Contractors’ Right to Sue in Washington Requires Registration

By on June 1, 2022
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Summary:

In Washington, contractors must be properly registered in order to pursue a legal action against a customer for breach of contract. Dobson v. Archibald, a February 2022 decision by the Washington Court of Appeals, reinforced how the governing statute – RCW 18.27.080 – does not simply create an affirmative defense but establishes a mandatory pleading prerequisite.1

Discussion:

In 2018, Archibald hired Dobson to refinish his hardwood floors for $3,200. Dobson was not a registered contractor. She had been referred to Archibald by acquaintances who were familiar with her construction and home repair work, including improvements Dobson had made to her own home. Archibald paid Dobson a $700 deposit before Dobson began her work. At the completion of the floor repair project, Archibald was unhappy with the appearance of the floors and informed Dobson that he would not pay the remaining $2,500.

Dobson recorded a lien against Archibald’s property and filed suit in 2019. Archibald moved for summary judgment, asserting that Dobson could not bring suit because she was not a registered contractor. After a cross-motion for summary judgment by Dobson and Archibald’s motion for leave to amend his answer, the trial court granted Archibald’s summary judgment motion and dismissed Dobson’s suit with prejudice.

The Appellate Court’s analysis started with the statute RCW 18.27.080, which provides, in pertinent part:

No person engaged in the business or acting in the capacity of a contractor may bring or maintain any action in any court of this state for the collection of compensation for the performance of any work or for breach of any contract for which registration is required under this chapter without alleging and proving that he or she was a duly registered contractor …

Dobson contended that nonregistration is an affirmative defense which must be timely pleaded and proved by the defendant. The Court rejected that contention, stating that the plain language of the statute does not support that view. The Court pointed also to Coronado v. Orona, 137 Wn. App. 308, 311 (“Washington contractors cannot sue clients to recover for compensation or for breach of contract if the contractors are not properly registered”). Therefore, registration must be alleged and proved by the plaintiff.

Dobson also contended that she was not a “contractor” under RCW 18.27.010(1)(a) and therefore did not need to be licensed. She argued that the registration requirement did not apply because she was primarily employed as a longshoreman and the flooring work she did for Archibald was “an isolated act in her spare time as a favor.” The Court looked to the statutory definition of a “contractor” and found that “[e]ven a single and isolated business venture is not exempt from the registration requirements of the registration act.”

The Court further clarified that the facts distinguished this case from Rose v. Tarman, 17 Wn. App. 160 (1977), on which Dobson relied. In Rose, the registration requirement did not apply where the parties were two friends with a longstanding social relationship. Here, Dobson and Archibald knew each other exclusively through this specific business transaction. Despite some superficial similarities, “[t]he narrow factual scenario that allowed Rose to avoid the registration bar is simply not applicable to Dobson.” Thus, the Appellate Court affirmed the trial court’s summary judgment dismissal of Dobson’s action.

Takeaways:

For contractors, this court decision reinforces the meaning and effect of Washington’s contractor registration act, RCW 18.27: contractor registration is a prerequisite to filing suit.

For legal practitioners, this Dobson case makes abundantly clear that plaintiffs must plead and prove contractor registration, and actions in the State of Washington that do not meet this pleading requirement will be subject to summary judgment dismissal.

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1 Dobson v. Archibald, 2022 WL 521496, 505 P.3d 115 (Feb. 22, 2022)

Filed under Breach of Contract, Contractor

Connecticut Appellate Court Confirms That Paid If Paid Clauses Remain Enforceable

By and on June 1, 2022
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In Electrical Contractors, Inc. v. 50 Morgan Hospitality Group, 212 Conn. App. 724 (2022), the Appellate Court affirmed the trial court’s finding that payment from the property owner to the general contractor was a condition precedent to the general contractor’s obligation to pay the subcontractor. Here, the plaintiff, an electrical subcontractor on a commercial construction project, sued the defendant, the general contractor, for nonpayment of over $350,000. The subcontract between the plaintiff and defendant provided that “[the plaintiff] expressly agrees that payment by [the owner] to [the general contractor] is a condition precedent to [the general contractor’s] obligation to make partial or final payments to [the plaintiff] as provided in this paragraph . . . .” The Court held that this provision clearly and unambiguously means that the general contractor was not obligated to pay the subcontractor unless the general contractor received payment from the owner. The court further made a point to distinguish “pay-if-paid” and “pay-when-paid” clauses, noting that the latter “merely postpones a general contractor’s obligation to pay its subcontractors for a reasonable period of time,” whereas the former creates a “condition precedent” to payment.

