In a really thorough and well-written opinion, Florida’s Third District Court of Appeal affirmed a $525,000 judgment in favor of a condominium unit owner arising from dispute over billings in a cost plus contract. The case is a great example with lots of good warnings and takeaways for those in the construction industry of how broad ranging construction disputes can become, the issues they often turn on, and how important experts can be to the outcome of the case.
Avant Design Group, Inc. v. Aquastar Holdings, LLC is a great example of what a typical construction payment dispute can involve. And it has some great reminders and takeaways for those in the industry, on everything ranging from contract terms and obligations under cost-plus agreements to fraudulent liens. The case also outlines the tremendous amount of effort it can take to litigate and prove construction claims, making it a good warning to anyone thinking of litigating a payment dispute of how expansive these lawsuits can become. More detailed takeaways are at the bottom of this write up, but first, here’s the story of the decision.
Avant Design Group, Inc. v. Aquastar Holdings, LLC arises out of a dispute between the owner of a condominimum unit and a construction project administrator hired to oversee the build out of the condominimum unit. In September 2016, the unit owner hired the administrator to “oversee the project's construction and to obtain goods and services for the interior build-out.”
Over the course of construction, the administrator provided a series of proposals, each containing schedules of items to be purchased, along with their anticipated costs. One of these proposed specifically addressed construction items. Most of the remainder of the proposal addressed furnishing, goods, and services for different rooms in the unit. The proposals were essentially identical other than the items and costs on each one, and each one stated that the owner would pay the cost of the goods and services of the various vendors, plus a “20% Interior Design and Administrative Fee.”
For 18 months, the parties worked together and performed their respective obligations under the various proposals. In March 2018, the unit owner became concerned with increasing costs and requested that the administrator provide the owner with copies of all vendor and contractor invoices reflected the costs of the services and materials. The administrator refused. Shortly thereafter, the unit owner terminated the contract. Up to that point, the administrator had billed a little over $1.2 million and been paid around $1.1 million, leaving a balance due of $91,009.21. After consulting with an attorney, the administrator recorded a construction lien of $66,909.21 against the unit.
The administrator then filed suit against the owner for breach of contract, open account, unjust enrichment, and foreclosure of the construction lien. The owner responded by suing the contractor and three of its owners individually for breach of contract, fraud in the inducement, breach of the covenant of good faith and fair dealing, conversion, fraudulent lien, violations of Florida’s Deceptive and Unfair Trade Practices Act, and unjust enrichment.
Ultimately the case proceeded to a six day, non-jury trial in June 2020, with the chief issue being whether the contract between the parties was a cost-plus contract or a fixed-price contract. Each party presented multiple witnesses and expert accounting witnesses. As part of this, the administrator testified that when billing the owner, sometimes it billed at the cost of the item plus the 20% fee, and sometimes there was additional profit built in to the cost of the item, to which the 20% fee was then added. Following trial, the court entered an order in favor of the unit owner on all of the administrator’s claims and on most of the unit owner’s claims. The court determined that “the parties' contract was a cost-plus contract,” and that the administrator “not only breached the contract but acted in a fraudulent manner; that [its] $66,909.21 construction lien was fraudulent under section 713.31; and that [its] refusal to provide the owner with information about vendor costs was itself a deceptive practice prohibited by FDUTPA.” This resulted in a $525,608.50 judgment being entered in favor of the property owner. Notably though, the trial court ruled in favor of the administrator’s three individual owners, finding that the conduct involved did not warrant piercing the corporate veil.
The parties both appealed various aspects of the ruling. On appeal the Third District Court of Appeal addressed each of the claims in turn.
Regarding the breach of contract claims, the court affirmed the trial court’s determination that the contract between the parties was a cost-plus contract. The court found that this limited the owner’s requirement to pay to the actual cost, plus the 20% fee, and nothing else.
Regarding the damages calculation, the court also affirmed the trial court’s calculation that the owner had been overbilled by $525,608.50 and was entitled to that as a refund. In support of this ruling, the appellate court relied on testimony from the owner’s accounting expert that his forensic review of the administrator’s QuickBooks file showed that the administrator had “(i) fabricated documents; (ii) backdated checks; (iii) greatly overcharged for the purchase of the unit's tile, then received money back from the tile supplier; (iv) billed [the owner] for a purchase of goods intended for a different [] customer; and (v) entered charges into QuickBooks for which there were no corresponding purchase orders.”
Regarding the fraud claims, the court reversed the trial court’s judgment in favor of the unit owner. The court found that the damages claimed and awarded were essentially breach of contract damages, and that fraud damages could not also be awarded where they would be the same as the contract damages.
Regarding the FDUPTA claims, the court reversed the trial court’s judgment in favor of the unit owner. While the trial court did find that the administrator engaged in deceptive acts when it refused to provide copies of the invoices supporting its billings, the trial court failed to allocate any damages to this claim. Accordingly, the appellate court was compelled to reverse the judgment.
Regarding the construction lien, the court affirmed the trial court’s determination that the lien was fraudulent. On appeal, the administrator argued that the amount of its lien was the result of a good-faith contract dispute, and therefore not fraudulent. The appellate court disagreed, citing that the trial court’s conclusion that the lien was fraudulent was based on its findings that the administrator had willfully overcharged the owner, and therefore willfully inflated its lien amount when it included those charges.
The court then remanded the matter to the trial court to revise its judgment in accordance with the appellate rulings.
There are many reminders and takeaways in this case. First, if you enter into a cost-plus contract, it means cost-plus. You cannot add in extra charges or inflate the cost of materials. You are entitled to the cost of the items, plus the agreed markup. You also must provide satisfactory proof of the cost of the items. So make sure you keep careful track of them. And if you overcharge, and get caught, you can be made to pay back the overcharges.
Second, there’s no hiding the ball in QuickBooks. While I didn’t go into as much detail above, the case outlines the audit trails and reports the forensic accountants were able to use to determine that charges had been changed after the fact, that some checks were backdated, and that items costs had been inflated.
Third, litigation takes a long time. The contract was entered into in 2016, the disputes arose in 2018, final judgment was entered in 2020, and the appeal was resolved at the end of 2022. And litigation is expensive. In addition to the attorneys’ fees, the parties hired forensic accountants, which can cost as much or more than attorneys. And the testimony of the owner’s forensic accountant appeared to drive much of the trial court’s ruling.
Finally, problems in your accounting or charging will not only cause issues with enforcing your contract, but will also likely cause issues with any construction lien filed based on those charges. So if you have concerns about your accounting or contract charges, make sure to resolve those before incorporating them into your construction lien.
You can click here to download a full copy of the decision to review for yourself.