by H. Hugh McConnell
Owners’ remedies for construction defects, always an area of flux, are emerging
from an especially volatile period which has markedly changed the legal environment in which Florida practitioners must litigate their claims. The changes have generally diminished the noncontractual avenues by which owners can seek relief, thereby increasing the importance of negotiating sufficient protection through contract. This article will give a brief summary of the more significant changes and examine the present state of legal theories available to owners to recover for shoddy construction.
The construction industry has unique features to bear in mind when evaluating the rules of law that govern it. First, construction combines the provision of both services and products, making it something of a hybrid in the commercial world. Second, the construction process involves the interaction of numerous separate providers who may or may not contract directly with the owner or with each other. Typically the owner is in privity only with the architect, who provides design services, and with the general contractor, who provides the service of coordinating the various trades involved in constructing the building in accordance with the architect’s design. Below the general contractor stretches what is commonly called the “chain of construction,” the various subcontractors, sub-subcontractors, and material suppliers who have no direct contractual dealing with the owner. A third feature is that the construction process results in the incorporation of numerous separate, fungible products into a single, complex structure. As a matter of law, those products lose their identity as goods and become real property. Gable v. Silver, 258 So. 2d 11 (Fla. 4th DCA 1972), adopted, 264 So. 2d 418 (Fla. 1972).
Construction defects can be classified into three categories: defective building materials, faulty workmanship, and improper design. Historically, the law has recognized that the various participants in the construction process are liable only for those defects that fall within their respective areas of expertise. For example, a contractor who builds a structure according to the design supplied by the owner generally is not responsible for the adequacy of the design unless the contractor expressly undertakes responsibility for the “performance” of the end product. City of Orlando v. H.L. Coble Construction Co., 282 So. 2d 25 (Fla. 4th DCA 1973), cert. denied, 288 So. 2d 505 (Fla. 1973). Therefore, if the problems encountered by the owner are design-related, the owner must look to the design professional for recovery. In analyzing possible remedies practitioners must determine the nature of the defect and the respective responsibilities of the project participants as allocated by contract. See, e.g., Florida Board of Regents v. Mycon Corp., 651 So. 2d 149 (Fla. 1st DCA 1995) (discussing “design” specifications, which keep design responsibility with owners, versus “performance” specifications, which shift design responsibility to contractors).
Defective Building Materials
For owners who do not purchase their materials directly from suppliers, Florida law affords few remedies when building products prove defective. Material suppliers who are in the business of manufacturing or distributing goods are deemed to be merchants who give UCC warranties. See, e.g., United States Fidelity & Guaranty Co. v. North American Steel Corp., 335 So. 2d 18, 21 (Fla. 2d DCA 1976). Unlike other jurisdictions, however, Florida’s version of the Uniform Commercial Code does not create warranties that run from manufacturers or sellers to third parties.1
The adoption of the economic loss rule in the landmark case of Casa Clara Condominium Association v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993), eliminated tort recovery by owners against suppliers where the damage claimed by the owner is only to the building in which materials were installed. While tort recovery is available when a product has damaged “other property,”2 the legal transmutation of building materials from “goods” into “realty” upon incorporation into a project effectively forestalls the argument that tort law may be invoked because the defective product damaged the other products with which it was installed. In Casa Clara the court reasoned that owners who purchase homes or contract for improvements to property in effect buy a single “product,” precluding tort recovery, which is barred “when a product damages itself, causing economic loss, but does not cause personal injury or damage to any property other than itself.” Id. at 1246.3
In Casa Clara the court also held that material suppliers, who could be located anywhere in the country and distributing products to many localities, are not governed by local building codes and, therefore, cannot be subject to liability under F.S. §553.84. An action under F.S. §553.84 for violation of a local building code can be brought “against the person who committed the violation,” and is generally available against contractors and possibly design professionals whose activities are directly governed by building codes. Because material suppliers are not governed by local codes, reasoned the court, they logically cannot commit a violation of a building code.
