All posts by Sanjo S. Shatley, Esq.

Sanjo S. Shatley is a Partner in CSK’s Construction Group and practices in the Jacksonville office. Mr. Shatley concentrates his practice in civil defense litigation, including premises liability, nursing home, medical malpractice, professional malpractice, and products liability. His practice also includes construction litigation and risk management counseling, including the representation of design professionals in professional liability claims, developers, contractors, and subcontractors in construction defect, contract, and lien enforcement claims, and payment and performance bond sureties in public and private bond and subrogation claims.
25AUG 2017

Florida’s Fifth District Court of Appeal recently addressed the issue of retroactive application of a construction subcontract on the basis of a merger clause in Don Facciobene, Inc. v. Hough Roofing, Inc.[1]

In the case, in late 2010, Don Facciobene, Inc. (“DFI”), a licensed general contractor, contracted with Digiacinto Holdings, LLC, an owner of a home built in 1905 in Melbourne, Florida, known as the Nannie Lee House or the Strawberry Mansion, to perform various renovations in preparation for a restaurant to be opened on the premises.  One of the renovations included a new roof.  DFI subcontracted the roofing work to Hough Roofing, Inc. (“HRI”), a licensed roofing subcontractor.  In mid-March 2011, HRI submitted an estimate and proposed statement of work to DFI.  DFI’s project manager signed HRI’s proposal on April 5, 2011, as well as an additional expanded proposal six days later.  According to the proposals, payment was due on completion.  HRI began work on the roof on April 15, 2011, without a signed subcontract.  However, DFI and HRI ultimately executed a subcontract on June 8, 2011, even though HRI had mostly finished its work by the end of May.

Under the subcontract, the terms of payment differed from the proposals.  Specifically, rather than payment being due on completion per the proposals, HRI was due progress payments, minus a ten percent retainage, on the twentieth day of the following month for work completed during the prior month.  Final payment, which amounted to the payment of the accrued ten percent retainage, was not due until thirty days after the entire renovation was complete.  The subcontract also required several conditions precedent to progress payments and final payments.  Specifically, prior to issuance of progress payments, DFI had to obtain payment from the owner for HRI’s work associated with the progress payment.  Also, HRI had to submit, upon request from DFI, a sworn statement identifying entities who provided labor and materials to HRI and documentation confirming they had been paid by HRI.  In addition, prior to final payment being issued, HRI was required to (1)  have completed at least 98% of its work; (2) submit unspecified closeout documents to DFI for approval; and (3) provide ia final lien waiver and release to DFI.

On the same day the subcontract was executed, HRI submitted its “final” invoice for $22,370.  Due to disputes over some of the charges, and despite receiving payment for HRI’s work from the owner on July 15, 2011, final payment for the entire project on December 21, 2011, and completion of the renovations occurring on December 30, 2011, DFI did not pay HRI anything for its work on the home.  Accordingly, HRI filed a claim of lien against the property, and on December 6, 2011, a Complaint against DFI and the owner for breach of contract.  On December 27, 2011, DFI notified HRI that the owner had discovered a leak in the roof; however, the owner refused permission for HRI to come onto the premises and repair the leak until May 2012.  Consequently, DFI repaired the roof, even though it did not have a roofing license, and filed a counterclaim against HRI seeking damages for the estimated cost of repairing the leak.  DFI also answered HRI’s breach of contract claim by asserting, as an affirmative defense, noncompliance with unspecified conditions precedent.

Following a bench trial, the trial court issued an amended final judgment.  The trial court found that both parties did not sign the subcontract until June 8, 2011, and, as of that time, HRI’s performance was more than 90% complete.  The trial court determined that “to retroactively apply the language to the work performed prior to the Contract being fully executed is not required since the total work called for by the Contract was substantially performed prior to the written Contract being signed.”  The trial court ruled that DFI breached the implied covenant of good faith and fair dealing by ceasing communications with HRI and not paying in late June.  The trial court awarded HRI the uncontested charges for metal roofing panels, plywood sheathing, thirty-one pitch pockets, and flat roof and base sheet, totaling $19,788.50.  However, after certain offsets and a small award being granted on the counterclaim, the trial court only awarded $15,439.65 to HRI, plus post-judgment interest.  The balance of the contract price was not part of the award because the trial court ruled that HRI did not comply with the conditions precedent to final payment contained in the subcontract.

