CONTRACTUAL WAIVER OF CONSEQUENTIAL DAMAGES

shutterstock_329903120Contractual waivers of consequential damages are important, whether they are mutual or one-sided.  I believe in specificity in that the types of consequential damages that are waived should be detailed in the waiver of consequential damages provision. Standard form construction agreements provide a good template of the types of consequential damages that the parties are agreeing to waive. 

 

But, what if there is no specificity in the waiver of consequential damages provision? What if the provision just states that the parties mutually agree to waive consequential damages or that one party waives consequential-type damages against the other party?  Let me tell you what would happen.  The plaintiff will argue that the damages it seeks are general damages and are NOT waived by the waiver of consequential damages provision.  The defendant, on the other hand, will argue that the damages are consequential in nature and, therefore, contractually waived.   FOR THIS REASON, PARTIES NEED TO APPRECIATE WHAT DAMAGES ARE BEING WAIVED OR LIMITED, AND POTENTIALLY THOSE DAMAGES NOT BEING WAIVED OR LIMITED, WHEN AGREEING TO A WAIVER OF CONSEQUENTIAL DAMAGES PROVISION!

 

Interestingly, this issue appeared in the recent case, Keystone Airpark Authority v. Pipeline Contractors, Inc., 43 Fla. L. Weekly D2601d (Fla. 1stDCA 2018).   Here, a plaintiff sued a contractor and engineer for defects to an airplane hangar and taxiways.  The plaintiff claimed the engineer’s negligence through its failure to supervise the work as contractually required which resulted in defective construction.  The plaintiff claimed that the engineer was responsible for the costs to repair the airplane hangar and taxiways.   The engineer argued under a waiver of consequential damages provision that read:

 

“Passero [engineer] shall have no liability for indirect, special, incidental, punitive, or consequential damages of any kind.”  

 

The engineer argued that the damages the plaintiff was seeking due to its failure to supervise was excluded under the waiver of consequential damages provision in the contract.  The plaintiff argued that such damages are general damages and not barred.  The trial court, as affirmed by the appellate court, held that the damage was barred because the damage was consequential.  In doing so, the court examined the definitions of the types of damages:

 

General damages are ‘those damages which naturally and necessarily flow or result from the injuries alleged. . . . General damages  ‘may fairly and reasonably be considered as arising in the usual course of events from the breach of contract itself. Stated differently, [g]eneral damages are commonly defined as those damages which are the direct, natural, logical and necessary consequences of the injury.

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In contrast, special damages are not likely to occur in the usual course of events, but may reasonably be supposed to have been in contemplation of the parties at the time they made the contract. They consist of items of loss which are peculiar to the party against whom the breach was committed and would not be expected to occur regularly to others in similar circumstances.  In other words, general damages are awarded only if injury were foreseeable to a reasonable man and . . . special damages are awarded only if actual notice were given to the carrier of the possibility of injury. Damage is foreseeable by the carrier if it is the proximate and usual consequence of the carrier’s action.

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[C]onsequential damages do not arise within the scope of the immediate buyer-seller transaction, but rather 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 at the time of contracting. 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

 

Keystone Airpark Authority, supra (internal citations and quotations omitted).

 

 

Based on these definitions, the court agreed that the repairs to the hangars and taxiways were not special damages as “[i]t cannot be said that repairs stemming from improperly supervised construction work are unlikely to occur in the usual course of business.”  Keystone Airpark Authority, supra.   Such damages did not involve special circumstances for which the plaintiff would be required to give the engineer actual notice. 

 

BUT… these damages were CONSEQUENTIAL:

 

[T]he cost of repair here did not constitute general damages, either, because the damages were not the direct or necessary consequence of Passero’s [engineer] alleged failure to properly supervise the construction work.  The 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 dealing with a third party – the contractor.  While these damages ‘were reasonably foreseeable,’ they are consequential and not general or direct damages.

 

The appellate, however, certified the following question 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?

 

Thus, there could be a ruling in future from the Florida Supreme Court relating to construction industry, specifically relating to the damages associated with a supervising architect or engineer.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

EXCULPATORY PROVISIONS IN BUSINESS CONTRACTS

shutterstock_734837968-644x316An exculpatory provision in a contract is a provision that relieves one party from liability for damages.  It shifts the risk of an issue entirely to the other party.   Such a provision is generally drafted by the party preparing the contract that is looking to eliminate or disclaim liability associated with a particular risk, oftentimes a risk within their control.  These provisions are also known as limitation of liability provisions because they do exactly that — limit liability as to a risk.   For this reason, they can be useful provisions based on the context of certain risks, and are provisions that are included in business contracts (such as construction contracts).

 

While such clauses are disfavored, they are enforceable if they are drafted clearly, unambiguously, and unequivocally.  If they are unclear, ambiguous, or equivocal, they will construed against enforcement.  See Obsessions In Time, Inc. v. Jewelry Exchange Venture, LLP, 43 Fla.L.Weekly D1033a (Fla. 3d DCA 2018) (finding exculpatory clause in lease ambiguous and, therefore, unenforceable as to lessor looking to benefit from the exculpatory clause).   

