If a party is contractually obligated to supervise construction work and determine the suitability of construction materials used in the construction, but the party fails to properly supervise and inferior materials are used by a third party, are the costs to repair damage caused by improper materials general, special or consequential damages? That is the query that led the First District Court of Appeal to certify a question of great public importance to the Florida Supreme Court in a recent case involving a construction defect dispute.
The certified question arose in Keystone Airpark Authority v. Pipeline Contractors, Inc. Keystone retained Pipeline Contractors to build airplane hangars and taxiways, and it contracted separately with Passero Associates, LLC to provide services that included “part-time resident engineering and inspection [and] material testing.”
Specifically, Passero agreed to “[o]bserve the work to determine conformance to the contract documents and to ascertain the need for correction or rejection of the work,” and to “[d]etermine the suitability of materials on the site, and brought to the site, to be used in construction.”
In Keystone’s eventual lawsuit against Passero for breach of contract and negligence, it alleged that Pipeline used substandard material for stabilization underneath the structures, which Passero failed to detect, causing the premature deterioration of the concrete hangar slabs and asphalt taxiways. It sought to hold Passero as well as Pipeline Contractors responsible for the cost to remove, repair and replace the hangars, taxiways and underlying subgrade.
Passero obtained a partial summary judgment in its favor by the trial court, which agreed with its contention that the damages Keystone sought were not a direct result of its alleged failure to supervise, but instead were caused by a combination of the alleged failure to supervise and the contractor improperly preparing the subgrade. Therefore, the trial court found that the damages were not general or direct damages, but instead were consequential damages that were excluded by a provision in the contract stating: “Passero shall have no liability for indirect, special, incidental, punitive, or consequential damages of any kind.”
In the subsequent appeal, Keystone argued that the cost of repair to the hangars and taxiways constituted general damages and not consequential damages because those damages were foreseeable. Relying on English case law from 1854, Keystone argued that it was foreseeable that the failure to properly supervise the construction could have resulted in construction defects going undetected, which could later require repair. Keystone further reasoned that the damages are general and not special or consequential as they arose naturally from the breach of its contract with Passero and did not involve special circumstances about which it would have been required to give Passero actual notice.
The appellate panel found that foreseeability was not at issue in the case, as Passero did not dispute that it is foreseeable that the failure to supervise construction work could result in the need for repairs. The appellate court rather explored the definition of general, special and consequential damages, and how the question of foreseeability affects the nature of the damages incurred.
Citing various cases, it found that while general damages are those damages which naturally and necessarily flow or result from the injuries alleged, special damages are not likely to occur in the usual course of events but may reasonably be supposed to have been contemplated by the parties at the time they made the contract. Consequential damages, on the other hand, do not arise from within the scope of the immediate buyer-seller transaction. They 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 which were reasonably foreseeable by the breaching party.
The appellate panel agreed with Keystone that the damages were not special damages. However, it concluded that the repair cost also did not constitute general damages because it was not the direct or necessary consequence of Passero’s alleged failure to properly supervise the construction work. The appellate panel reasoned that: “[t]he contractor could have completed the job correctly without Passero’s supervision. Thus, the need for repair did not arise within the scope of the immediate transaction between Passero and the Airpark. Instead, the need for repair stemmed from loss incurred by the Airpark in its dealings with a third party – the contractor.” The appellate court concluded that “[w]hile these damages were reasonably foreseeable, they are consequential and not general or direct damages.”
However, the court acknowledged that this case is distinguishable from past decisions because the contract between Keystone and Passero expressly required Passero to supervise the construction work and determine the suitability of the materials brought onto the site. It therefore certified the following question as one of great public importance:
“Where a contract expressly requires a party to supervise construction work and to determine the suitability of materials used in the construction, but the party fails to properly supervise and inferior materials are used, are the costs to repair damage caused by the use of the improper materials general, special, or consequential damages?”
Florida contractors, engineering firms and property owners will be interested to see whether the state’s highest court decides to take up this question in 2019.