contractor is not liable to third parties for patent defects once the project owner accepts the work.

In McIntosh, a fatal car accident occurred. The victim’s son sued the company that designed the traffic signals at the intersection.  At trial the jury held that the design company was negligent in its traffic signal design which caused the plaintiff’s faither’s death.  The jury also found that the negligent design was accepted and discoverable by FDOT with the exercise of reasonable care.  Therefore the trial court entered a judgment in favor of the design company.

On appeal, the Fourth District Court of Appeal affirmed the trial court’s ruling, and applied the Slavin doctrine.  Under Slavin, the liability of a contractor is cut off after the owner has accepted the work performed, if the alleged defect is a patent defect which the owner could have discovered and remedied.  Slavin has two requirements to cut off a contractor’s liability to third parties: (1) the defect or dangerous condition was obvious had the owner exercised reasonable care; and (2) the owner has accepted the contractor’s work.  The reasoning behind Slavin is that if the owner has knowledge of a defect and accepts the work, it is now the owner’s burden to correct the patent defects — not the contractor.

Can a Construction Lien Survive a Mortgage Foreclosure?

In the recent case of CDC Builders, Inc. v. Biltmore-Sevilla Debt Investors, LLC, 151 So. 3d 479 (Fla. 3d DCA 2014), the Third District Court of Appeal found one instance where a construction lien would survive a mortgage foreclosure.

In this case, CDC Builders, the contractor, entered into a contract with the Riviera entities, the developers, to build twenty five luxury homes.  The Riviera entities obtained financing from SunTrust.  The Riviera entities failed to pay for the last eight homes constructed and CDC Builders recorded two construction liens.

The principal of the developers formed a new corporation, BSDI, which purchased the Riviera entities’ loans from SunTrust.  BSDI then filed a lawsuit to foreclose the construction loans against the Riviera entities and seeking to wipe out CDC Builder’s liens.  The trial court granted final summary judgment of foreclosure in favor of BSDI and wiped out CDC Builder’s liens.

On appeal, the Third District Court of appeal reversed the trial court holding that “[t]he law does not permit a person to borrow money from a bank, give the bank a mortgage, incur additional liens and junior mortgages on the property, purchase the mortgage back from the bank, and then foreclose on the mortgage for the primary purpose of eliminating the additional liens and junior mortgages.”  The court went on to state that “persons cannot do indirectly what they are not permitted to do directly.”

ARBITRATION PROVISIONS IN CONSTRUCTION CONTRACTS

Are Arbitration Provisions in Construction Contracts Ambiguous Where the Contract Also Contains a Waiver of Jury Trial Provision?

In Bari Builders, Inc. v. Hovstone Properties Florida, LLC, Florida’s Fourth District Court of Appeal answered “No” and ruled in favor of enforcing the arbitration provision.  In Bari Builders, a condominium association sued the developer for construction defects.  The developer brought a third-party complaint against its subcontractors – including Bari Builders.  The subcontract with Bari Builders contained two conflicting provisions:

1. The first provision stated that the parties agreed to binding Arbitration of any controversy or claim arising out of the contract;

2. The second provision stated that in all actions the parties waive the right to jury and agree to determination of all facts by the court.

Hovstone argued that the jury waiver provision rendered the arbitration provision ambiguous and unenforceable.  The Fourth District Court of Appeal disagreed and enforced the arbitration provision.  The court held that under Florida law, arbitration is a preferred method of dispute resolution and all doubt regarding scope of an arbitration clause should be resolved in favor of arbitration.  The Court held that the two provisions could be read together to give meaning to both of them.  The jury waiver provision would be applied in the event the parties chose to waive their right to arbitrate.  Therefore, the arbitration provision was not ambiguous and was enforceable.

Architect Standard of Care

What is an architect’s standard of care to an owner?  A recent case gave guidance on this standard of care and liability for change order items caused by incomplete or incorrect plans.

In School Board of Broward County v. Pierce Goodwin Alexander & Linville, the Fourth District analyzed the architect’s responsibility for change order items caused by incomplete or incorrect plans. 137 So. 3d 1059 (Fla. 4th DCA 2014).  The school board hired an architectural firm to perform design services for a school renovation project.  After construction was completed the school board sued the architect for the extra costs of change order items generated due to changes in the initial design plans to meet building code requirements after construction commenced.  At trial the jury held that the architect did not breach its standard of care as to the most expensive change order; and awarded damages as to the choice orders where liability was admitted.  The school board appealed based on the jury instructed to decide based on an incorrect standard of care.

The Fourth District reiterated the standard of care that an architect owes to an owner.  The court stated that “an architect owes a duty of care to his client in arranging site plans and drawing buildings which are in conformance with building and zoning codes as well as other similar local ordinances.”  An architect commits a tort and breaches its contract when this duty is breached.  A contractual provision can enhance the architect’s standard of care.  In this case the court held that since the contract required the architect to provide plans for a building that would be code-compliant, then that was the standard of care owed, instead of the standard of a ordinary and reasonable skill services.

Contractor Damages:

In Hibachi Grill v. Arki Construction, Inc., Florida’s Third District Court of Appeal was faced with two important questions that arise in construction disputes:

1. Can an owner setoff the general contractor’s claims by amounts paid to subcontractors? and

2. What is the proper measure of damages for a contractor that obtains substantial completion.

Answer 1: The answer to question #1 is yes, where the contractor pleads that its damages include reductions due to the owners direct payments to subcontractors.  Arki Construction filed an amended complaint alleging that its damages were “the total sum of $32,104.36, less whatever amounts paid directly by the [Owner] to other subcontractors.”

Arki filed a motion for summary judgment seeking the entire amount of the unpaid contract balance.  The owner filed an affidavit in opposition detailing payments to project subcontractors in the amount of $14,810.80.  Even though the owner’s affirmative defenses of set off for sums paid to subcontractors was stricken by the trial court, where the contractor pled that its damages should be reduced by amounts paid by the owner to subcontractors, it was reversible error for the trial  court to enter judgment in favor of the contractor without providing a reduction in the damages for the amounts paid by the owner to subcontractors.

Answer 2: Where a contract is breached after substantial performance by the contractor, the measure of damages is the unpaid contract balance, and not the contractor’s lost profit.