Owners’ remedies against contractors for defective materials also are severely limited. In the absence of an express warranty from their contractors, owners may not look to their general contractors when products they install are latently defective. Because contractors are viewed as providers of services and not products, they are not deemed to be “merchants” under the UCC and UCC implied warranties do not pass from contractor to owner. Jackson v. L.A.W. Contracting Corp., 481 So. 2d 1290 (Fla. 5th DCA 1986), review denied, 492 So. 2d 1333 (Fla. 1986); Arvida Corp. v. A.J. Industries, Inc., 370 So. 2d 809 (Fla. 4th DCA 1979). UCC warranties are in effect cut off by the presence of the contractor in the chain of construction.
Also, contractors are not deemed at common law to warrant the quality of their materials. Rather, they are held to an ordinary standard of care in selecting and inspecting materials incorporated into their work. Without an undertaking as to quality, an owner has no remedy against a contractor when the defect in a building product is not discernible by the contractor through the exercise of ordinary care and skill. See Wood-Hopkins Contracting Co. v. Masonry Contractors, Inc., 235 So. 2d 548 (Fla. 1st DCA 1970) (subcontractor not liable for latent defects in bricks not discernible by exercise of care and skill in inspection and present through no fault or knowledge of subcontractor).
Owners, therefore, should ensure that their contractors expressly warrant the quality of the materials installed as well as the workmanship. It is not unusual for standard construction contracts to provide express warranties by contractors that materials will be of good quality, new, and free from defects. See, e.g., AIA Document A107-1987, §9.4. Even with an express warranty, however, if the contractor is directed by the owner to install a specified building product and does so in accordance with the manufacturer’s specifications, the risk of defects in the product may shift from the contractor to the owner. See Charles R. Perry Construction, Inc. v. C. Barry Gibson & Associates, Inc., 523 So. 2d 1221 (Fla. 1st DCA 1988).4
One means of protecting owners in advance is to require contractors, as a condition of the contract, to assign to owners all UCC warranty rights from sellers and manufacturers. See Ashley Square, Ltd. v. Contractors Supply of Orlando, Inc., 532 So. 2d 710 (Fla. 5th DCA 1988). Such an assignment, of course, may take place at any time, even after litigation has commenced. Privity problems may thus be cured when owners are able to secure the cooperation of contractors.
The contractor’s province is directing the manner and means in which building materials are installed in order to accomplish the architect’s design. Contractors undertake to build in accordance with the plans and specifications. Hawaiian Inn of Daytona Beach, Inc. v. Robert Myers Painting, Inc., 363 So. 2d 125 (Fla. 1st DCA 1978), cert. denied, 370 So. 2d 461 (Fla. 1979). Deviations from the design will constitute a breach. Biscayne Roofing Co. v. Palmetto Fairway Condominium Association, Inc., 418 So. 2d 1109 (Fla. 3d DCA 1982). The contractor’s liability, of course, is coextensive with the terms of the contract and is limited by privity.
Owners are prevented from suing contractors in tort by the economic loss rule, the announced purpose of which is to confine parties to the remedies that they negotiate by contract. See, e.g., AFM Corp. v. Southern Bell Telephone & Telegraph Co., 515 So. 2d 180 (Fla. 1987); Sandarac Association, Inc. v. W.R. Frizzell Architects, Inc., 609 So. 2d 1349 (Fla. 2d DCA 1992), review denied, 626 So. 2d 207 (Fla. 1993). This obviously adds great importance to the manner in which owners structure their contractual arrangements. Owners may act as their own general contractors by becoming “owner-builders” and contracting directly with each trade and material supplier necessary to construct improvements to their property. In such a case an owner will be in privity with every participant and be able to negotiate warranty rights and other remedies as proponents of the economic loss rule contemplate.
In the typical case, however, the owner contracts with a single general contractor to manage the project, coordinate the various trades, and assure proper performance of the work. An owner may not sue nonprivity subcontractors on a contract theory and is limited to seeking recovery for breach of warranty/contract against the general contractor. While the general contractor is liable for the adequate performance by both itself and its subcontractors, the owner takes the risk of depending upon the longevity, trustworthiness, and financial viability of the general contractor in the event defective work is discovered after the contractor has been paid. That risk can be reduced by owners’ requiring their prime contractors to assure the assignment to them of warranties from all lower-tier contractors and suppliers and by obtaining warranties from subcontractors and suppliers as a condition to contract formation.