Both DFI and HRI appealed the amended final judgment on HRI’s breach of contract claim and DFI’s counterclaim.  DFI asserted that the trial court erred in finding that its subcontract with HRI did not apply retroactively and that, consequently, HRI was barred from receiving any payment at all due to noncompliance with the conditions precedent to progress payments and final payment contained in the subcontract.  HRI filed a cross-appeal seeking payment for the full value of its subcontract.

While “multiple errors” were found in the amended final judgment that warranted reversal, of significance is the Fifth District’s holding that the trial court’s decision not to apply the subcontract retroactively was error in light of the merger clause contained within the subcontract.  The Fifth District reasoned that the merger clause required retroactive application because it acted to replace the original contract with the new one.  For support, the Fifth District relied on Katz v. Fifield Realty Corp.[2] and Aly Handbags, Inc. v. Rosenfeld[3], citing Aly Handbags for the proposition that  [t]he well established rule of law is that a contract may be discharged or extinguished by merger into a later contract entered into between the parties in respect to the same subject which replaces the original contract.”  The Fifth District noted that the trial court’s failure to apply the subcontract retroactively resulted in HRI being barred by the conditions precedent from collecting the final payment, while allowing it to receive a progress payment for work performed before execution of the subcontract.

Even though the Fifth District agreed with DFI’s position that the trial court should have applied the subcontract retroactively, it disagreed with DFI’s position that such retroactive application would bar HRI from receiving any payment at all due to HRI’s failure to comply with the conditions precedent.  In its Complaint, HRI alleged that it had “fully performed all of its obligations under the Contract or has been excused from performance.”  As noted above, DFI asserted, as an affirmative defense, noncompliance with unspecified conditions precedent.  The Fifth District pointed out that DFI did not specify which conditions precedents HRI did not comply with or how HRI failed to comply with them.  Accordingly, because the affirmative defense did not contain the specificity required pursuant to Florida Rule of Civil Procedure 1.120(c), the Fifth District concluded that DFI failed to preserve its right to demand proof that HRI complied with the conditions precedent to progress payments and final payment.  As a result, the Fifth District confirmed that the trial court’s award of uncontested charges to HRI was appropriate, as was most, but not all of the offsets.  Additionally, the Fifth District concluded that the trial court should have also awarded HRI the ten percent retainage, and, because this case involved liquidated damages, prejudgment interest from July 20, 2011, for the progress payment and January 29, 2012, for the final payment.

Based on this decision of the Fifth District, it is likely that construction subcontracts containing merger clauses in Florida will be retroactively applied in instances where proposals for work to be performed are executed in advance, even though the subcontracts are not executed until after the work described therein is nearly complete.  Accordingly, for those entities that decide to enter into such subcontracts in similar circumstances, prudence requires knowledge of and compliance with the terms of the subcontract, not reliance on terms contained within earlier executed proposals.

If you have any questions about this Fifth District decision, please do not hesitate to contact a member of CSK’s Construction Group.

[1] No. 5D15-1527, 42 Fla. L. Weekly D1627 (Fla. 5th DCA July 21, 2017).

[2] 746 F. Supp. 2d 1265 (S.D. Fla. 2010).

[3] 334 So. 2d 124 (Fla. 3d DCA 1976).

