How to defend against construction contract violation claims

What Every Developer And Owner Should Know About Mechanics’ Liens: Part III

This alert is the third of a three part series intended to help developers and owners evaluate and address liens against their property.

Defending a mechanics’ lien claim can be daunting. A successful mechanics’ lien claim includes mandatory award of attorneys’ fees and can create substantial title issues for an owner or developer. Accordingly, it is important to evaluate whether there is a defense to the claim early on in assessing whether to settle with or fight the lien claimant. Here are some defenses that can defeat a lien claim:

  • Improper legal description: A lien could be defective for failure to properly describe the real estate on which improvements have been made. However, minor defects in the description are not usually sufficient to defeat a mechanic’s lien claim.
  • Sworn Statement: A notice of lien must be a sworn statement. However, minor deficiencies in a sworn statement are not sufficient to invalidate a lien.
  • Wrong Claimant: A notice of lien must be filed by the party with the actual claim. Thus, for example, when a lien was filed by the corporation but the contract for construction had been entered into by the corporation’s principal in his individual capacity, the lien is invalid.
  • Wrong Owner: The proper owner of the property must be named in the lien or it is invalid.
  • Materialman to a Materialman: A materialman who supplies materials to a materialman cannot have a valid lien.
  • Untimely Lien Notice: Depending on the type of construction, a lien notice must be filed within either 60 (residential) or 90 (commercial) days of the last work done or material provided. A lien claimant cannot extend this time by performing work incidental to the contract or by entering into a new contract for separate work.
  • Time-barred Claim: To enforce a mechanic’s lien, the claimant must file a complaint in the county where the real estate or property that is subject to the lien is situated within one year after the date the statement and notice of intention to hold a lien was recorded. Indiana courts rigorously enforce this deadline. Moreover, an owner or other interested party, like a developer or mortgagee, can act to accelerate this process by serving the lien claimant with formal notice to proceed within 30 days of the notice. If the claimant dawdles past that deadline, the lien is void and the claimant cannot prosecute a mechanics’ lien and recover statutory damages like attorneys’ fees.
  • Pre-Lien Notice: One of the most common and successful defenses to the claims of subcontractors or other parties not in direct privity with the owner is the failure to give the appropriate pre-lien notice if the work concerns residential construction or improvements.
  • Bona Fide Purchaser: A lien for materials or labor provided for the original construction of a residential dwelling is not valid against a purchaser who records the deed by which the purchaser takes title prior to the mechanic’s lien being recorded.
  • Consent of Owner: In order for a lien claimant to have a valid lien, the owner must have either actually or impliedly consented to the work. Thus, when a tenant makes improvements, those providing labor or material at the direction of the tenant do not have a valid lien unless they can show the active consent of the owner and it can be shown that there was a “bargained-for” benefit to the owner. The owner’s knowledge and even approval of construction or other improvements may not be sufficient to establish active consent especially when the improvements made do not directly benefit the owner.
  • Full Payment to Contractor: While the owner will not be able to defeat the lien claim of a subcontractor or materialman based on this defense, Indiana does give the owner some protection by disallowing attorneys’ fees in the event the owner has fully paid the “contract consideration” to the general contractor.
  • Intended Use of Materials: If a materialman furnishes materials that are used in the construction of a building but without knowledge that this was the intended use, it will not have a valid mechanic’s lien.
  • Actual Use: Materials that are not actually used in the construction or improvement will not support a mechanic’s lien. But if an owner removes material without the supplier’s knowledge, the material supplier may still have a valid lien.

The unfortunate reality is, everything can be done correctly, but the subcontractor still has to defend and potentially pay a lot of money

How to defend against construction contract violation claims

Many subcontractors don’t realize the extent of liability when signing an indemnity agreement. | Photo: Stock.adobe.com

The building industry is no stranger to indemnity provisions commonly found in construction contracts, but the legal interpretation of these agreements may come as a surprise.

Many subcontractors don’t realize the extent of liability when signing an indemnity agreement. They presume that they will defend only if they are found negligent. The unfortunate reality is, everything can be done correctly, but the subcontractor still has to defend and potentially pay a lot of money.