Lack of privity does not prevent an owner’s recovering for defective work under the Florida Minimum Building Codes Act, F.S. §§553.70-.895, which creates in F.S. §553.84 a private right of action for any person who is damaged as a result of a violation of the building code against the person who “committed the violation.” This may not be as easy a determination as it seems, because F.S. §553.84 provides no definition for the operational term “commit,” and there are only a few case decisions interpreting the statute. See, e.g., Sierra v. Allied Stores Corp., 538 So. 2d 943 (Fla. 3d DCA 1989) (owner not strictly liable for code defects for work performed by others on property notwithstanding express duty of compliance with building code).
A contractor or subcontractor should be held liable for code-violating work it actually performs within the scope of the contract because it is bound to build in accordance with the code and violates the code when it fails to do so. The act of pulling the building permit imposes upon the contractor the duty of supervising all of the work performed under the permit. Therefore, a general contractor should also be liable under F.S. §553.84 for code violations when it does not actually perform the work but, rather, delegates it to a subcontractor who, in turn, physically “commits” the violation.
It is not unusual for contractors to conduct business through corporations with insufficient assets to satisfy claims for defective work. A contractor does not need a physical plant to operate and can lease equipment and hire labor as needed on a project-by-project basis. Thus, the corporate form often constitutes a substantial impediment for recovery by the owner for defective construction.
Prior to Casa Clara and the more recently decided Murthy v. N. Sinha Corp., 644 So. 2d 983 (Fla. 1994), owners could recover directly against the licensed individuals responsible for jobs undertaken by corporate contractors when defective construction could be traced to a lack of proper supervision of work. F.S. Chapter 489, part I, governs the licensing of individuals as construction contractors and the qualification of business organizations to engage in the business of contracting. F.S. §489.1195(1) imposes a duty on “qualifying agents” (i.e., individual license-holders) to supervise all work performed by the business organization on whose behalf they pull permits and supervise work. The failure of a contractor to supervise properly can result in the revocation or suspension of a license by the Construction Industry Licensing Board of the Department of Business and Professional Regulation, which regulates licensed contractors. See Alles v. Department of Professional Regulation, 423 So. 2d 624 (Fla. 5th DCA 1982); Hunt v. Department of Professional Regulation, 444 So. 2d 997 (Fla. 1st DCA 1983).
In the now-limited Gatwood v. McGee, 475 So. 2d 720 (Fla. 1st DCA 1985), it was held that the failure to supervise construction properly gave rise to a common law private right of action against the qualifying agent of a general contractor for defective work. While the cause of action arose out of the statutorily-imposed duty of supervision, the Gatwood court stressed that the action was premised upon the theory of common law negligence, not implied warranty or contract. “A qualifying agent is not an insurer against construction defects unless he is obligated therefor by contract or warranty.” Id. at 723. Gatwood involved common construction defects without resulting personal injury or damage to other property and, therefore, allowed the recovery of economic damages in tort. The effect of Casa Clara, however, is necessarily to eliminate recovery under the Gatwood negligence theory in the ordinary defect case seeking recovery for economic losses from poor construction.
In Murthy the Florida Supreme Court resolved an implicit conflict among appellate districts as to whether the licensing statute itself created an implied private right of action against individual contractors for breach of the duty to supervise.5 The court declined to recognize a private right of action based upon the lack of clear legislative intent to make individuals liable for the breaches of corporations that they qualify. Almost simultaneously, the Florida Legislature confirmed the determination of the court by enacting F.S. §489.131(12), which declared that no civil causes of action were to be construed from F.S. Chapter 489, part I, unless specifically provided. The duty to supervise thus runs not to third parties, but to the state, which may, of course, punish infractions through regulatory means. Otherwise, qualifiers are wholly insulated from individual liability for defective construction.
By allowing licensed contractors to avoid personal liability by doing business through corporations, the Florida Legislature holds contractors to a lower standard of accountability than it does professionals such as architects and engineers. Architects and engineers are statutorily barred from using the corporate form as a means of avoiding personal liability for failure to meet standards of professional care to which they are bound to adhere.
Claims by owners against design professionals for errors in design are subject to slightly fewer restrictions than claims against contractors for defective construction. Typically, an owner contracts with an architect for design services and the architect in turn engages engineers as subconsultants to provide structural, electrical, mechanical, or other specialty design services. It is not uncommon, however, for engineers to be engaged directly by owners or by contractors. Architects and engineers are liable in contract to those for whom they provide design services and, therefore, the extent of their liability will be determined largely by the written agreement pursuant to which they perform their work, plus such additional obligations as the law imputes by way of implied warranty.
