Prejudgment Interest in Construction Defect Litigation - Florida's Loss Theory on Liquidated Damages Post-Bosem and Why Every Construction Lawyer Should Be Familiar with It

Article excerpt

IMAGINE this--You have just finished trial on a five week construction defect suit. You are tired, but happy with the result. Your client, the developer of a $250 million uber-luxury residential tower, "won." The plaintiff condominium association that sued five years ago was only awarded $15 million in damages-instead of the $50 million they were seeking. After five years of contested litigation, you feel vindicated. The Chief Financial Officer (CFO) for your client is thrilled. He is taking you out for drinks tonight. Your client's Owner Controlled Insurance Policy only afforded $ 15 million in coverage, and the CFO was worried that if the verdict exceeded the available insurance, it would bankrupt them. There aren't that many construction contracts for $250 million uber-luxury towers anymore. You have a grin on your face of pure relief that the verdict was within limits.... But it does not last long. Within an hour of your "win," opposing counsel emails you a motion to add prejudgment interest on the award. Counsel is arguing that the interest dates back to turnover nearly a decade ago. You quickly realize that your client may actually owe millions of dollars--millions of dollars they do not have.

For a construction lawyer, a plaintiff's claim for prejudgment interest on liquidated damages can often be one of the most significant parts of the case. If you are representing a general contractor, developer, subcontractor, or carrier who insures any of them, and a condominium association is claiming construction defect damages dating back to the date of turnover as far as a decade prior to suit, the association's claim for prejudgment interest against your client cannot be an afterthought. In those instances, the association's claim often amounts to millions of dollars and can even overshadow the costs to repair the alleged defective work of the construction players involved.

Florida is unique in its interpretation of what constitutes "liquidated damages" for purposes of determining whether prejudgment interest should be awarded. In what can be described as the country's minority view, the Florida Supreme Court confirmed in Bosem v. Musa Holdings, Inc., (1) and its progeny that an association does not necessarily need to show "out of pocket" expenditures for repairing alleged defective work in order to get prejudgment interest at the end of a case. The association can forgo performing repairs, file suit, and a jury's verdict can retroactively set liquidated damages as of a chosen date of loss years prior to the Complaint ever being filed. Once a date of loss and amount of damages is set by the trier of fact, prejudgment interest becomes a matter of right.

This article provides a brief discussion of the law in Florida post-Bosem and explains how it differs from other States in the country that do require, for now, "out of pocket" expenditures or set damages. (2) This article contends that the argument to be inferred from Bosem following the 2008 real estate bubble--that a cash-strapped, but wrongfully-damaged construction plaintiff should not be penalized by a requirement that the damages be "liquidated" in the traditional sense--provides a template for arguments that will be raised across the country.

I. Florida's Loss Theory

Although prejudgment interest is awarded as a matter of right in forty-two (42) of fifty-one (51) jurisdictions, including Florida, (3) Florida adopts the "loss theory" and prohibits discretion in the award of prejudgment interest. As confirmed by the Florida Supreme Court in Bosem, the distinction between liquidated damages, or "out of pocket" expenditures, and unliquidated damages is irrelevant to the determination of whether prejudgment interest is available. (4) The "loss" is the wrongful deprivation of the plaintiff's property. "Out of pocket" expenditures need not exist. If a jury's verdict or a trier of fact's findings has the effect of fixing damages as of a prior date, prejudgment interest must be awarded as of that prior date. …