I write a fair amount about construction claims, and I frequently emphasize the importance of properly proving damages in connection with construction claims (e.g., a general contractor only being awarded $22,000 on its $1.3 million claim against a subcontractor, in part, because the general contractor failed to adequately prove its damages).
Under Florida law, the burden is on the party seeking damages to prove its damages with a reasonable degree of certainty. While difficulty proving your damages may not be a bar to recovery, the award of damages cannot be based on mere speculation or guesswork.
A recent federal court trial illustrates the difficulty contractors and subcontractors can have proving claims against each other for breach of a construction contract.
In Metalizing Technical Services, LLC v. Berkshire Hathaway Speciality Insurance Company, a contractor was awarded a project to repair and rehabilitate the MacArthur Causeway East Bridge in Miami-Dade County. The contractor, in turn, entered into a subcontract with another company for a portion of the project work, including repair and painting work.
During construction, a car accident killed one of the subcontractor’s employees. As a result of the accident, the general contractor discovered that the subcontractor did not have insurance required under the subcontract, including workers’ compensation insurance. The general contractor terminated the subcontractor’s contract and hired a replacement subcontractor to complete and repair the previous subcontractor’s work.
The terminated subcontractor believed it was still owed money for its work on the project and sent an approximately $1.2 million bond claim to the general contractor’s payment bond surety. The general contractor claimed it did not owe any money because it had setoffs for the subcontractor’s deficient work and insurance-related damages that exceeded the remaining subcontract balance. The subcontractor then sued the payment bond surety, and the general contractor intervened in the case.
At trial, the subcontractor had about $937,000 in claims, including $40,000 for damages associated with a stoppage in work, $215,000 for a hazardous materials claim, and the remaining subcontract balance of around $682,000. In defense, the general contractor alleged it had setoffs totaling around $950,000.
The subcontractor’s work stoppage claim
The subcontractor contended it was owed money because an owner representative ordered the subcontractor to stop work and as a result, the subcontractor incurred idle equipment and labor costs. Ultimately, the court held that the general contractor was not liable for the work stoppage claim because that claim was barred under the subcontract in two ways.
First, the claim was barred because the subcontractor failed to provide timely written notice. The subcontract required the subcontractor to “immediately notify” the general contractor in writing when additional compensation was due as a result of a suspension of the work. The court noted that the subcontractor’s first written notice regarding the work stoppage issue was nearly a month after the work stoppage. Thus, the claim was barred.
Second, even if timely written notice had been provided, the court noted that the subcontract barred compensation for delays that did not impact the critical path. The court reasoned that since the stoppage did not impact the critical path, the subcontractor was not entitled to additional compensation due to the work stoppage. (For more on critical path delays, click here.)
Finally, the court also held the subcontractor failed to “meet its burden of proving its work stoppage damages with reasonable certainty.” The court noted that while uncertainty as to the amount of damage is not necessarily a bar to recovery under Florida law, damages “cannot be based on speculation or guess work but must have some reasonable basis in fact.”
The court then proceeded to shred the subcontractor’s key witness on the work stoppage claim, noting that the witness was unable to describe the equipment in the claim, could not remember how he came up with the prices, and could not remember whether he used a standby rate to calculate the equipment costs.
One of the general contractor’s witnesses testified that, at most, the subcontractor had $11,000 in work stoppage damages. The subcontractor then tried to stipulate that $11,000 was the correct amount. But the court held that “the imprecise testimony of [the general contractor’s] witness alone is not sufficient evidence for [the subcontractor] to meet its burden of showing, with reasonable certainty, that it incurred $11,000 in damages.”
The subcontractor’s hazardous materials claim
The subcontractor also sought about $215,000 related to costs associated with unexpected hazardous materials detected on the project. The court held that the subcontractor was not entitled to recover on that claim for two reasons.
As to the first reason, the court concluded that the subcontractor waived any right to recover on the claim because it did not comply with the mandatory claims process under the subcontract. In particular, the subcontract required the subcontractor to request the general contractor to appeal an owner’s denial of a claim and post security for the appeal. Since the owner rejected the subcontractor’s claim and the subcontractor neither requested the general contractor to appeal the decision nor posted security for the appeal, the court held the subcontractor waived its claim under the subcontract.
Further, even if the subcontractor complied with the claims provision, the court found that the general contractor had no obligation to pay the subcontractor because subcontract provided that the subcontractor could not recover any payment that had not yet been made to the general contractor (i.e., the subcontract had a pay-if-paid clause). Since the subcontract unambiguously shifted the risk of owner nonpayment to the subcontractor, the court held that the subcontractor’s hazardous materials claim failed.
The subcontractor’s claim for the subcontract balance
The subcontractor also had a claim for its subcontract balance, which was around $682,000. The general contractor stipulated to that claim less any of the general contractor’s setoffs.
The general contractor’s claim for setoffs
The real fight in this case seemed to be about the general contractor’s claimed setoffs. Those setoffs included amounts the general contractor spent to complete the subcontractor’s work and other associated costs.
Also, the general contractor had setoffs related to increased insurance costs it allegedly incurred due to the car accident that should have been covered by the insurance the subcontractor should have obtained but failed to get. Those insurance costs included anticipated increases in general liability and excess liability insurance premiums.
As to the construction-related setoffs, the court awarded the general contractor the full amount of its requested setoff damages. The court rejected the subcontractor’s arguments that generally alleged the general contractor failed to reasonably avoid unnecessary costs by obtaining multiple bids from potential replacement subcontractors and performing unnecessary work.
The court discussed the law of avoidable consequences, noting that under the doctrine, “one seeking damages as the result of another’s act cannot recover those damages which he could have avoided by the exercise of reasonable care.”
In essence, the court concluded that the damages the general contractor incurred in completing the subcontractor’s work could not have been avoided through “ordinary and reasonable care,” so the court awarded the general contractor its construction-related damages.
The second group of setoff damages were for the general contractor’s insurance-related setoffs. The general contractor alleged it incurred increased workers’ compensation, general liability, and excess liability insurance costs due to the uninsured accident that occurred, which should have been covered by the subcontractor’s nonexistent insurance. The subcontractor stipulated that the general contractor was owed a $96,000 setoff for increased workers’ compensation costs.
When the court considered the general contractor’s alleged increased general liability and excess insurance costs, the court concluded the general contractor failed to meet its “burden of proving that the setoffs [the general contractor] claim[s] for increases in liability and excess liability premiums are a reasonable measure of damages for which [the subcontractor] is responsible.”
The court found that the general contractor’s “liability and excess liability insurance setoffs are based on speculative and — admittedly — imprecise forecasts.” The court further concluded that the general contractor “failed to show [the subcontractor’s] breach of the Subcontract caused the damages and that there is some standard by which the amount of damages may be adequately and reliably determined.” Thus, the court rejected the general contractor’s $211,000 setoff for anticipated increases in general liability and excess liability insurance premiums.
Conclusion – the subcontractor wins $278,000 on a $937,000 claim
After taking into consideration the setoffs that the general contractor had adequately proven, the court awarded the subcontractor about $278,000 on its $937,000 claim.
A contractor’s ability to adequately prove its damages should be given priority consideration in construction disputes. If you can easily prove the other party is liable for breaching your contract but you cannot adequately prove the damages that result from that breach, you should think twice about pursuing that claim.
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