In undertaking to furnish design services, design professionals do not warrant the end products of their work in the manner of a supplier of goods under the Uniform Commercial Code. Audlane Lumber & Builders Supply, Inc. v. D.E. Britt Associates, Inc., 168 So. 2d 333 (Fla. 2d DCA 1964), cert. denied, 173 So. 2d 146 (Fla. 1965)(design engineer does not “warrant” his or her service or the tangible evidence of his or her skill to be “merchantable” or “fit for an intended use”); Lee County v. Southern Water Contractors, Inc., 298 So. 2d 518 (Fla. 2d DCA 1974) (supervising engineer not a “guarantor” of result). Rather, a design professional’s duty is based upon the standard of care “to exercise and apply his professional skill, ability and judgment in a manner which is reasonable and without neglect.” Shepard v. City of Palatka, 414 So. 2d 1077, 1078 (Fla. 5th DCA 1981). A claim by a client against a design professional, therefore, is properly one for breach of the implied warranty or covenant to perform the services required in a professional manner. Brickell Biscayne Corp. v. Morse/Diesel, Inc., 683 So. 2d 168, 170 (Fla. 3d DCA 1996).
The economic loss rule generally prevents tort recovery for defective design by owners in privity with design professionals. The recent flurry of judicial activity surrounding the economic loss rule has caused some confusion among practitioners over whether there still exists an action for professional “negligence” for defective design. The confusion stems from the nomenclature, because it is customary for professional malpractice claims to be labeled “negligence,” although the duty breached actually arises from the contract between the professional and the client. The confusion can be avoided by identifying the claim as being for breach of contract. The same standard of care is involved in both the contract and tort theories, with the only difference being the source of the duty—contract versus common law.
When an architect has hired an engineer to produce a portion of the design, the architect will remain liable to the owner for all work performed by the consulting engineer. An architect may not delegate to others the responsibility for complying with applicable laws and regulations. Atlantic National Bank of Jacksonville v. Modular Age, Inc., 363 So. 2d 1152 (Fla. 1st DCA 1978), cert. denied, 372 So. 2d 466 (Fla. 1979). In the absence of privity, however, the owner may not sue the subconsultant engineer for breach of implied warranty and, further, will be barred by the economic loss rule from suing in negligence for design defects resulting only in economic damages. City of Tampa v. Thorton-Tomasetti, P.C., 646 So. 2d 279 (Fla. 2d DCA 1994); but compare Southland Construction, Inc. v. Richeson Corp., 642 So. 2d 5 (Fla. 5th DCA 1994).6
Florida courts have recognized one exception to the economic loss rule where liability is sought against professionals by persons not in privity and when certain requirements are met. In First Florida Bank, N.A. v. Max Mitchell & Co., 558 So. 2d 9 (Fla. 1990), the Florida Supreme Court adopted Restatement (Second) of Torts §552 as the basis for allowing third party tort claims for economic losses caused by professional negligence. The key requirements are that 1) the professional be in the business of providing information; 2) the third party rely on faulty information in the course of making a business decision, and, most important; 3) the professional know at the time of furnishing the information that the third party will rely on it.
The applicability of §552 has been recognized in the case of a professional engineer alleged to have negligently prepared an inspection report of the physical condition of an existing apartment building converted to condominium, when the report was furnished as part of the developer’s prospectus and relied upon by purchasers of units in the condominium. See Bay Garden Manor Condominium Association, Inc. v. James D. Marks Associates, Inc., 576 So. 2d 744 (Fla. 3d DCA 1991).
The facts of Bay Garden are atypical in that the engineer’s inspection report was knowingly prepared for the specific purpose of being read and relied upon by prospective purchasers of the condominium. Whether the reach of §552 could extend to third party liability of an architect or engineer in the ordinary case in which owners of property discover latent construction or design defects in a newly constructed building is questionable.
