Summary: Keystone Airpark is an airport in northern Florida, between Gainesville and Jacksonville. The airport engaged a contractor to construct airplane hangars and taxiways. The contractor reportedly used substandard materials for stabilization underneath the structures and pavement, resulting in premature deterioration. The airport brought a claim against the contractor to recover the costs of removing, repairing, and replacing the hangars, taxiway, and underlying subgrade. The airport also brought a parallel claim against Passero Associates, an engineering firm that the airport had retained for part-time resident engineering and inspection, and materials testing. Passero had not detected or reported on any defects in materials or installation by the contractor.
The professional services agreement between the airport and Passero contained a waiver of consequential damages clause that relieved Passero of exposure to “indirect, special, incidental, punitive, or consequential damages of any kind.” Passero argued that the airport’s only direct damages for negligence or breach of contract were Passero’s fees, and that damages flowing from the contractor’s defective work were consequential damages and hence had been waived. The trial court agreed with Passero, and the airport appealed.
Decision: The appellate court confirmed the trial court’s decision. The appellate court reviewed Florida law defining and categorizing damages and concluded that the damages sought by the airport from Passero were consequential damages.
General or direct damages are those that “naturally and necessarily flow or result from the injuries alleged,” and arise in “the usual course of events” from the breach of contract. Based on this fundamental definition, the airport argued that the construction defects naturally flowed from Passero’s inadequate monitoring of the construction, in the usual course of events, and thus were general/direct damages that were not waived in the professional services agreement.
However, the court concluded that the definition of consequential damages was a better fit:
Consequential damages ‘do not arise with the scope of the immediate buyer-seller transaction, but rather stem from losses incurred by the non-breaching party [here, the airport] in its dealings, often with third-parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party….’
The consequential nature of loss…is not based on the damages being unforeseeable by the parties. What makes a loss consequential is that it stems from relationships with third parties, while still reasonably foreseeable at the time of contracting.
The Court of Appeal acknowledged that there were no controlling Florida cases regarding a deficient inspection of construction. However, the court cited other consequential damages cases, such as damages flowing from a failed security system, and non-Florida construction cases, in support of its decision to categorize the damages as consequential. However, the court apparently determined that this was a close call, because it certified the question of whether the airport’s damages were consequential to the Florida Supreme Court, as an issue “of great public importance.”
Comment: The Florida Supreme Court declined to review the Keystone Court of Appeal decision, meaning that the Keystone categorization of damages remains precedential law in Florida. Certainly this is a comforting decision for design professionals, which typically face a substantial challenge in attempting to monitor the many details of construction activities and installations, often on limited budgets (recall that Passero’s role was “part-time”). However, was the decision fair and in accord with general expectations in the industry? Wasn’t the very purpose—the only purpose—of the professional services agreement to protect the owner from construction defects? Would it be fair to say that construction defects “flow naturally” from a breach of duty under the agreement? Was it a correct analysis to conclude that the involvement of a third party always pushes damages into the “consequential” category—even when that third party’s action are in essence the subject matter of the services contract? Should all damages within the four corners of a project be categorized as direct?
EJCDC publishes documents that contain mutual waiver of consequential damages clauses. These clauses are intended to protect against obscure and distant consequences, from outside the project scope. But as the Keystone case illustrates, the impact may sometimes be more direct. Perhaps it is no surprise that in many cases one party or the other—often a project owner—will remove such a waiver from a contract during the contract formation process.