 

Exculpatory clauses are enforceable only where and to the extent that the intention to be relieved from liability is made clear and unequivocal. The wording must be so clear and understandable that an ordinary and knowledgeable person will know what he is contracting away. A phrase in a contract is ambiguous when it is of uncertain meaning, and thus may be fairly understood in more ways than one.

Peterson v. Flare Fittings, Inc., 177 So.3d 651, 654 (Fla. 5th DCA 2015) quoting Tatman v. Space Coast Kennel Club, Inc., 27 So.3d 108, 110 (Fla. 5th DCA 2009). 

 

 

Because such clauses are disfavored and will be narrowly construed against the party who benefits from the clause, there are certainly public policy considerations that may come into play. See, e.g., Loewe v. Seagate Homes, Inc., 987 So.2d 758 (Fla. 5th DCA 2008) (exculpatory provision in agreement for purchase and construction of new home unenforceable to the extent it relieved homebuilder for an intentional tort and homebuilder could not contract around complying with building code). 

 

When negotiating a contract with an exculpatory provision in a contract, make sure you appreciate the risk associated with the clause.  The risk could be significant and outside of your control.  Make sure the provision is drafted in a clear, unequivocal. and unambiguous manner.  If you are dealing with such a provision after-the-fact, consult with counsel to best analyze arguments pertaining to the enforceability of that provision.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE INCLUSION OF LIMITATION OF LIABILITY PROVISIONS FOR DESIGN PROFESSIONALS

images-1Design professionals need to remember the benefit of newly enacted legislation effective July 2013 that authorizes a limitation of liability provision for design professionals in their individual capacity. Florida Statute s. 558.0035 authorizes a design professional to limit their personal liability if: (a) the professional’s company entered into the contract for professional services; (b) the contract does not name the professional as a party to the contract; (c) the contract provides in uppercase and at least 5 font points larger than the rest of the contract that an employee or agent of the professional’s company cannot be held individually liable in negligence, and (d) the professional’s company maintains professional liability insurance. See Fla. Stat. s. 558.0035 set forth below. Complying with this statute can limit a professional’s liability in an individual capacity for economic damages, although based on the language of the statute, it would not extend to personal injury or property damage not subject to the professional services contract.

 

When negotiating a contract for a design professional, it is good to include a limitation of liability provision to protect professionals working with the design professional company/ entity entering into the contract. I would include a provision identifying that it is specifically understood that employees or agents of the contracting party are not parties to the professional services contract. The reason being is many times professional services contracts will call out the specific professional(s) that is to act as the company’s representative or the professionals that will be performing the professional services. Additionally, I would include in uppercase and 5 font sizes larger than the balance of the text in the contract a provision to the effect: “PURSUANT TO FLORIDA STATUTE S. 558.0035, AN INDIVIDUAL EMPLOYEE OR AGENT OF_______ [CONTRACTING PARTY] MAY NOT BE HELD INDIVIDUALLY LIABLE IN NEGLIGENCE FOR ANY CLAIMS, DAMAGES, OR DISPUTES ARISING OUT OF AND SUBJECT TO THE CONTRACT.”

 

Although the statute provides that the limitation of liability provision does not apply to damages to personal injuries or property not subject to the contract, it does not define the circumstances in which this would apply. For instance, if a structure is deficiently engineered and a portion falls down or collapses and damages persons or property other than the structure itself, it would seem that the limitation of liability provision would not extend to these types of damages since the other property and personal injuries were not subject to the professional services contract. On the other hand, there could be the argument that these damages are subject to the professional services contract because they arose out of errors and omissions in the performance of professional service contractual obligations.

 

When negotiating a contract for an owner, the key is to ensure that the design professional has sufficient professional liability insurance based on the requirements of the project (i.e., sufficient insurance limits and potentially tail / extended reporting period coverage). An owner willing to agree to the limitation of liability provision could put a disclaimer that reflects that should the contracting party not continue its professional liability insurance for “x” years after the project’s completion with a date retroactive to the contract date or purchase tail coverage for the same period of time, the limitation of liability provision shall be deemed null and void.

 

Florida Statute s. 558.0035

(1) A design professional employed by a business entity or an agent of the business entity is not individually liable for damages resulting from negligence occurring within the course and scope of a professional services contract if:
(a) The contract is made between the business entity and a claimant or with another entity for the provision of professional services to the claimant;
(b) The contract does not name as a party to the contract the individual employee or agent who will perform the professional services;
(c) The contract includes a prominent statement, in uppercase font that is at least 5 point sizes larger than the rest of the text, that, pursuant to this section, an individual employee or agent may not be held individually liable for negligence;
(d) The business entity maintains any professional liability insurance required under the contract; and
(e) Any damages are solely economic in nature and the damages do not extend to personal injuries or property not subject to the contract.
(2) As used in this section, the term “business entity” means any corporation, limited liability company, partnership, limited partnership, proprietorship, firm, enterprise, franchise, association, self-employed individual, or trust, whether fictitiously named or not, doing business in this state.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.