Indemnity agreements typically require the indemnitor, or subcontractor to “defend, indemnify and hold harmless” the indemnitee, the general contractor or developer, from third-party claims. As a subcontractor, it’s reasonable to assume that you would only need to defend and/or indemnify the indemnitee if the claim arose because of a defect or problem with your work; however, that is often not the case. Under many construction subcontract agreements, the subcontractor is obligated to defend even if the sub’s work is perfect.

RELATED

Court’s Ruling on the Duty to Defend

In Crawford v. Weather Shield Mfg. Inc. (2008), the California Supreme Court held that the duty to defend claims embraced by the indemnity agreement arises immediately upon the proper tender of defense, and thus, before the litigation has determined whether indemnity is actually owed. (Id. at p. 558.) Claims on which a duty to defend is owed include those which at the time of tender allege facts that would give rise to a duty of indemnity. (Ibid.) In 2019, this decision was upheld in Centex Homes v. R-Help Construction Company, and took the Crawford decision a step further by clarifying the issue of whether the trier of fact (that is, a jury) decides whether the indemnity agreement applies. The court in Centex made clear that this issue was not for the jury to decide, but was the court’s decision to make as a matter of law.

The jury still decides whether the subcontractor is negligent or at fault, but the outcome of that determination does not change the obligation for the subcontractor. That means, under this type of indemnity agreement, it doesn’t matter if the subcontractor was not at fault or negligent. All that matters is the claim or allegation “arises out of the work.”

For example, a subcontractor installs a concrete curb and does so exactly as it should be installed. An individual then trips over the curb and the contractor is sued. Under Centex, if the subcontractor has an agreement to “indemnify and defend any and all claims arising out of the work” the subcontractor still has to defend this claim. The court says that whether the subcontractor was at fault or not is irrelevant. They must defend the general contractor because the claim arose out of the subcontractor’s work. That is what the contract requires as a matter of law.

Under many construction subcontract agreements, the subcontractor is obligated to defend even if the sub’s work is perfect.

Additionally, whether the subcontractor was also named in the complaint doesn’t matter because under the indemnity agreement, it states the subcontractor will defend and indemnify the contractor for any claims out of the work—not any claims arising out of the subcontractor’s negligence in the performance of the work (which is a different type of indemnity agreement that is obviously more beneficial to the subcontractor). While this may seem illogical to the subcontractor, this type of indemnity agreement is perfectly legal. The case can proceed to trial, and even if the subcontractor is exonerated because the work was done properly, the person still tripped over the subcontractor’s installed curb and therefore the subcontractor has to pay for the defense of the general contractor, in addition to defending themselves.

If I’m Found Not at Fault, Can I Get My Money Back?

As a subcontractor, you may be wondering if it’s possible to recoup your defense costs after the matter is decided and it’s determined that you weren’t negligent. The short answer is no. The defense duty arises upon tender of the potentially covered claim and lasts until the underlying lawsuit is concluded. To get your money back, you have to prove, as the subcontractor, that the claim was not embraced by the indemnity agreement as a matter of law, and until you’ve established that, you still have to defend both yourself and the general contractor/indemnitee.

Let’s assume you defended the general contractor and incurred $20,000 in costs to establish that the claim didn’t arise out of your work – the person did not trip over the curb you installed; he actually tripped over something else unrelated to the curb installation and the injury did not arise out of your work. Since the claim is not embraced by the indemnity agreement, do you get that $20,000 back? The courts in Crawford and Centex didn’t answer this. They only care that it was “alleged to have arisen out of your work,” which suggests that you don’t get your money back. The courts did make it clear that even if you establish you weren’t negligent, but the claim arose out of your work—i.e., he did trip over your curb. You don’t get your money back.

The moral is, thoroughly read all contracts and ensure you understand the provisions. As a subcontractor, your hands may be tied since you want the work and feel like you have to agree to the contractor’s indemnity terms. However, before you sign off, it’s worth asking your lawyer to negotiate the terms and change the language to “any claim arising out of our negligence” versus the standard language of “any claim arising out of our work.” Generally speaking, this avoids the scenario addressed above where you will have the duty to defend whether you are negligent or not.

Delays are unavoidable in the construction industry. This article presents some commonly used and oft successful tactics for the prudent project owner in combatting (or preventing) delay claims.

октября 22, 2020 at 10:00 AM

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Delays are inevitable in construction. They can also cause the project owner to lose a lot of money resulting from contractor claims, loss of use of the project, the cost of construction funding and other damages which are incurred when a project extends beyond the scheduled completion date.

