Retroactive Application of a Construction Subcontract Containing a Merger Clause? Florida’s Fifth District Court of Appeal Answers in the Affirmative

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).

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