As happens far too often, contractors bid on an improvement project, start the work, only to later walk off the job. The contractor might do this for one of many reasons: the job was not bid correctly, prices go up, the laborers demand more money, and anything else that leads the contractor to believe they will make less in profits than expected. Now, the association is left with a partially completed project, leaving the property unusable, with no contractor to complete the work. What should the board do in this situation? How does the association evaluate its damages against the contractor who walked off the job? Such questions were forced to be addressed by single family homeowners in the case of Forbeses v. Prime General Contractors, Inc., decided by the Second District Court of Appeal of Florida in an opinion filed on September 7, 2018.
In this case, the Forbeses contracted with Prime General Contractors, Inc. (“Prime”) for the complete renovation of their home. The contract required that the Forbeses pay Prime the total amount of $276,000 in separate payments due at five defined milestones of the project: (1) 25% due upon signing the contract; (2) 25% upon completion of demolition; (3) 25% upon completion of the “dry-in” stage of construction; (4) 15% after roofing and siding installation; and (5) the remaining 10% upon completion of construction. The construction contract also provided that “any alteration or deviation from the contract must be made in writing and signed by both Forbeses and Prime.”
The construction contract was signed, and Prime began the necessary demolition, requiring the Forbeses to pay the first two milestone payments in the total amount of $138,000. After demolition was completed, Prime informed the Forbeses that the cost of the materials needed for the project had increased requiring an increase in the cost of the project to $550,000. Prime demanded that the Forbeses immediately pay the third milestone payment and an additional $31,450 for the work Prime had already completed and provided the Forbeses with a written change order for the increase in costs to modify the construction contract. Relying on the costs quoted by Prime, the Forbeses refused to sign the change order, resulting in Prime walking off the job. Because the property had only reached the demolition phase, the property was left uninhabitable.
Needing a place to live, the Forbeses rented a home and began the search for another contractor to complete the work. Five contractors later, the Forbeses could not find a contractor willing to complete the work. The Forbeses ultimately purchased another home to live in and were not able to pay both the mortgage on the project home and the mortgage on the residence home. As a result, the project home fell into foreclosure.
The Forbeses sued Prime for breach of contract, seeking the following damages: (1) payments they made to Prime under the contract; (2) payments they made for updated architectural plans; (3) certain other expenses, including rent for alternate housing; and (4) a loss of equity in their home they had prior to contracting with Prime. At trial, the Forbeses argued that Prime materially and completely breached the construction contract by demanding payments it was not entitled to under the contract and then walking off the job. Prime defended by arguing that, among other things, the Forbeses were also in breach and failed to mitigate their damages. The trial court found that Prime did in fact materially breach the contract but only awarded damages for rent of alternative housing because the trial court took the position that damages in this case were to put the Forbeses in as good a position as if the contract had been fully performed, of which the Forbeses provided no evidence, and that the Forbeses did not engage in mitigation efforts.
The Forbeses appealed the trial court’s decision for two reasons: (1) the trial court used the incorrect method of calculating damages by taking the position that damages in this case were to put the Forbeses in as good a position as if the contract had been fully performed; and (2) the trial court’s finding that the Forbeses failed to mitigate their damages is unsupported by evidence. The Second District Court of Appeal of Florida agreed with the Forbeses.
The Court explained that, in the event of a party’s material breach, the non-breaching party may treat the material breach as a breach of the entire contract, at which time the non-breaching party can suspend their own performance of the contract and seek damages to either:
1. return the non-breaching party to the position the non-breaching party was in prior to contracting with the breaching party, or
2. put the non-breaching party in the position the non-breaching party would have been in had the contract been fully performed.
Based upon the damages sought by the Forbeses, the trial court should have concluded that the Forbeses were seeking damages to restore them to the position they were in prior to contracting with Prime. Because the trial court did not do so, the Court held that the trial court used the incorrect method to calculate damages in this case.
As to mitigation of damages, the Court explained that there is no “duty to mitigate” in contract cases but that the non-breaching party is prevented from recovering damages that the non-breaching party could have reasonably avoided. A reduction in contract damages should only be considered where the Forbeses failed to undertake measures to avoid damages that were available to them without undue effort or expense. Given the circumstances of the Forbeses with an uninhabitable home and unable to find a willing contractor, the Court found that there was no competent substantial evidence to support a damage reduction.
Due to the trial court’s failure to apply the correct method of calculating damages and its improper application of a reduction of damages for failure to mitigate, the Court reversed the decision of the trial court so that the Forbeses would be awarded the full amount of damages to which they were entitled.
This case is a classic example of the need to purchase both performance and payment bonds to accompany the construction project at hand. While doing so will cost the association an additional 2% to 5% of the project costs, these bonds ensure that, if the general contractor does not pay the sub-contractors and suppliers and/or walks off the job, the bond surety, pending the terms of the bond, will be obligated to step in. In this author’s opinion, payment and performance bonds are worth their weight in gold… and then some.