Delays can be caused by the owner, the designer, the contractor, or a combination of any of these. Owner caused delays may be occasioned by site access issues, delays in obtaining government approvals, financing issues, changes to the scope of work and many other reasons. Designer caused delays may result from inadequate detail in the plans, lack of timeliness in responding to submittals and requests for information (RFI), design errors and omissions and untimely inspections, among other things. Contractor caused delays may occur from poor project management and coordination, inadequate financial and labor resources or defective workmanship. Lastly, unanticipated severe weather—or a pandemic—can also delay a construction project.

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In today’s post-boom construction environment, claims by project owners of construction defects, wrongful or otherwise, are all too common. Because the potential for damages and litigation expense associated with such claims can be substantial, a contractor would do well to have a working knowledge of his rights and responsibilities under a commercial general liability (“CGL”) insurance policy, especially the carrier’s “duty to defend”.

Under a standard form CGL policy, an insurer will typically exercise two separate and distinct duties to the insured-contractor. First, the standard policy will typically provide a “duty to defend” the contractor when a lawsuit is filed, to the extent the suit raises claims potentially within the coverage afforded under the policy. The duty to defend is generally what it sounds like: the insurance company pays an attorney to defend the contractor, subject to the terms and conditions of the CGL policy. This coverage is critical considering the potential cost of defending a defect claim to completion. Second, the standard policy provides a “duty to indemnify” or to pay sums, to a third party, which the contractor may become “legally obligated to pay”. Again, this would be subject to the policy’s coverage and limits.

This article is limited primarily to the insurer’s duty to defend the construction defect claim.

Construction Defect Claim Filed; Now What?

The first step after a claim is lodged is for both insurer and insured to determine whether the allegations against the contractor state a claim which potentially falls within defined coverage (e.g. the policy’s insuring agreement, endorsements, exclusions, and exceptions to the exclusions). The CGL insurer’s duty to defend is triggered by the allegations contained within the four corners of the complaint – not by the facts as may be later proved in court, nor the contractor’s version of the facts, or even the parties’ initial defenses. Where there is any doubt about whether the duty to defend applies, the issue must be resolved by a court in favor of the insured-contractor. Florida courts, for example, have held that the duty to defend is broader than the duty to indemnify because the insurer must defend the case even if the facts alleged are actually untrue or the legal theories presented are flawed.

At this point, you may be asking yourself, what are those magic words which cause the duty to defend to kick in? The short answer is an allegation that will “fairly and potentially” bring a claim within the coverage of the policy. The long answer is that, subject to the policy’s terms, exclusions and exceptions to exclusions, a standard CGL policy will provide coverage for an “occurrence” that has caused “property damage” (or bodily injury) within the policy’s coverage period. There is a lot to unpack in this sentence. Luckily, one state’s Supreme Court did just that in a 2007 case.

The matter involved a general contractor who hired a subcontractor to perform soil compaction and testing for a project. The soil compaction was performed in a defective manner which, in turn, caused structural damage to the building being built. The Court cited cases which generally held that the costs to properly fix the soil compaction itself would generally not be covered. However, the Court found that the structural damages to the building caused by the faulty soil compaction were covered as “physical injury” to “tangible property”. Therefore, generally speaking, the costs to repair property damage caused by a contactor’s (or its subcontractor’s) defective work are often covered where the costs to repair a contractor’s defective work are generally not.

As a rule of thumb, to trigger the insurer’s duty to defend, the allegations of the complaint should set forth a defect caused by the contractor or its subcontractor(s), (e.g. “occurrence”) which in turn caused damage to property other than the contractor’s (or its subcontractor’s) own work and which damages are within the coverage timeframe and terms and conditions of the policy. Know also that a construction defect caused by a subcontractor, not intended or expected by the general contractor, could constitute an “occurrence” under the language of the general contractor’s CGL policy.

Although the insurer typically assigns defense counsel, an insured may request a particular lawyer, possibly its own attorney, as long as he/she is experienced with the particular claims being alleged and he/she is willing to handle the matter in accordance with the insurer’s guidelines.

One thing is certain – a contractor’s ability to trigger coverage under an applicable policy is absolutely critical. Just one significant uninsured defect claim could easily bankrupt most contractors.