Filed under Contractor, Paid If Paid Clauses, Subcontractors

The Connecticut Appellate Court Decides That Construction Contractor Was Not Obligated To Continue Accelerated Schedule to Mitigate Its Damages Following Late Delivery of Materials by Supplier

By on March 1, 2022
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In United Concrete Prods. v. NJR Constr., LLC, 207 Conn. App. 551, 263 A.3d 823 (2021), the Connecticut Appellate Court has issued a decision that should be of interest to the Connecticut construction industry and the construction bar. The lawsuit arose out of the late delivery of materials on a construction project, which is a frequent problem on construction projects. In United Concrete Products, the defendant general contractor, NJR Construction, LLC (“NJR”) was retained by the State of Connecticut Department of Transportation (“DOT”) to replace a bridge over the Hockanum River (“Project”). Id. at 555-58 (2021). The Prime Contract provided that NJR with an eight-week time-frame to perform the work, at which time the road would be closed to traffic. Id. The Prime Contract also provided for a bonus of $3,000 for each day the road was opened to traffic prior to the eight week deadline of August 8, 2016, and for liquidated damages of $3,000 for each day the road remained closed beyond the deadline. Id.

NJR subsequently entered into a purchase order (“Subcontract”) with the plaintiff, United Concrete Products, Inc. (“United”), whereby United agreed to provide certain concrete components for the Project, including ten pre-stressed concrete beams. Id. The Subcontract required that United deliver the concrete beams by June 7, 2016, but, NJR did not actually schedule the delivery until June 29, 2016. Id. Nevertheless, even with that schedule NJR could have reopened the road by July 19, 2016, which would have allowed it to receive the full $60,000 incentive bonus. However, United did not deliver the concrete beams until July 26, 2016, which caused NJR to lose the incentive bonus, be assessed liquidated damages by the DOT, and to incur additional delay damages. Id. After deducting the amount of $179,500 in damages that it incurred due to United’s late delivery of the beams, NJR paid United the balance of $66,074.75. Id.

United then filed a lawsuit in the Connecticut Superior Court seeking, among other things, payment of the full amount due under the Subcontract, without the offset, a claim for violation of Connecticut’s Prompt Payment Act, as well as a claim against NJR’s payment bond surety under the Connecticut’s Little Miller Act.1 Id. NJR asserted affirmative defenses and a counterclaim alleging, among other things, that United breached the Subcontract by failing to meet the delivery deadline for the beams, and violated the Connecticut Unfair Trade Practices Act (“CUTPA”) by repeatedly misrepresenting when it would deliver the materials. Id.

One of United’s defenses to NJR’s breach of contract counterclaim was that NJR had failed to mitigate its damages by failing to maintain its accelerated work schedule on the Project after United’s late delivery of the beams, which would have substantially reduced NJR’s damages. The defense was based upon the fact that prior to the delivery of the beams on July 26, 2016, NJR had been taking a “fast-track” approach to the Project; i.e., working on an accelerated schedule, in order to maximize its ability to receive the incentive bonus. Id. at 567. However, after United’s untimely delivery of the beams, and the realization that it would not receive any incentive bonus from the DOT, NJR abandoned its fast-track approach to the schedule, and proceeded at a regular pace. Id.

The trial court ultimately rendered judgment in favor of United on its breach of contract claim, finding that because the contract was for the sale of goods, and was therefore governed by the Article 2 of Uniform Commercial Code (“UCC”), the fact that NJR accepted the beams despite the late delivery, NJR was liable to pay for the full amount due under the Subcontract without a setoff. Id. at 560. The trial court also awarded NJR the full amount of its claimed damages against United on the counterclaim for late delivery of the beams, and also for United’s violation of CUTPA. Id. at 559. The trial court rejected United’s mitigation of damages defense. On appeal, the Connecticut Appellate Court affirmed the relevant portions of the judgment below, including with respect to the mitigation of damages issue.

