An inspector’s liability and the problem with ‘consequential damages’
It has become common for contracting parties to include a clause in their agreement that neither will be liable to the other for “consequential damages.” For example, the widely used terms and conditions of the American Institute of Architects (AIA) A-201 contract, under paragraph 15.1.6, gives some examples of consequentials, but those examples can be misleading. The problem is few people are sure what the term “consequential damages” means.
Under that AIA clause, and without mentioning the words “delay damages,” the contractor will not have to pay the owner for rentals, loss of use of the property or “loss of management productivity,” whatever that is. On the other hand, the owner will not have to pay the contractor for extended home office overhead.
Certainly, this partial listing does not begin to include everything that falls under the category of consequential damages. Does the clause cover the contractor’s field office overhead? Loss of labor productivity? Extended equipment rentals? For inspection services agreements, the idea of consequentials is even more vague. If the inspection fails to locate an error or defect, is the inspector liable, for example, for the repair costs, any delays caused by the need for repair or any damages to adjacent work caused by the defect?
I touched on this topic in “Do You Delve or Just Look?” (Electrical Contractor, September 2019). An important recent case from Florida—Keystone Airpark Auth. v. Pipeline Contractors Inc.—goes much further than the case referred previously to clarify the scope of a no consequentials clause for claims against an inspector. The owner was certainly surprised by the result in this case.
Keystone is a busy regional airport located between Jacksonville and Gainesville, Fla. It averages nearly 90 aircraft operations per day on two asphalt runways. Pipeline was hired to construct hangars and taxiways. Separately, the owner hired Passero Associates to “inspect, observe and monitor” the work and report to the owner any deficiencies it observed. As it turned out, Passero did not see major errors in the construction.
The defects that the inspector missed were so severe that the owner had to remove and replace the hangars and taxiways. The owner sued the contractor for defective construction and also sued the inspector for breach of contract, demanding that the inspector pay for the cost of repair.
Passero, the inspector, argued that it was not liable for the asphalt repairs as all of that work was consequential damages, absolving it for liability under the contract. The inspector’s contract had a no consequential damages clause. The question presented in court was whether the repair costs were consequential damages within the meaning of the inspector’s contract.
The Florida Court of Appeals agreed with the inspector and let it off the hook. How did the court reach that conclusion? After all, had Passero done its inspections properly, the defects later discovered could have been avoided or lessened.
Aside from the court’s justification for its ruling, which will be discussed, the important thing for you to know is this: With a no consequentials clause in your inspection agreement, you will not be liable for any damages or deficiencies you missed in the items you were required to inspect. This rule of law, as established in Florida, applies whether your inspection missed seeing the defect or whether you neglected to inspect at all. This court decision is consistent with cases from other jurisdictions.
Now for the court’s reasons for why the damages were consequentials and not “direct.”
- “The damages were not the direct or necessary consequence of [the inspector’s] alleged failure to properly inspect.” (Emphasis added.)
- The need for repair was caused by the asphalt contractor, not by the inspector.
- “The need for repair stemmed from [Airpark’s] dealing with a third party—the contractor.”
In other words, had the paving been done properly, the inspector’s failures would not have caused any harm.
Analogous cases defining consequential damages were cited by the court and included termite damage discovered after a termite inspector certified that the home was termite-free; the cost of stolen goods after a defective security system did not go off during a burglary; and the cost of correcting structural defects resulting from an architect’s defective drawings not found by the inspector. These other cases were from Florida, North Carolina and Virginia and seem to indicate the general rule on consequentials. As a result, the only claim the owner could make against the inspector for failure to properly inspect was for the “direct” damages and that would be limited to the amount of the inspector’s fee.
Keep in mind all of these cases were based on claims between two parties to one agreement. Where harm is done to a noncontracting third-party, negligence law applies, the contract waiver language has no bearing on a negligence claim, and the inspector could be liable for the resulting harm.