01JUN 2016

On July 20, 2015, diplomatic relations were officially restored between the U.S. and Cuba. Since that date, a number of significant political events have taken place. First, the U.S. reopened its embassy in Cuba on August 14, 2015. Next, on January 26, 2016, offices of the U.S. Departments of the Treasury and Commerce announced new amendments to the Cuban Assets Control Regulations and Export Administration Regulations. These amendments removed “existing restrictions on payment and financing terms for authorized exports and reexports to Cuba of items other than agricultural items or commodities,” and established “a case-by-case licensing policy for exports and reexports of items to meet the needs of the Cuban people, including those made to Cuban state-owned enterprises.”[1] Additionally, these amendments “further facilitate travel to Cuba for authorized purposes by allowing blocked space, code-sharing, and leasing arrangements with Cuban airlines, authorizing additional travel-related and other transactions directly incident to the temporary sojourn of aircraft and vessels, and authorizing additional transactions related to professional meetings and other events, disaster preparedness and response projects, and information and informational materials, including transactions incident to professional media or artist productions in Cuba.”[2]   Finally, on March 21, 2016, President Barack Obama was the first sitting U.S. President to visit Cuba since the 1959 revolution, in which Fidel Castro overthrew Fulgencio Batista. This revolution ultimately led to the U.S. severing diplomatic relations in 1961 and President John F. Kennedy imposing a trade embargo between the U.S. and Cuba, which remains in effect today.

Noteworthy developments involving some U.S. construction companies and equipment manufacturers have occurred following the restoration of diplomatic relations. For example, the U.S. recently approved the construction of the first U.S.-operated factory in Cuba since the revolution. Specifically, “a two-man company from Alabama” has been authorized “to build a plant assembling as many as 1,000 small tractors a year for sale to private farmers in Cuba.”[3] While the plant initially “will assemble commercially available components into a durable and easy-to-maintain 25-horsepower tractor selling for less than $10,000,” the two men “have plans to produce excavators, backhoes, trench-diggers and forklifts, equipment that’s badly needed across Cuba, where virtually all the infrastructure is crumbling after years of neglect and mismanagement and a lack of cash that the government blames on the embargo.”[4] In addition, on April 7, 2016, for the first time, a number of U.S. companies participated in Havana’s 11th International Construction Fair, evidencing interest on the part of these companies to conduct business in Cuba.

However, even though the U.S. is relaxing some restrictions on the trade embargo with Cuba, U.S. construction companies and equipment manufacturers will not have the opportunity to conduct significant business in Cuba until the trade embargo is fully lifted. While President Obama has announced his desire for this to occur, only the U.S. Congress has such power. As of this time, there has been no indication when the U.S. Congress might take such action.

If the trade embargo is fully lifted, “Cuban demand for construction and agricultural machinery is likely to provide U.S. producers of such machinery with significant export opportunities in the near term.”[5] Accordingly, on February 10, 2016, Caterpillar Inc. announced the selection of Rimco as its dealer for Cuba. According to Philip Kelliher, vice president with responsibility for the Americas & Europe Distribution Services Division, “Cuba needs access to the types of products that Caterpillar makes and, upon easing of trade restrictions, we look forward to providing the equipment needed to contribute to the building of Cuba’s infrastructure. This momentous announcement is part of our preparations in anticipation of the United States lifting its 55-year-old trade embargo on Cuba.”[6]

Cuba is also counting on significant increases in tourism as restrictions on U.S. citizens traveling there are eased further. As such, it has “plans to expand its tourism industry and revitalize urban core areas, which will require significant construction of buildings and underlying infrastructure, as well as conservation of historic structures and neighborhoods.”[7] Also, Cuba’s airports and seaports will require significant upgrades to accommodate any increased tourism. Due to the close proximity of these two countries, it is believed U.S. construction companies could strongly compete for a significant number of these vast revitalization opportunities in Cuba following Congress’ lifting of the trade embargo.

