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Setoffs in Construction Defect Case Leave Plaintiffs Feeling Shortchanged

Published: May 16th, 2018

By: Thomas P. Wert

Plaintiffs in a complex Florida construction defect case settled for $2.7 million with 10 subcontractors and then won additional damages at trial against remaining defendants. Imagine their surprise when the judge applied the settlement money to offset the trial award in what is called a “setoff,” slashing their trial award by $2.7 million. The judgment reflected the legal principle that a plaintiff can’t collect twice for the same damages.

The appeals court decision upholding the trial court’s decision demonstrated a problem sometimes seen in construction defect cases that make it to trial, says Thomas P. Wert, a litigator in Dean Mead’s Orlando office who is board certified in construction law. “If you sue 10 people asserting the same claim and then settle with one, the amount of the settlement with the one defendant may be set off against any awards you win against the other nine,” says Wert. This may be true even if the defendants were responsible for different construction problems such as, say, a pool design, concrete work and plumbing.

“The problem,” says Wert, “is that it’s extremely difficult for courts in these complex construction cases to determine exactly who is responsible for each problem. If everyone was sued for breach of contract, the court likely will make sure the total amount collected doesn’t exceed the overall award,” he says.

Dream Home Was a Nightmare

The lawsuit stemmed from defects buyers encountered in their new 10-bedroom, 23,391-square-foot Palm Beach home. Shortly after moving into what they thought would be their dream home, they discovered mold that apparently was caused by undisclosed flooding from Hurricane Wilma and multiple other defects. They sued the sellers, developer, general contractor and 12 subcontractors, alleging breach of contract, negligent failure to disclose, fraud and violation of Florida’s Deceptive and Unfair Trade Practices Act.

The plaintiffs settled with 10 of the subcontractors, and a 10-week trial against the seller, developer and general contractor went mostly in their favor – until the setoff was applied.

Why the Court Allowed the Setoff

The plaintiffs argued that the construction problems encompassed by the subcontractor settlements did not overlap with the problems allegedly created by the defendants who went to trial. Perhaps they were right. But the problem is that, in practice, it often is difficult to determine how damages overlap because settlement agreements usually are broadly worded and don’t differentiate specific damages that are covered by the settlement, says Wert.

The law avoids endless arguing over where damages begin and end for each defendant by providing that if a settlement agreement is not specific about what defects it covers, the entire amount can be applied as a setoff when other defendants are jointly and severally liable, meaning that plaintiffs can collect all or part of a judgment against any of the parties. The appeals court, which called the case “extremely complicated and lengthy,” said it would have taken a second trial to differentiate liability among the defendants, and thus the setoff was “the only pragmatic result.”

Wert explains that construction defect settlements seldom have the specificity to avoid setoffs. “Typically, a settlement agreement will say one party will pay a certain amount in return for a release for all claims,” he says. “From the defendant’s viewpoint, a universal release from liability is the goal of the settlement, and there is no advantage – and it might even be problematic – to be specific about responsibility for claims.”

Wert adds that while a plaintiff’s attorney could ask for specificity to differentiate claims, such an agreement may be less attractive to a defendant who wants to be assured it is receiving a release from all liability.

Takeaway: In Settlements, Consider Those Who Aren’t in the Room

The setoffs would not have been an issue if the remaining defendants had not gone to trial. While most disputes never make it all the way to the courtroom, Wert says plaintiffs’ attorneys should consider how settlement agreements will affect a case against defendants who do go to trial for damages that fall under the same broad claims, such as failure to disclose. In some cases, it may be advantageous for a plaintiff to be very specific on the defects a settlement covers.

Or maybe not. The calculus can be complicated, Wert says. Most defendants will be reluctant to settle for anything less than a universal release from liability, and parsing claims also means that remaining defendants will have the advantage of defending more limited allegations.

While it seems counterintuitive that a legal principle designed to prevent double recovery may actually result in a plaintiff recovering less than deserved, that can be the result when one party settles and another goes to trial on the same claim. Before a claimant signs a settlement agreement, he or she should consider the effect on claims against parties who are not in the room.