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How to defend against construction contract violation claims

Legal Services for Construction, Real Estate, and other Business Industries

Experienced Construction Law Attorneys

If you are an owner of property or a contractor or subcontractor and you are involved in a dispute over defects in a newly constructed building or structure, you want an experienced construction defect attorney to protect your interests. You want attorneys with the experience to protect your rights in any legal proceeding, who have successfully helped others in similar situations for many years.

At Fullerton & Knowles, P.C., our construction lawyers offer over 30 years of experience to clients throughout Virginia, Maryland, Pennsylvania and the District of Columbia, handling a wide range of construction defect claims involving both defective new construction, defects in remodeling work, defective designs, defects in plans, engineering defects, etc.

We handle a broad range of all types of construction defect disputes, including:

Negligent site investigation

Defective designs or plans

Building code or housing code violations

Express warranty and implied warranty claims

Sub-standard workmanship and contractor negligence

Violation of industry standards

Water leakage or damage

Defective roofing, flashing or window installation

Electrical and mechanical defects

Failure to follow plans and specifications

Product and material defects and failures

Manufacturing defects in buildings components

Physical damage to buildings

Structural damage or errors

Lateral or sub- adjacent support claims

Loss of use damages

Economic Loss Rule

Fraud and misrepresentation claims

Insurance claims and coverage issues

Contractor licensing issues

Restitution or repayment of amounts paid to unlicensed contractors

Limitations & Repose Periods

Statutes of Limitations

Bodily Injury, Property Damage and Malpractice (other than medical malpractice) actions must be commenced within three (3) years. CPLR §214. The statute of limitations on a claim against an architect or design professional that is essentially stated as a breach of the ordinary professional obligations, has a three year statute of limitations, regardless of whether it is asserted as breach of contract or negligence. This malpractice cause of action commences “from the date of termination of the professional relationship … and the completion of the ‘performance of significant (i.e. non-ministerial) duties under the parties’ contract.’” Board of Managers of 255 Hudson Condominium v. Matorella, 37 Misc.3d 1222 (S.Ct. N.Y. Ct. 2012) citing Sendar Development Co., LLC v. CMA Design Studio, P.C., 890 N.Y.S.2d 534 (1st Dep’t 2009).

Statute of Repose:

CPLR §214-d imposes certain procedural requirements, i.e. filing of a Notice of Claim, upon prospective plaintiffs for personal injury and property damage claims or cross-claims and third party claims against licensed architects, engineers, surveyors and landscape architects which accrue more than ten (10) years after the performance of services that gave rise to the claim. Once the Notice of Claim is filed, a prospective plaintiff is entitled to proceed with discovery. However, the design professional is also entitled to bring a motion to dismiss for failure to state a cause of action prior to the actual filing of suit. CPLR §214-d does not, however, extend any applicable statutes of limitation, nor does it affect the dates of accrual for claims against architects or engineers. Getwicks v. Campbell, 257 A.D.2d 601 (2d Dep’t. 1999).

Right to Repair Laws and/or Pre-Suit Statutory Procedures

New York has limited right to repair laws.

New York Gen Bus. Law § 777-a, a housing merchant implied warranty is implied in the contract or agreement for the sale of a new home and shall survive the passing of titled. A housing merchant implied warranty shall mean, inter alia, that one year from and after the warranty date the home will be free from defects due to a failure to have been constructed in a skillful manner.

Indemnity and Contribution

Indemnity

  1. A covenant, promise or agreement in a construction contract which purports to indemnify or hold harmless the indemnitee against liability for personal injury or property damage caused by or resulting from the negligence of the indemnitee is void and unenforceable. N.Y. Gen. Oblig. Law §5.322.1
  2. The phrase “[t]o the fullest extent permitted by law” is often interpreted by New York courts to be “savings language” making a contractual indemnity provision enforceable. See, Dutton v. Pankow Bldrs., 745 N.Y.S.2d 520 (1st Dep’t 2002).
  3. “To the fullest extent permitted by law” contemplates partial indemnification and limits the contractual indemnity obligation to a subcontractor’s own negligence. Brooks v. Judlau Contr., Inc., 869 N.Y.S.2d 366 (2008).
  4. However, the phase ‘regardless of whether or not it is caused in part by a party indemnified hereunder’ has been held to violate the General Obligations Law, even when the indemnity provision includes the “savings language.” Cavanaugh v. 4518 Associates, 776 N.Y.S.2d 260 (1st Dep’t 2004).
  5. A subcontractor’s obligation to indemnify cannot be ‘incorporated by reference’ to the indemnity obligation in the prime contract. Waitkus v. Metropolitan Hous. Partners, 854 N.Y.S.2d 388 (1st Dep’t 2008).
  6. The statute of limitations on a claim for contractual or common law indemnity is six (6) years, CPLR §213 (2); McDermott v. City of New York, 428 N.Y.S.2d 643 (1980), and accrues when a judgment is entered or payment is made. Bay Ridge Air Rights Inc. v. State, 404 N.Y.S.2d 73 (1978).