It might be argued that by sealing construction drawings filed with the building official or by carrying out the duties of a special inspector and filing reports with the building official, the design professional knows that his or her filings will be relied upon by owners in assessing the quality of the building in which they are acquiring an interest or making improvements. See Audlane Lumber, 168 So. 2d 335 (designer of trusses has duty to known users or consumers). It would seem, however, that §552 requires more than merely the “constructive reliance” of having documents filed in the public records that are open to inspection by prospective owners. Courts are now generally disinclined to expand exceptions to the economic loss rule. See, e.g., Florida Building Inspection Services, Inc. v. Arnold Corp., 660 So. 2d 730 (Fla. 3d DCA 1995); Palau International Traders, Inc. v. Narcam Aircraft, Inc., 653 So. 2d 412 (Fla. 3d DCA 1995), cert. denied, 661 So. 2d 825 (Fla. 1995); but see Southland Construction, 642 So. 2d at 8.
No reported cases hold design professionals subject to civil liability under F.S. §553.84 for defective design, and the application of that statute to architects and engineers is a matter of debate. Design professionals ordinarily are not directly governed by building codes, although they may be required by the building official to carry out inspections of work. Whether a design professional “commits” a violation of the code by preparing a design that violates code requirements has not been directly addressed by any Florida court.7
Unlike licensed contractors, design professionals may not hide behind a corporate shield to avoid personal liability for their own malpractice. See F.S. §471.023(3) (imposing personal liability against engineers practicing through corporations); F.S. §481.219(11) (imposing personal liability against architects signing and sealing construction documents); F.S. §621.07 (affirming individual liability of professionals practicing through professional service corporations).
Purchasers of New Homes
Owners who have purchased completed homes from builders or developers—as opposed to those who have contracted for improvements to their existing property—have additional remedies for defective construction. Builder-sellers are deemed under Florida common law to impliedly warrant that the homes they sell are fit and merchantable. Gable v. Silver, 258 So. 2d at 11. These warranties are limited in that they extend to original purchasers only. Strathmore Riverside Villas Condominium Association, Inc. v. Pacer Development Corp., 369 So. 2d 971 (Fla. 2d DCA 1979). The implied warranties do not arise in the sale of nonresidential property or property intended for residential development. Conklin v. Hurley, 428 So. 2d 654 (Fla. 1983).
Purchasers of condominium units are granted statutory warranties under F.S. §718.203. Two major warranties are created: 1) warranties of “fitness and merchantability for the purposes or uses intended” that are deemed to run from the developer to each condominium unit purchaser; and 2) “warranties of fitness as to the work performed or materials supplied” running from the contractor and all subcontractors and suppliers to both the developer and each unit purchaser. These warranties are deemed to run to both original and subsequent purchasers and, therefore, avoid the privity limitation of the common law warranties.
Like express warranties, the F.S. §718.203 warranties contain explicit limitations as to time and scope. Accordingly, some analysis as to the nature of the defect and the manner of its occurrence must be made before framing an action for breach. Despite these warranties’ having been enacted over 20 years ago, only two reported cases have construed their reach and effect.
One case, Seawatch at Marathon Condominium Association, Inc. v. Charley Toppino & Sons, Inc., 658 So. 2d 922 (Fla. 1994), settled the apparent uncertainty created by the express time limits for the various warranties and the customary delay in the developer’s turning over control of the condominium to the purchasers. The developer’s warranty as to the structural components of the condominium runs for three years from “completion of the building.” F.S. §718.203(1)(e). It was argued that if turnover of control did not occur until six years after completion of the building, the warranty would have expired before the purchasers could discover the defects and bring their action for breach. The Florida Supreme Court rejected that argument, however, recognizing that the warranty periods were different from the applicable statute of limitations period. The latter does not begin to run until after the developer has relinquished control of the condominium to unit purchasers, pursuant to F.S. §718.124 of the Condominium Act, which tolls claims by condominium associations until the date of turnover.