The Appellate Court reiterated the general proposition that in the context of contracts and torts, the party receiving the damage award has a duty to make reasonable efforts to mitigate damages. Id. at 567. The Court further explained as follows: “To claim successfully that the plaintiff [or counterclaim plaintiff] failed to mitigate damages, the defendant [or counterclaim defendant] must show that the injured party failed to take reasonable action to lessen the damages; that the damages were in fact enhanced by such failure; and that the damages which could have been avoided can be measured with reasonable certainty. … Furthermore, [t]he duty to mitigate damages does not require a party to sacrifice a substantial right of his own in order to minimize a loss.” Id. (quoting Sun Val, LLC v. Commissioner of Transportation, 330 Conn. 316, 334, 193 A.3d 1192 (2018)).

Although United argued that the trial court erred by failing to offset or reduce NJR’s damages based on failure to mitigate because NJR abandoned its fast-track work schedule following the late delivery of the beams, the Appellate Court disagreed. The Court agreed with NJR’s position that once NJR realized that it was not going obtain the incentive bonus due to United’s late delivery of the beams, the was no reason for NJR to continue with the accelerated schedule. Id. at 567-68. Because NJR was only obligated to make reasonable efforts to mitigate its damages, such reasonable effort only entailed working at a normal, rather than an accelerated pace. Id. at 568.

What is interesting about this decision is that NJR had already established the fast-track schedule for the Project, but only reduced it to a normal schedule after United’s late delivery of the beams, rather than maintaining the status quo. Nevertheless, the Appellate Court found once United breached the Subcontract by delivering the beams late, thus eliminating the very reason that NJR was operating on the accelerated schedule, it was no longer reasonable to expect NJR to maintain that accelerated schedule. Accordingly, under the proper circumstances, a party can defeat a failure to mitigate defense, even if its post-breach conduct arguably increased its damages.
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1 The payment bond claim and other issues discussed in the lengthy appellate decision are outside the scope of this article, which is focused on the mitigation of damages issue.

Filed under Construction, Contractor

Federal Judge Enjoins Section of New Florida Insurance Reform Law Relating to Advertising and Solicitation by Roofing Contractors

By on September 1, 2021
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On July 1, 2021, Florida’s Senate Bill 76 (“SB 76”), which modified several provisions that impact Florida’s property insurance litigation, went into effect. This bill was Florida’s latest attempt to stabilize the rising insurance premiums and reduce the burden on Citizens Property Insurance Corporation by encouraging private carriers to write new policies on homes in Florida due to double-digit insurance rate increases, restricted coverage, or being forced to turn to the state’s insurer of last resort, Citizens. More specifically, Florida homeowner’s insurance lawsuits accounted for 76% of all litigation against insurers across the country in 2019. “When Florida accounts for only 8 percent of the nation’s property insurance claims but 76 percent of national property insurance litigation, you know there is a problem,” said Mark Wilson, president and CEO, Florida Chamber of Commerce. The new law also includes changes to the state’s one-way attorney fee statute, and imposes deadlines to file claims. It also placed new requirements and restrictions on roofing contractors, prompting several roofing companies to challenge constitutionality of the new law and new restrictions.

Part of the new law was an attempt to curtail the proliferation of solicited roof insurance claims. The frequency of roof claims and costs of those claims has increased dramatically in Florida over the past several years. Members of the insurance industry argue that solicited roof claims essentially have turned the homeowners’ insurance policy into a maintenance contract. The new law was designed to limit the ability of roofing contractors to use various forms of advertising to solicit jobs that entail insurance claims. However, roofing contractors challenged the new law and argued its restrictions violate their First Amendment rights. The state countered that the new law is a reasonable restriction on commercial speech in light of the state’s interest in combating consumer exploitation and fraud.

On July 11, 2021, a federal district judge sided with the roofing contractors and enjoined the portion of SB 76 dealing with advertisements by roofing contractors. In a 90-minute hearing, Chief U.S. District Court Judge, Mark Walker, of the United States District Court, Northern District of Florida, heard the companies’ argument for injunction that the law violates its free speech rights and is a “thinly veiled attempt to prevent anyone from assisting homeowners from making valid insurance claims to repair their homes.” The judge noted that the state identified substantial interests worthy of protection, but found those interests are not directly implicated by contractors advertising their roofing repair services to homeowners and informing homeowners that they may have storm damage that may be covered by insurance. As of this date, the injunction remains in effect and the case before Judge Walker is proceeding.