Contribution

Where two or more parties are subject to liability for damages for the same bodily injury, property damage or wrongful death may claim contribution among them whether or not an action has been brought or a judgment has been rendered against the party from whom contribution is sought. CPLR §1401.

Certificate of Merit – Experts

In New York, there is no requirement for filing certificate or affidavit of merit for claims against design or construction professionals.

How to defend against construction contract violation claims

In this article.

In order for a mechanics lien claim to be valid, the claimant must be defined as contractor or subcontractor as described in the Mechanics Lien Act. In this article, we’ll discuss the various methods for evaluating the validity of a mechanics lien in Illinois. We cover topics such as the proper prerequisites to a mechanics lien, the difference between contractors and subcontractors and the work must have been done to satisfy a lien, information necessary in a mechanics lien, and deadline associated with filing a claim.

In this article, we’ll discuss the various methods for evaluating the validity of a mechanics lien in Illinois. We’ll cover topics such as the proper prerequisites to a mechanics lien, the difference between contractors and subcontractors and the work must have been done to satisfy a lien, information necessary in a mechanics lien, and deadline associated with filing a claim.

Subcontractor Vs. Contractor Mechanics Liens

Have the Prerequisites to the Lien Been Satisfied? The prerequisites for a contractor versus a subcontractor lien differ somewhat, but the basic stipulations are the same.

Is the claimant a contractor or subcontractor?В

In order for a mechanics lien claim to be valid, the claimant must be defined as contractor or subcontractor as described in the Mechanics Lien Act. This act defines a contractor as any person who enters into a contract with the owner of the land or property in question for the purpose of improving or maintaining the land or structure on the land. A subcontractor is one who contracts with the general contractor to do a portion of the work but is not privy to the contract between the general contractor and the owner. A first-party materials provider to the general contractor may also be considered a subcontractor. Simply stating that one is a contractor or subcontractor, even in the terms of the contract, is not enough to establish proof when reviewing a case. The facts of the relationship must be examined in order to establish what role was actually played.

What’s in the Contract?

The burden of proof is on the lien claimant to show that he or she has a contract to support the claim. Under the Mechanics Lien Act, the contract can be written or oral, however, a case based on an oral contract may be harder to prove. Ultimately, the written or oral contract must exist in some form and support the stipulations in the claim.

The contract must be legal, and not void due to violation of law or public policy. For example, a lien from an unlicensed contractor would be unenforceable.

Who is the contract with?

In order for the lien claim to be valid, it must fall into one of three categories.

  1. Contract with the owner. Depending on how the property is titled, the business situation, and how many parties are involved, the “owner” of a business can sometimes be ambiguous. However, if the contractor does his or her due diligence, it should be clear at least who the owner is in name, whether an individual, commercial entity, bank or something else.
  2. Contract with the owner’s authorized agent. Here we have an individual or entity who has the authority to act on behalf of the owner. It may not always be apparent that an individual is an authorized agent for a given piece of real estate and often it falls on the court to make the determination. For example, if multiple individuals own one half undivided interest in a property and another person owns the other one half undivided interest, the latter individual’s actions can be considered those of the authorized agent for the whole.
  3. Knowingly permitted by the owner. This is an individual who “has the permission of the owner,” to contract work on a property. This permission doesn’t have to be in the form of a written document as long as it can be proven in court. For example, if the owner of a building knowingly allowed a tenant to contract work for improvements the lien against the tenant and owner would be valid.

Did the Claimant Provide Lienable Labor or Material?