The second case, Leisure Resorts, Inc. v. Frank J. Rooney, Inc., 654 So. 2d 911 (Fla. 1995), dealt with the different scopes of the warranties given by the developer on one hand and the contractors, subcontractors, and suppliers on the other. The developer’s warranties of “fitness and merchantability,” F.S. §718.203(1), echo the common law warranties created in Gable v. Silver, as well as the UCC warranties of merchantability and fitness for particular purpose running to purchasers of products, F.S. §§672.314, 672.315. Accordingly, they can be viewed as broadly encompassing the standards of habitability, good workmanship, compliance with the plans and specifications, and compliance with the building code that underly the common law implied warranties. By contrast, the contractor, subcontractor, and supplier warranties, F.S. §718.203(2), are limited to “fitness as to the work performed or materials supplied.” Noticeably these warranties omit the language “for the purposes or uses intended” contained in the developer warranties.
In Leisure Resorts the Florida Supreme Court recognized the more restricted scope of the contractor warranties by holding that a contractor was not liable under F.S. §718.203(2) for the installation of air conditioning units that were insufficient to cool the condominium apartments properly. Because the units met the architect’s specifications and were not inherently faulty, the adequacy of performance was seen as relating to “intended purpose” or “intended use,” which the court observed was “more within the control of the developer who has control of the design of the building.” Id. at 914. That is, the deficiency complained of related more to the design function—specifying the required capacities of the air conditioning units—than to workmanship, which falls within the responsibility of the contractor.
The common law and statutory remedies available to property owners for defective construction all contain inherent limitations which the practitioner must closely analyze when evaluating the course of recovery to be followed. Recovery in contract presents a much cleaner and less problematic route, although privity, as always, poses a substantial impediment to claims against lower-tier participants in the construction process. Before a project begins, it is important to structure the contractual arrangement to assure privity relationships by requiring either third party beneficiary contracts, assignments of warranties, or separate contracts between the owner and various participants. Where such protections were not created in advance, practitioners should pursue after-the-fact assignments of warranty rights against lower-tier contractors, consultants, and suppliers to supplement remedies which might otherwise be available. q
1 Compare, e.g., Va. Code Ann. §8.2-318 (which extends product warranties to remote purchasers) with Fla. Stat. §672.318 (which does not).
2 See Florida Power & Light Co. v. McGraw Edison Co., 696 F. Supp. 617 (S.D. Fla. 1988), aff’d, 875 F.2d 873 (11th Cir. 1989).
3 The economic loss rule should not prevent tort recovery, however, where defective construction results in damage to previously standing property improvements. For example, water damage to an existing structure caused by a faulty re-roofing should be recoverable in tort where the structure itself is not within the scope of the re-roofing contract and could be considered “other” property. In such a case damages to the structure would be recoverable, while the defective roofing would be excluded by the economic loss rule.
4 See also Justin Sweet, Legal Aspects of Architecture, Engineering, and the Construction Process §24.02 (5th ed. 1994).
5 Compare Mitchell v. Edge, 598 So. 2d 125 (Fla. 2d D.C.A. 1992); Gatwood v. McGee, 475 So. 2d 720 (Fla. 1st D.C.A. 1985); Finkle v. Mayerchak, 578 So. 2d 396 (Fla. 3d D.C.A. 1991).
6 In Southland the Fifth District allowed recovery in tort by a contractor against a professional engineer, reasoning that because tort liability to nonprivity persons for professional malpractice was “already-established,” its recognition did not constitute an expansion of tort not permitted by the economic loss rule. That decision is probably limited to its facts and should not be read as the basis for tort liability to non-privity claimants in all cases.
7 But see Edward J. Seibert, A.I.A., Architect & Planner, P.A. v. Bayport Beach & Tennis Club Association, Inc., 573 So. 2d 889 (Fla. 2d D.C.A. 1990) (Fla. Stat. §553.84 claim brought against architect below, but not challenged on appeal). It would be ironic if a contractor could be liable under Fla. Stat. §553.84 for following a code-violating design while the author of the design could not. More reasonably, the contractor’s liability should be limited to code-violating workmanship and deviations from the design because contractors are contractually bound to build in accordance with the design.
H. Hugh (Terry) McConnell practices appellate law in Coral Gables, concentrating in commercial and construction matters. He represented the homeowners in the Casa Clara and Seawatch cases discussed in this article. Mr. McConnell received his B.A. from Yale University, his J.D. from Northeastern University, and his Masters in regional planning from the University of North Carolina at Chapel Hill. He has taught law on the adjunct faculty of the University of Miami Department of Civil and Architectural Engineering and regularly appears as a guest lecturer in construction law at the University of Miami School of Law.