Filed under Contractor

Biden’s Buy American Policy & What it Means for Contractors

By and on February 5, 2021
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On January 25, 2021, President Biden signed an Executive Order (EO) “Ensuring the Future is Made in All America by All of America’s Workers”, which seeks to bolster U.S. manufacturing through the federal procurement process. Note that, just six day earlier, on January 18, the Federal Acquisition Regulation (FAR) Counsel issued a final rule implementing former President Trump’s July 2019 EO, titled “Maximizing Use of American-Made Goods, Products, and Materials” (EO No. 13881) on the then-current Buy American standards. For context, Trump’s proposed revisions – adopted and implemented by the FAR Council earlier this year – imposed three (3) significant changes worth noting: (1) increasing the percentage of domestic content (other than iron or steel) from 50% to 55% that an end product must contain in order to qualify as a “domestic end product”; (2) implementing an even higher increase in the domestic content requirement for iron and steel products to at least 95% U.S. “predominately” iron or steel product; and (3) increasing the price evaluation preference for domestic offerors from 6% to 20% (for other than small business) and 30% (for small businesses). The FAR’s rule became effective January 21, 2021, and applies to solicitations issued on or after February 22, 2021, and resulting contracts let. Biden’s EO rescinds Trump’s EO No. 13881 “to the extent inconsistent with [Biden’s] EO.” However, when dissected, it is clear Biden’s Buy American plan does little to modify thresholds inconsistent with the Trump Administration; rather, the White House’s latest EO implements changes in the form of BA administration. Nonetheless, Biden’s EO does expressly note that it supersedes and replaces Trump’s EO on the same issues.

Notably, Biden’s EO creates a Made in America Office (MAO) under the Office of Management and Budget (OMB)1 for the purpose of overseeing domestic preference laws and waivers by federal agencies. The EO, further, directs the FAR Council to consider replacing the component test requirements currently found at FAR Part 25 to ensure that domestic end products contact the requisite domestic content required. Biden’s EO goes on to request that the FAR Council (1) “increase the numerical threshold for domestic content requirements for end products and construction materials” and “increase the price preference for domestic end products and construction materials.” The Biden Administration’s EO, however, does not specify numbers for domestic content requirements or price preferences (i.e. greater than 55% domestic content or more than a 30% price preference for small businesses). It is unclear if – or by how much – these percentages will increase from those adopted by the FAR Council’s latest rule per the Trump administration’s July 2019 EO on these very issues. Biden’s EO also increases transparency in the exemption and waiver process, requiring waivers and their respective justification be available for public view via MAO’s website.

For now, it is clear our new Administration has done little to substantively change Buy American laws, as the EO focuses on waiver oversight, enforcement, and transparency. Government contractors and suppliers should closely monitor formally-approved changes to ensure compliance As the FAR Council may opt to revisit its recently adopted regulations and/or “consider” replacing the component test itself, affected contractors should keep abreast of any component test related revisions.
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1 In comparison, the Trump EO “directed each agency to go back and look at their own processes and strengthen them where necessary.”

Filed under Contractor

Ninth Circuit Rules Supreme Court’s Two-Part Test of Implied Certification under the False Claims Act Mandatory

By on May 6, 2019
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For those contractors in the government arena, read on.

The False Claims Act (“FCA”) was enacted to deter knowingly fraudulent actions by contractors which resulted in a loss of property to the Government. Intent to defraud with resulting financial hardship was required. Contrary to popular misconception, the statute was not designed to punish all false submissions to the Government simply because those submissions, or claims, are later found to be false. The statute’s inclusion of the requisite element of knowledge is consistent with this notion:

(1) A defendant must submit a claim for payment to the Government;

(2) the claim must be false or fraudulent;

(3) the defendant must have known the claim was fraudulent when it was submitted (also known as scienter); and

(4) the claim must have caused the Government to pay out money.

See 31 U.S.C. § 3729(a).

Despite these explicit elements (in addition to common law elements of fraud), over the last two decades, contractors have seen ever-expanding theories of FCA recovery presented by qui tam plaintiffs and the Government. For example, under the FCA, the false “claim” evolved over time: the claim no longer needs to be an express false claim (i.e. the truthfulness of the claim is a direct condition of payment); the claim can be “implied” misrepresentation or “half-truth”.

