Contract Interpretation

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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.

Is the EU in Your Contracts (and You Don’t Know It)?For those firmly in the sights of the EU’s General Data Protection Regulation (GDPR), the enforcement date of May 25, 2018, is likely indelibly embedded in their minds. For others, this date may have come and gone without significance, other than perhaps an increased general buzz about GDPR as companies across the globe wrestled with its scope and requirements. Those that were unaffected by the May 25, 2018, deadline cannot necessarily rest easy.

Companies are learning that GDPR’s impact can be felt a number of ways and its reach is growing over time. Specifically, many are seeing provisions relating to representations and warranties involving GDPR compliance appearing in agreements they are being asked to sign. In some ways this situation can present more of a problem than implementing a compliance effort prior to May 25, 2018. That is because these contractual provisions can be very onerous, overbroad, possibly unnecessary, and are often part of a business negotiation with urgency as to the resolution of any disputes.

The reason companies are beginning to see GDPR provisions appear in agreements is because GDPR contains requirements that a company must impose on any other company that processes its data. In this scenario, the company is a “controller,” referring to its obligations to control its own data, and the other company is a “processor,” which the controller must ensure complies with GDPR provisions. A company deemed a controller would have been dealing with GDPR back before the May 25, 2018, deadline. To the contrary, while processors should have been involved in compliance discussion prior to that deadline, for a variety of reasons some are still being surprised by the inclusion of provisions in contracts. However, just because a provision shows up in an agreement for your company to sign, it does not necessarily mean your company is implicated by GDPR. This situation makes this area a minefield and requires companies to proceed very cautiously.

Assume Company A has either not considered GDPR compliance at all or decided it was inapplicable to them as a controller, but recently received a new agreement from Company B requiring Company A to make representations and warranties relating to its GDPR compliance. There are a number of possible scenarios. The first is that the representations and warranties are not appropriate to include in the agreement and should be stricken. Although this scenario requires specific factual analysis, at a high level, this would be the scenario if Company A is not performing any processing of EU citizen personal data for Company B. This scenario is fairly common for several reasons. One reason is that companies such as Company B may try to use uniform agreement provisions for simplicity, relying on the most favorable set of representations. Similarly, Company B may be trying to take the most conservative position, or simply not bothering to edit agreements to remove provisions that are favorable, even if inapplicable. If the inapplicability of the provision is pointed out, hopefully in this scenario Company B will be amenable to removing it because Company A should not be making representations and warranties for complying with a regulation such as GDPR if they are not complying or if they are unsure. In another scenario, there may be insistence in including the provision, but Company A does not believe GDPR is applicable to them. Here, a compromise may be to include language that limits the representation of compliance to applicable regulations. While this result is less ideal than the two parties agreeing GDPR does or does not apply, it can allow Company B to use a more standardized approach.

The final and worst scenario is if Company A realizes through the inclusion of this provision that they are considered processors pursuant to the GDPR and that Company B’s request is not only reasonable, but Company B must get that assurance for its own compliance with GDPR. This scenario can be downright dire if an agreement must be signed and Company A is not complying with GDPR. This last scenario must be avoided. If your company cannot say with certainty whether it is or is not considered a processor for another controller’s data, then the possibility of this last scenario should loom larger than the May 25, 2018, deadline until that question is answered.

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.