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Aman Kahlon represents owners, general contractors, and subcontractors. His experience ranges over a wide variety of disputes. He advises clients on delay, interference, defective design, and negligence claims. View articles by Aman

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.

Appellate Court asks Florida Supreme Court: What Kind of Damages Are Repair Costs?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. If you have any questions about this decision or other Florida construction law issues, please contact Aman Kahlon.

Florida Court Finds Arbitration Clause Expanding Authority of Courts to Vacate/Modify Arbitration Awards UnenforceableThe Florida Arbitration Code addresses the confirmation, vacation, modification or correction, and appeal of arbitration awards in Florida. In September, a Florida District Court of Appeal addressed whether parties may expand the scope of judicial review provided under the Florida Arbitration Code. In National Millwork, Inc. v. ANF Group, Inc., a subcontractor sought to void the arbitration clause in its subcontract by arguing that the provision impermissibly expanded the scope of judicial review to include a determination as to whether the arbitrator properly applied Florida law.

The Florida Arbitration Code limits the authority of Florida courts to vacate and/or modify arbitration awards to circumstances when an award is procured by corruption, fraud, or other undue means or when there is evident partiality, corruption or misconduct by the arbitrator. The Florida Arbitration Code also prohibits parties from varying the grounds for vacating or modifying an award.

The appellate court in National Millwork concluded that the subcontract arbitration provision allowing for appellate review of the arbitrator’s application of Florida law fell outside the scope of judicial review allowed under the Florida Arbitration Code. The court relied on the parallel analysis of the U.S. Supreme Court when addressing comparable considerations under the Federal Arbitration Act. As a result, the court reversed the lower court’s order compelling arbitration and remanded for consideration as to whether the portion of the arbitration clause that inappropriately expanded judicial review rendered the entire clause void or whether that portion could be severed from the rest of the clause.

The Florida appellate court’s decision clarifies the scope of permissible judicial review of arbitration awards under Florida law. Many states’ arbitration statutes mirror the Florida statute at issue in this case, and caution should be exercised when drafting contractual arbitration provisions that run counter to a state’s applicable arbitration statutes.

While the inclusion of a “severability clause” into a contract may help avoid rendering the entire arbitration clause unenforceable, that result is not guaranteed. If a court finds that the offending portion of an arbitration clause is integral to the agreement to arbitrate, it may void the entire clause. In such circumstances, a party may unexpectedly find itself litigating an action in state court and unable to take advantage of the arbitration provision duly negotiated by the parties at the start of the project. If you have questions about reviewing arbitration clauses or other contract provisions, please contact Aman Kahlon for more information.

Oregon Anti-Indemnity Statute Voids Sub-sub’s Duty to Indemnify Sub for the Sub’s Own NegligenceThe Ninth Circuit Court of Appeals recently upheld the application of Oregon’s anti-indemnity statute to a contractual indemnity provision requiring a sub-subcontractor’s insurer to indemnify the subcontractor for the subcontractor’s own negligence. In First Mercury Insurance Company v. Westchester Surplus Lines Insurance Company, Multnomah County contracted with a general contractor for the renovation of a bridge. The general contractor hired a subcontractor to furnish materials including reinforced decking. The subcontractor, in turn, contracted with a sub-subcontractor to manufacture the decking material. The sub-subcontract required the sub-subcontractor to indemnify the subcontractor for the subcontractor’s own negligence in causing damage to a third party—in this instance, the County.

After the project was completed, several defects in the bridge were discovered, including cracks in the decking. When the County sued, the subcontractor was found to have been negligent and partially liable for the defects and resulting damage to the County. The subcontractor claimed indemnity from the sub-subcontractor per the terms of the sub-subcontract, but the trial court refused to enforce the indemnity provision because it was void under Or. Rev. Stat. § 30.140(1). The relevant portion of the statute provides that any provision in a construction agreement that requires a company or its insurer/surety to indemnify another against liability for damage to property caused in whole or in part by the negligence of the indemnitee is void. Citing the plain language of the statute, the Ninth Circuit affirmed the trial court’s judgment denying indemnity.

The Ninth Circuit opinion serves as an important reminder of the variety of anti-indemnity provisions across the nation. Many states take Oregon’s approach and restrict the scope of indemnity provisions to cover only the negligence of the indemnitor and not the negligence of the indemnitee. Other states have more lenient anti-indemnity statutes or no anti-indemnity provision at all. Still others take a harsher approach than Oregon and impose stricter limitations in their anti-indemnity laws and may even have different laws for different industries.

When negotiating agreements for work outside your company’s traditional footprint, consider whether the state where the project is located has an anti-indemnity statute and how it is applied. Indemnity provisions in construction contracts can be exceptionally consequential in terms of allocating risk between parties, so it is essential to understand how such provisions will be applied and enforced in any particular state before executing an agreement and moving forward with a project in that state.

If you have questions about anti-indemnity laws or negotiating indemnity provisions, please contact Aman Kahlon for more information.