The United States Supreme Court in its paramount 2016 Escobar decision dealt squarely with the issue and interpretation of “implied” false certifications. The High Court, in pertinent part, ruled that implied certification is a viable theory of FCA liability at least where two conditions are met: (1) first, the claim does not merely request payment, but also makes specific representations about the goods or services provided, and (2) second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.” Escobar went on to provide an exact test for the FCA’s materiality requirement, clarifying that, even when a provision is labeled an express “condition of payment”, not every violation of that requirement will give rise to liability. Instead, materiality looks to the effect on the likely or actual recipient of the alleged misrepresentation; i.e. the Government. Put another way, the Government’s designation of compliance with a particular statutory, regulatory, or contractual requirement is not dispositive on the issue of materiality.

On August 27, 2018, the U.S. Court of Appeals for the Ninth Circuit, in U.S. ex rel. Scott Rose, et al., v. Stephens Institute, No. 17-15111 (9th Cir. August 24, 2018), affirmed both express and implied certification theories under the FCA, finding that falsity can be had by (1) an express certification; i.e. where the contractor seeking payment falsely certifies compliance with a law, rule, or regulation as part of the process for which its claim for payment is made/submitted, or (2) an implied false certification; i.e. the contractor has previously undertaken to expressly comply with a law, rule, or regulation (but does not do so as to the instant claim), and that obligation is implicated by submitting a claim for payment even though a certification of compliance is not required as part of the process in submitting the claim in question.

With respect to the later, the Ninth Circuit mandated Escobar’s two-part test for implied certification, but only where the two conditions enumerated in Escobar are satisfied: again, (1) the claim makes specific representations about the goods or services provided, and (2) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations “misleading half-truths.”1

The take away: the Ninth Circuit’s latest opinion is generally helpful for some defendant contractors: in cases where the now-mandatory two-part test is not met, absent appeal, the defendant may be absolved of FCA liability. That being said, government contractors and others participating in federally-funded programs must be prepared to defend against FCA suits based on an implied certification theory, which still very must exists.

The opinion in U.S. ex rel. Scott Rose, et al. v. Stephens Institute was issued by a three-judge panel. The Ninth Circuit left open the possibility that the issue may be revisited en banc.
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1 Although beyond the scope of this article, “misleading half-truths” are often found when the withholding of certain data by the defendant from the Government caused, or was material to, the Government’s decision to purchase the goods or services; i.e. the data was a condition of payment even if not designated an express condition of payment. For example, when the defendants had knowledge that the degradation of bullet-proof vests which they sold to the Government contradicted the defendants’ misrepresentations about the superiority of those vests. Note, the inquiry is highly factual and must be analyzed on a case-by-case basis.

Filed under Contractor, False Claims Act

Using the Prevention Doctrine

By on March 18, 2019
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The following scenario happens regularly in the construction industry. A contractor on a project reaches out to a subcontractor to perform work. Excited about the prospect of performing the work, the subcontractor signs a contract and puts it nose to the grindstone. After dutifully completing the work the subcontractor turns to the contractor and asks to be paid. But, the contractor refuses saying that there is a provision in the subcontract that says the contractor is only obligated to pay the subcontractor if the contractor receives payment from the owner. So the contractor has completed the work, but has no money to show for it.

One potential remedy for a subcontractor in this situation is the use of the prevention doctrine. “Under the prevention doctrine, ‘if a promisor prevents or hinders fulfillment of a condition to his performance, the condition may be waived or excused.’” Cox v. SNAP, Inc., 859 F.3d 304, 308 (4th Cir. 2017) (quoting Moore Bros. Co. v. Brown & Root, Inc., 207 F.3d 7171, 725 (4th Cir. 2000)). “Put simply, ‘where a party to a contract is the cause of the failure of the performance of the obligation due him or her, that party cannot in any way take advantage of that failure.’” Haddon Hous Assocs v. United States, 711 F.3d 1330, 1338 (Fed. Cir. 2013) (quoting Restatement (Second) of Contracts § 245; Williston, § 39:4).

So let’s add to the scenario above that the contractor failed to request payment from the owner for the subcontractor’s work. The contractor’s failure to request payment could be deemed a violation of the prevention doctrine, which would bar the contractor from being able to raising the contract terms as a defense. Alternatively, let’s say that the contractor had committed significant errors on the project and that as a result, the owner was withholding funds. Here too, the subcontractor could contend that the contractor’s mistakes on the project, which led to the owner withholding payment, should excuse contract terms that would otherwise bar payment. Basically, the contractor should not be allowed to benefit from its mistakes and failures to not pay an innocent party.

While the prevention doctrine is not a sure-fire solution to a problem with a contractor who won’t pay, it is a useful tool that we should be ready to use when the situation warrants.