Nevertheless, even when the day comes when U.S. construction companies and equipment manufacturers are free to fully conduct business in Cuba, it is expected that they will “face major obstacles, which would include a multi-layered bureaucracy, an unpredictable legal system and a highly regimented labor market.”[8]

First, conducting business or “starting up a company in Cuba means collaborating with the Cuban government and restrictions on how you hire workers. The foreign investment law allows for 100 percent foreign-owned companies, but the tax treatment, approval process and other restrictions means that it’s not practical. Most companies with foreign capital are 49/51 percent joint ventures with the government having control.”[9]

Second, under Cuba’s 2014 Foreign Investment Act, “most business disputes must be settled in Cuban courts, although clauses stipulating international arbitration can be inserted in contracts if desired.’’[10] According to Jaime Suchlicki, director of the Institute for Cuban and Cuban-American Studies at the University of Miami, the “legal system offers no protection to foreign investors.”[11] He also contends that there is “no independent judiciary.”[12] Moreover, “trials and legal proceedings are conducted in secret.”[13] According to Ted Piccone, senior fellow in foreign policy at the Brookings Institution, “there’s no transparency in the Cuban system, so it’s really hard for investors to know what they’re walking into.”[14] It is also believed by some that “state control means the government can apply laws arbitrarily, based on political considerations.”[15] It should also be noted that U.S. companies seeking to venture into Cuba “need to be especially aware of the perils of violating the U.S. Foreign Corrupt Practices Act, which makes it illegal for a U.S. company or individual to make payments to foreign officials to obtain business,” since Cuban officials control the economy.[16]

Third, companies are precluded from hiring their own workers in Cuba. Rather, a “government employment agency dictates who works in foreign businesses and at what wage.”[17] Cuba has a dual-currency system which include both convertible pesos (CUCs), “which can be exchanged for dollars but cannot be exchanged outside the island,” and national pesos, “which can’t be converted and are worth 1/25th of a CUC, for local use.”[18]   According to Jaime Suchlicki, the “agency also receives the workers’ salaries in CUCs and pays the workers a fraction of that amount in national pesos.”[19] It is estimated that Cubans, on average, make approximately $20 per month.

Despite the many obstacles and risks likely to be encountered when conducting business in Cuba, multi-billion dollar opportunities for U.S. construction companies and equipment manufacturers just may exist a mere 90 miles away from Florida (specifically, from the Southernmost Point of the Continental U.S.). However, until the trade embargo is fully lifted by Congress, for most of these companies, the wait to be a part of a potential construction boom in Cuba must continue.

In the meantime, CSK will continue to monitor developments in these regards and will provide future updates as warranted.

 


[1] Press Release, U.S. Dep’t of the Treasury, Treasury and Commerce Announce Further Amendments to the Cuba Sanctions Regulations (Jan. 26, 2016) (on file with author).
[2] Id.
[3] Associated Press, U.S. Approves First Factory in Cuba Since Revolution, NBC News, Feb. 15, 2016, http://www.nbcnews.com/news/latino/u-s-approves-first-factory-cuba-revolution-n518926.
[4] Id.
[5] Cuba’s Construction and Agricultural Machinery Sectors, Cuba Journal, Apr. 19, 2016, http://cubajournal.co/cubas-construction-and-agricultural-machinery-sectors.
[6] Press Release, Caterpillar, Inc., Caterpillar Names Rimco Official Dealer for Cuba (Feb. 10, 2016) (on file with author).
[7] Cuba’s Construction and Agricultural Machinery Sectors, supra note 5.
[8] Reuters, US companies that want to do business in Cuba will have to play by Cuba’s rules, Business Insider, June 8, 2015, http://www.businessinsider.com/r-cuba-inc-open-to-foreign-capitalists-but-within-limits-2015-6.
[9] Mack Kolarich, 17 Things You Need to Know Before Doing Business in Cuba, Entrepreneur, Mar. 30, 2016, https://www.entrepreneur.com/article/273135.
[10] Christina Hoag, Doing Business in Cuba, SAGE Bus. Researcher, Apr. 11, 2016, http://businessresearcher.sagepub.com/sbr-1775-99546-2726283/20160411/doing-business-in-cuba.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] Id.
[19] Id.