The keyword when asserting a valid lien is “improvement” to the property. Did the claimant actually improve the property in anyway? The Mechanics Lien Act goes into great detail when defining “improve” as it relates to work done or materials provided by a contractor or subcontractor. When considering materials provided, it is not necessary that the materials actually be incorporated into a structure for a lien to be valid, but rather must have at least been delivered and knowingly received by the client.

Did the Lien Claimant Finish The Project?

A contractor must have completed the work set forth in the contract, or be able to show that he or she, in good faith, made the greatest attempt to complete a “substantial portion” of the work agreed upon in the contract. If the appropriate amount of work was not completed the contractor must be able to provide a valid excuse for nonperformance, such as an owner excusing the contractor from a worksite, making it impossible for the contractor to finish the work. Breach of contract by the owner is another valid excuse for nonperformance. In the case of a subcontractor leaving a job site due to action on the part of the contractor, and the work being incomplete, the contractor would not have a valid excuse for nonperformance.

Evaluating all the prerequisites for a lien is the first step in finding a defense against a Mechanics Lien. Beyond the prerequisites, there are a number of other factors associated with a proper Mechanics Lien. These include:

  • Timely perfection of the lien
  • The specific requirements of a general contractor
  • The specific requirements of a subcontractor and materials supplier
  • Evaluating the time periods surrounding the work done and the claim
  • Amendments to the lien
  • Proper information recorded in the Lien
  • Verification of the Lien
  • The balance due to the claimant
  • Description of the property
  • Time-frame associated with the lien and the claimant
    ‍

For more information on a Mechanic’s Lien, the Mechanics Lien Act and the applicable deadlines check out the article How to Perfect a Mechanics Lien In Illinois.

How to defend against construction contract violation claims

Florida, like many states, maintains a Building Code. Generally, the Florida Building Code is intended to make construction across the State as uniform as possible, while also ensuring that the resulting structures are safe and usable for whatever purpose they are intended. Unfortunately, in some cases, failing to follow the Code may cause problems that can jeopardize the integrity of the structure, putting lives at risk. Retaining the services of an attorney experienced in construction defect law is crucial to holding these individuals accountable. Pursuant to Florida law, every three years, the Florida Legislature must update the Florida Building Code, and is required to take into account international building code norms when doing so. Outgoing Senator Bill Nelson has recently chastised the Legislature for passing a law which allows it to waive the international building code consideration. A discussion of the legal ramifications of violations of the Florida Building Code, as well as how liability can attach, will follow below.

Violations of the Florida Building Code

Florida law allows an individual to bring a cause of action against another party, such as a contractor or a subcontractor, if that other party materially violates the Florida Building Code. According to the law, a “material violation” of the Building Code is a violation that exists within a completed building, structure, or facility which may reasonably result, or has resulted, in physical harm to a person or significant damage to the performance of a building or its systems. If a court finds a material violation does exist, then the court may impose fines on the party, and, if the fines are not paid, can suspend the party’s license, preventing the party from obtaining construction permits for future projects.

Liability for Violations of the Building Code

It is important to note that findings of violations of the Florida Building Code will not result in direct compensation to the property owner. The fines and other penalties go to the state, not property owner.

However, proof of a violation of the Building Code can be evidence of negligence, as part of a construction defect claim against the builder. Briefly, to prove a party, in the construction industry, has been negligent, a successful plaintiff must show that the party had a duty to construct a building or other edifice in a reasonably safe manner, that the party had failed in this duty, that the plaintiff was injured, that the injury was a direct cause of the party’s failure to uphold this duty, and that the injury resulted in quantifiable damages.

Accordingly, it is a requirement that a plaintiff must have suffered an injury to succeed in a negligence claim. Thus, even though a party may have violated the Florida Building Code, if there is no injury, there can be no action based on negligence.

If an injury has occurred, though, the plaintiff may be able to use the party’s violation of the Florida Building Code as proof that the party failed to adhere to its duty of constructing an edifice in a reasonably safe manner. In this case, the “duty” is the legal requirement that the party must follow the Florida Building Code.

Finally, it should be noted that Florida courts have held that two parties cannot be held liable for violations of the Building Code. Specifically, suppliers or materialmen or developers have been held not to be liable for violations of the Building Code. This is because they were not involved in the actual construction of the edifices.