Filed under Contractor, Subcontractors

Illinois Supreme Court Limits Reach of Implied Warranty Claims Against Contractors

By on February 25, 2019
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In a recent decision, the Illinois Supreme Court held that a purchaser of a newly constructed home could not assert a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶ 1. The decision overruled Minton v. The Richards Group of Chicago, which held that a purchaser who “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor” could assert a claim of a breach of the warranty of habitability against the subcontractor. 116 Ill. App. 3d 852, 855 (1983).

In Sienna Court Condo. Ass’n, the plaintiff alleged that the condo building had several latent defects which made individual units and common areas unfit for habitation. 2008 IL 122022 at ¶ 3. The Court rejected the plaintiff’s argument that privity should not be a factor in determining whether a claim for a breach of the warranty of habitability can be asserted. Id. at ¶ 19. The Court also rejected the plaintiff’s argument that claims for a breach warranty of habitability should not be governed by contract law but should instead be governed by tort law analogous to application of strict liability. Id.

The Court reasoned that the economic loss rule, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 91 (1982), refuted the plaintiff’s argument that the implied warranty of habitability should be covered by tort law. 2008 IL 122022 at ¶ 20. Under the economic loss rule, a plaintiff “cannot recover for solely economic loss under the tort theories of strict liability, negligence, and innocent misrepresentation.” National Tank Co., 91 Ill. 2d at 91. The Court explained that the rule prevented plaintiffs from turning a contractual claim into a tort claim. 2008 IL 122022 at ¶ 21. The Court further noted that contractual privity is required for a claim of economic loss, and an economic loss claim is not limited to strict liability claims. Id. Because the plaintiff’s claim was solely for an economic loss, it was a contractual claim in nature; therefore, the Court concluded that “the implied warranty of habitability cannot be characterized as a tort.” Id. at ¶ 22.

The Court also rejected the plaintiff’s argument that warranty of habitability should be governed by tort law because it involves a duty imposed by the courts. Id. at ¶ 23. It reasoned that “an implied term in a contract is no less contractual in nature simply because it is implied by the courts . . . .” Id. The Court noted that the warranty of habitability can be waived under Illinois law, but individuals are not able to waive duties imposed upon them by the courts. Id. If the warranty of habitability was a tort claim, it would “raise[] significant practical problems, particularly for subcontractors” given that they “depend upon contract law and contracts with the general contractor to protect and define their risks and economic expectations.” Id. at ¶ 24. Because a subcontractor’s fees, costs, and liability are controlled by his contracts, turning an implied warranty of habitability claim into a tort would make those contracts pointless. Id.

The Court’s decision to overrule Minton rested on three primary reasons: (1) Minton failed to discuss why the economic loss rule did not apply; (2) Minton did not address what effect its holding would have on the contractual relationships of subcontractors and general contractors; and (3) there is “no authority for the idea that a tort duty comes into and out of existence depending on whether another entity is bankrupt.” Id. at ¶ 25. In light of the opinion, a home purchaser’s remedy where there is economic loss is now limited to those parties with whom it has a direct contractual relationship.

Filed under Construction Defect, Contractor, Contracts, Subcontractors, Warranty

A Section 558.004 Pre-Suit Notice of Defect Tolls Florida’s Ten-Year Statute of Repose for Filing Construction Defect Claims

By on November 7, 2018
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In prior coverage of Florida’s latest construction law developments, Gordon & Rees provided insight on Florida’s detailed update to its ten-year statute of repose for construction defect claims enacted on June 14, 2017. In the recently decided case of Gindel v. Centex Homes, No. 4D17-2149, 2018 WL 4362058, (Fla. 4th DCA, Sept. 12, 2018), a case of first impression, Florida’s Fourth District Court of Appeal held that serving a contractor with a Section 558 pre-suit notice of construction defect constitutes an “action” under Section 95.11(3)(c) and therefore tolls the statute of repose.

In Gindel, a putative class of individuals purchased townhomes (“Homeowners”) from the defendants, a homebuilder and its subcontractor (“Contractors”) alleging damages due to defective construction of the townhomes. Homeowners closed on and took physical possession of their respective properties on March 31, 2004, thereby triggering the statute of repose under Section 95.11(3)(c), Florida Statutes (the “statute of repose”). After discovering alleged construction defects, Homeowners served the Contractors with a pre-suit notice of defect on February 6, 2014, pursuant to Section 558, Florida Statutes. Contractors rejected the Homeowners’ request to cure the alleged defects. Consequently, Homeowners filed suit against Contractors on May 2, 2014 – 59 days after the statute of repose had expired.

