The Construction Advantage
You Can Fool Me Once, But Not Twice!
In a recent case out of the Fifth Circuit Court of Appeals, the Federal Appellate Court concluded that a subcontractor had raised genuine issues of material fact regarding fraudulent inducement into a settlement agreement by a general contractor that would require a trial. In Fisk Electric Company v. DQSI, filed by the court on June 29, 2018, the subcontractor, Fisk Electric, contracted with DQSI for an Army Corps of Engineers project for a pump station construction project that was being performed post Hurricane Katrina. Fisk Electrical was the electrical subcontractor and when the project was finished late, Fisk Electrical submitted a request for equitable adjustment seeking 464 days of delay and more than $400,000 in additional costs. DQSI initially would not agree to submit Fisk Electric’s request for equitable adjustment to the government.
Fisk Electrical thereafter sued the general contractor and the payment bond surety under the Federal Miller Act. After mediation, the parties entered into an agreement where DQSI would submit the request for equitable adjustment to the government following the settlement. The settlement also dismissed the court case with prejudice.
Later, Fisk Electric learned from the Army Corps of Engineers that it would not entertain their request for equitable adjustment because DQSI had previously settled all matters with the Army Corp of Engineers with prejudice, prior to Fisk Electric filing its first lawsuit. Fisk Electric then filed a second lawsuit against the surety and DQSI alleging rescission of the previous settlement agreement, a new Miller Act Claim against the surety bonding company, and claimed fraudulent inducement into the first settlement agreement. In essence, it was alleged that DQSI knew that it had settled all matters with the Army Corps, but misled Fisk Electric into thinking it could still file a claim with the Army Corps.
After the trial court granted summary judgment in favor of the general contractor, the Fifth Circuit Court of Appeals concluded that there was a genuine issue of material fact that would require a trial as to whether Fisk Electric had properly relied upon the conduct and representations of the general contractor. The general contractor argued that because Fisk Electric did not actively investigate the events between the Army Corps of Engineers and DQSI prior to settling the first case, that Fisk Electric could not have justifiably relied upon DQSI’s conduct as part of the second lawsuit. The Fifth Circuit concluded that an issue of fact remained as to whether the general contractor had represented to Fisk Electric that negotiations were still ongoing with the Army Corps of Engineers and that Fisk Electric’s delay damages claim was still viable, when in fact the project was closed out. Because these statements were made during mediation of the first lawsuit that led to a settlement and dismissal,, the Fifth Circuit Court of Appeals concluded that whether Fisk Electric had been fraudulently induced to settling its claims without knowledge of the final close out of the project, would in fact require a trial.
Residential Construction Issues – Potential Pitfalls for Contractors and Owners
A recent Maine Superior Court decision, Phu Le v. Averill Construction, LLC, Docket No. CV-16-366 (Me. Super. Ct. Sept. 11, 2018) highlights the importance of careful attention to the requirements of the Home Construction Contracts Act (“HCCA”), and other potential pitfalls related to residential construction.
Homeowners brought a lawsuit against a construction company and the contractor personally, with claims related to the construction of an addition to an existing residence in Falmouth. The parties participated in a 4-day trial, after which the court made a number of findings of fact and issued an order awarding damages to the plaintiffs, to be paid by the defendant contractor individually. A number of the issues raised in this case are instructive on potential risks for contractor and owners when entering into contracts for residential construction projects.
Home Construction Contract Act Violation
The court found that though the parties had entered into a contract, the contract documents were extremely deficient and in violation of the HCCA. The court highlighted the following issues as violations:
- The original contract document included a contract price, but did not include: estimated start and completion dates; the required warranty language; the required dispute resolution clause; the required language with respect to change orders; nor the required consumer protection language (see 10 M.R.S.A. §§ 1487(3), (7), (8), (9), (12), (13));
- Subsequent contract documents inexplicably reflected different prices; and
- Documents presented by the contractor that appeared to be attempts at change orders or additional contracts were not signed by the plaintiffs, in violation of 10 M.R.S.A. §§ 1487 and 1488
Although the homeowners made several other claims for damages – including related to poor workmanship – due to the deficiencies in the damages evidence presented, the court relied heavily on the violation of the HCCA as the basis for an award of damages to the plaintiffs. A violation of the HCCA is considered prima facie evidence of a violation of Maine’s Unfair Trade Practices Act (“UTPA”), which provides for actual damages, restitution, and appropriate equitable relief. The court found that the homeowners had paid the contractor $13,500 more than the specified contract price. The court concluded that this extra cost was directly attributable to the HCCA violations because the deficient contract documents did not inform the homeowners of their rights with respect to written change orders and remedies that they could invoke in the event of the contractor’s breach. Instead, the contractor repeatedly asked for more money, claiming he would only continue working if he got paid, and the court found that the deficient documents contributed to the homeowners’ belief that they had to keep paying to get the work done. As a result, the court found restitution in the amount of the $13,500 to be appropriate under the circumstances, and awarded the contractor to pay the homeowners that amount. In addition, the court invited the homeowners to submit an application for attorney’s fees and costs related to their HCCA/UPTA claims.
Breach of Warranty; Poor Workmanship
Importantly, without the HCCA claims, the homeowners in this case may not have recovered at all. The court found that their breach of warranty claims related to deficient workmanship had merit, and in fact, the breaches were so obvious that no expert testimony was needed. The court also noted that a certificate of occupancy does not preclude a finding of defective workmanship.
However, the court found “significant failures” in the homeowners’ proof of damages on the defective workmanship issue. Although an expert testified on the cost to repair the work, the court did not find the estimate to be credible, noting that many of the items identified were cosmetic and the estimate included work to be done by other contractors, which was deemed inadmissible hearsay. Thus, a claim for $85,500 in damages related to poor workmanship was effectively eliminated because of poor expert testimony which left the court with no way to “reasonably determine the actual amount of damages caused by [the contractor’s] poor workmanship.” This is a harsh lesson on the importance of solid expert testimony in any construction case.
Also of note, the court found that the contractor was personally liable for the damages awarded to the homeowners. Although the contractor operated an LLC entity, the only contractual documents in this case designated the individual, not the entity, as the contracting party. The documents also directed the homeowners to make payments to the contractor individually, and not the entity, which they did for the majority of the payments. From the facts, the court concluded that the homeowners were dealing with the contractor in his individual capacity, and not the entity, and therefore the individual was liable for any damages.