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Waiver of Consequential Damages may have Unintended Consequences

In Florida, parties often negotiate and include a waiver of consequential damages in construction contracts and design professional contracts.  However, based on a recent decision by one Florida appellate court, waiving the right to recover consequential damages may have a broader impact than intended. In Keystone Airpark Authority v. Pipeline Contractors, Inc., No. 1D17-2897, 2018 WL 6174666 (Fla. 1st DCA, Nov. 27, 2018), Florida’s First District Court of Appeals held that the concept of "consequential damages" in a contract between an owner and supervising architect included all damages caused by a non-party contractor, even foreseeable damages resulting from an architect’s or engineer’s failure to supervise construction. Keystone Airpark Authority (“Airpark”) contracted with Pipeline Contractors, LLC (“Contractor”) to build airplane hangars and taxiways on its property.  Airpark entered into a second contract with Passero Associates, LLC (“Passero”) to provide engineering services, inspections, material testing, and observation of Contractor’s work.  The contract between Airpark and Passero contained a waiver by Airpark of consequential damages. After construction was complete, Airpark discovered that Contractor used substandard material for below-grade support underneath the hangars and taxiways.  Ultimately, the structures and subgrade needed to be removed, repaired and replaced.  Airpark sued Passero and Contractor in the same case.  Airpark alleged that Passero had a contractual duty to ensure the materials Contractor used were proper and that Passero had breached that obligation. Airpark sought to recover from Passero and Contractor the cost to remove, repair and replace the hangars, taxiways and underlying subgrade. Passero argued that the damages sought by Airpark were not a direct result of Passero’s alleged failure to supervise, but instead were caused by a combination of the alleged failure to supervise and the contractor’s improper work.  Passero took the position that Airpark’s damages were consequential damages, excluded by its contract with Airpark.  Passero contended a claim for damages against it was limited to the contract value for the engineering services. Airpark responded that the repair costs were general damages, not consequential, because those damages were foreseeable.  Airpark argued that the failure to properly supervise the construction clearly could have resulted in construction defects going undetected, and as a result it was foreseeable that the defects would later require repair. Agreeing with the trial court, the Appellate Court held that foreseeability was not the dispositive issue.  Instead under Florida law, direct damages are the direct or necessary consequence of the breaching party’s actions.  Consequential damages stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach and that were reasonably foreseeable by the breaching party at the time of the breach.  The consequential nature of loss is not based on the damages being unforeseen by the parties, but those damages that are caused by a third party, while still reasonably foreseeable at the time of contracting. The Appellate Court ruled that Contractor could have completed its work correctly without Passero’s supervision, and therefore the need for repair did not arise within the scope of the immediate transaction between Passero and Airpark.  Rather, the need for repair stemmed from the loss incurred by Airpark in its dealings with Contractor, a third party.  While the damages were reasonably foreseeable, they were consequential and not general or direct damages as to Passero. The First District Court of Appeals stated that this issue was a question of great public importance and asked the Florida Supreme Court to address the matter.  The Florida Supreme Court has not yet determined whether it will accept the case. Based upon this ruling, it is important for all parties to understand what a waiver of consequential damages might mean in the context of an architecture contract or design/engineering professional contract.  A party should take care to pay close attention to these waivers and be sure the contract language accurately reflects its true intent on the types of damages that are recoverable and those that are not.

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