Contractors moved for summary judgment, contending that the statute of repose barred Homeowners’ claims because the action was commenced not at the time the notice of defect was served, but when Homeowners actually filed their lawsuit. The trial court agreed with Contractors and ruled that service of the notice of defect did not commence the action under the statute of repose, filing a lawsuit did, and Homeowners lawsuit had been filed too late. The trial court entered summary judgment in Contractors’ favor. Homeowners appealed the trial court’s judgment.

The issue on appeal was “whether the pre-suit notice required by Chapter 558 qualifies as ‘an action,’ as the term is defined in the statute of repose, sections 95.011 and 95.11(3)(c).”

In answering this question, the court began its analysis with the plain language of Section 95.011 and Section 558 because each of them have their own definition of what constitutes an “action.” Section 95.011 defines an “action” as a “civil action or a proceeding”; Section 558.002(1) defines an “action” as a “civil action or arbitration proceeding.” Thus, as a textual matter, a homeowner’s service of a pre-suit notice of defect does not constitute an “action” within the express definition of either Section 95.011 or Section 558.002(1). Add to that, Section 558.004(1)(a) further makes clear that a pre-suit notice of defect is not an “action” under that Section 558 because it makes a distinction an “action” and a “written notice of claim,” and directs that the latter must be served on a contractor before the former can be filed in court. Importantly, however, as the Gindel Court noted, Section 95.011 and Section 558 are not textually intertwined such that the definition of an “action” under Section 558 must be read into Section 95.011(3)(c). Accordingly, the Court held that the term “action” in Section 95.011 and Section 558 are two separate and distinct terms that do not rely on one another.

The trial court, however, had construed the term “action” in Section 95.011 to mean only a civil action. By ruling that a pre-suit notice of defect is not an “action” under Section 95.011, the trial court effectively struck out the term “proceeding,” which is designed to encompass dispute resolution processes other than a civil action. The trial court’s construction of the statute conflicted with the canon of statutory interpretation that “a statutory provision should not be construed in such a way that it renders the statute meaningless.” Warner v. City of Boca Raton, 887 So. 2d 1023, 1033 n.9 (Fla. 2004).

Next, the Court looked to the Supreme Court’s decision in Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013), for guidance. In Raymond James, the Supreme Court had to decide whether an arbitration proceeding constituted an “action” under Section 95.011. The Court resorted to Black’s Law Dictionary for the definition of the word “proceeding,” which means “[a]ny procedural means for seeking redress from a tribunal or agency.” The Court further reasoned that because an arbitration involves a legal process for seeking redress from an “adjudicatory body,” arbitration meets the definition of a “proceeding” under Section 95.011. But in the context of a Section 558 pre-suit notice defect, a homeowner is not commencing an action before a tribunal, but rather, is complying with a require prerequisite to do so. Accordingly, Raymond James can be distinguished from Gindel on those grounds. The proposition that Raymond James stands best for is that the Supreme Court has recognized that a “proceeding” under Section 95.011 may be a process besides a civil action. The holdings in Raymond James and now Gindel leave open the possibility that parties who agree to engage in pre-suit mediation in a non-construction cases before the statute of limitations expires could use pre-suit mediation as a means of tolling the time period to file suit.

Last, the Court looked at the practical purposes behind the Section 558 pre-suit notice of defect requirement. A pre-suit notice of defect is designed to enable the parties to work towards curing any alleged defective construction without first filing a civil action. The only reason the Homeowners in Gindel server a pre-suit notice of defect instead of immediately filing suit is because Section 558.003 expressly prohibits from filing a civil action “without first” “serv[ing] written notice of claim on the” (Section 558.004(1)(a)) defendant. Thus, it would undermine the purpose of Section 558.003 to provide claimants incentive to circumvent the pre-suit claim procedures put in place thereby. But even with that legislative intent in the backdrop, in granting Contractors summary judgment, the trial nonetheless court ruled that Homeowners should have ignored Section 558.003 by commencing their lawsuit and seeking a stay until compliance with Section 558.003 had been effect. The Gindel Court, however, rejected the notion that the Homeowner’s should have had to resort to violating rather than “rightly complying” with Section 558 pre-suit notice of defect requirement.

