Amandeep S. Kahlon | Bradley Arant Boult Cummings | February 26, 2019
On January 25, 2019, a Florida appellate court certified the following question to the Florida Supreme Court:
WHERE A CONTRACT EXPRESSLY REQUIRES A PARTY TO INSPECT, MONITOR, AND OBSERVE CONSTRUCTION WORK AND TO DETERMINE THE SUITABILITY OF MATERIALS USED IN THE CONSTRUCTION, BUT THE PARTY FAILS TO DO SO AND INFERIOR MATERIALS ARE USED, ARE THE COSTS TO REPAIR DAMAGE CAUSED BY THE USE OF THE IMPROPER MATERIALS GENERAL, SPECIAL, OR CONSEQUENTIAL?
The answer to this question is of interest to the construction community because of the prevalence of consequential damage waivers in construction contracts.
In Keystone Airpark Authority v. Pipeline Contractors, Inc., an owner contracted with a general contractor for the construction of an airplane hangar and taxiways in Clay County, Florida. The owner separately contracted with an engineering firm to inspect, observe, and monitor the contractor to ensure compliance with the plans and specifications, including the use of suitable materials by the contractor. After the contractor completed the project, the owner alleged that the hangar’s concrete slabs and the concrete taxiways began to deteriorate prematurely because of the contractor’s use of the substandard stabilization materials underneath the structures. The owner sued the contractor and the engineering firm for the costs to repair and replace the hangar, taxiways, and underlying subgrades.
In response, the engineering firm moved for summary judgment arguing that the incidental, special, and consequential damages waiver in its contract precluded award of the repair and replacement costs sought by the owner. The firm argued that the owner could only recover the costs of the inspection services provided under the inspection contract for any breach. The trial court agreed and enforced the consequential damages waiver, and the owner appealed.
On appeal, the court analyzed whether the damages sustained by owner were general, special, or consequential in nature. The court determined that the repair costs were not special damages because the costs of repair were likely to result from the engineering firm’s failure to fulfill its explicit inspection obligations and did not involve special circumstances for which actual notice may have been required. In other words, the cost to repair and replace the hangar and taxiways was a natural and reasonable consequence of failing to inspect and verify the suitability of the materials used.
However, the appellate court also concluded that the repair costs were not general or direct damages since they did not arise from the immediate transaction between the engineering firm and the owner for provision of inspection services. Per the court, even assuming the engineering firm failed to inspect, the contractor could have completed construction correctly, so the repair costs were not a direct result of the engineering firm’s breach.
The court, instead, analogized the facts in Keystone Airpark to other failure to inspect cases, where Florida courts categorized repair costs as consequential damages, or foreseeable damages that stem from losses incurred by the non-breaching party’s dealings with third parties. But, the court also acknowledged that other failure to inspect cases did not address an express contractual duty to inspect and determine suitability of construction materials, as at issue in Keystone Airpark. Because of this concern, the appellate court, while affirming the trial court’s summary judgment ruling, certified the question recounted above to the Florida Supreme Court for final determination on how to classify repair cost damages arising from a breach of an express inspection requirement.
If the Florida Supreme Court determines that the repair costs should be treated as general or direct damages, that ruling may transform risk allocation under many Florida construction contracts. Where parties, like architects and engineers, have typically relied on consequential damages waivers to limit liability when performing services like inspections or submittal review, the treatment of repair and replacement costs as general damages will seriously undermine the effect of such waivers and create exposure to significant damages awards. Such damages may substantially exceed the actual costs of the services provided.
To prepare for such a contingency, contracting parties should consider other avenues to limit liability. For example, parties with this potential exposure may pursue hard liability caps tied to insurance policy limits or the price of the services provided. Ultimately, it may be that the Florida Supreme Court sides with past precedent and determines repair costs arising from the failure to inspect are consequential damages, but you should be prepared and plan for an alternative result when negotiating contracts in the interim. Of course, further guidance on this issue depends not only on the Florida Supreme Court’s decision, but also the extent to which other states follow the Florida Supreme Court’s lead on this issue.