Thus—and although Gindel likely laid to rest any question as to whether a Section 558 notice of defect tolls the statute of repose—the Homeowners there could have ensured the viability of their claims by filing their lawsuit and contemporaneously serving the notice of defect on the defendant, then moving to stay the action until pursuant to Section 558.003 until the applicable timeframe set forth in Section 558.004(1)(a) expires. Notably, the Court did not disavow this procedure, but held that construction defect claimants are not required to resort to this procedure to comply with the statute of repose if they timely served their notice of defect, and that claimants should not be penalized for adhering to the statutory procedure.

The court ultimately held that the trial court’s summary judgment order was erroneous because Homeowners’ timely service of a pre-suit notice of defect under Section 558 constituted an “action” under Section 95.011, and reversed and remanded the case to the trial court to reinstate the complaint.

Conclusion

Claimants wishing to bring construction defect claims now have clarity from the Gindel decision that service of a Section 558 pre-suit notice of defect, even right up against the expiration of the statute of repose, tolls the time to file suit.

Filed under Construction Defect, Contractor

Insurers May Not Be Required to Defend Contractors In a Florida §558 Proceeding

By on October 5, 2018
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In recent holding1, the Florida Supreme Court held that an insurer may not have a duty to defend a contractor in a Florida §558 proceeding.

Chapter 558 of the Florida Statutes sets forth procedural requirements which must be met before a claimant may file a construction defect action. These requirements include serving a contractor, subcontractor or supplier with written notice of the claim. The contractor, in turn, must serve a written response to the notice of claim in which the contractor provides either an offer to repair the alleged construction defect at no cost to the claimant, resolution of the claim through a monetary payment, a statement disputing the claim, or a statement that any monetary payment will be determined by the recipient’s insurer.2 The claimant may file suit if the contractor disputes the claim and refuses to remedy the alleged defect or provide monetary compensation.

In the case of Altman Contractors, Inc. v. Crum & Forster Specialty Insurance3, Altman Contractors was the general contractor for a condominium project in Broward County, Florida. Altman Contractors was insured by Crum & Forster Specialty Insurance (“C&F”) through seven consecutive one-year commercial general liability policies that were essentially identical. The policies required C&F to defend Altman Contractors against any “suit” seeking damages because of bodily injury or property damage. The policies defined “suit” as follows:

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

  1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
  2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

The policies did not provide further definitions for “civil proceeding” or “alternative dispute resolution proceeding” as used within the definition of “suit.”

After being served with a §558 notice, Altman Contractors notified C&F of the claims and demanded that C&F defend and indemnify it. C&F denied that the notice invoked its duty to defend because it did not constitute a “suit” as defined by the policy. Altman Contractors ultimately resolved the construction defect claims without a lawsuit being filed and without C&F’s involvement. Altman Contractors then filed suit for declaratory relief in which it sought a declaration that C&F owed a duty to defend and indemnify it under the policies.

The Florida Supreme Court held that Florida’s Chapter 558 notice and repair process “cannot be considered a civil proceeding under the policy terms because the recipient’s participation in the chapter 558 settlement process is not mandatory or adjudicative.”4 Rather, a recipient of a Chapter 558 notice may “choose to not respond and, thereby, force the claimant to file a lawsuit to recover for the identified construction defect.”5 The court nevertheless recognized that the policies’ definition of “suit” included “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”6 The court then held that, while the Chapter 558 process was not a civil proceeding, it was an alternative dispute resolution proceeding under which the insurer’s consent was required to invoke its duty to defend.

Based on this ruling, an insurer is not necessarily required to defend a Florida contractor that received a Chapter 558 notice. The Florida Supreme Court does not interpret Chapter 558 as constituting a “civil proceeding” as defined in many CGL policies. Even if the policy in question contains language pertaining to “alternative dispute resolution proceedings,” the insurer’s duty to defend can only be invoked with its consent. This could have broad ramifications in Florida construction defect actions, as a contractor’s ability to investigate and contest the allegations could be adversely impacted without the assistance of counsel.

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1 Altman Constrs., Inc. v. Crum & Forster Specialty Ins. Co., 232 So.3d 273 (Fla. 2017).
2 See Fla. Stat. § 558.004(5).
3 232 So.3d 273 (Fla. 2017).
4 Id. at 278.
5 Id.
6 Id.

Filed under Construction Defect, Contractor

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