Page 48 - CCD-Mag-Summer-Fall-2020

The Construction Law Corner: “At the Intersection of Construction and Law”
Consequential Damages: To Waive
or Not to Waive? That is the Question.
by Thomas Morales, Esq., and Aja Robbins
In the early-1990s, the New Jersey Supreme Court handed down a decision that forever changed the way construction deals are handled. It all began when the Sands Hotel & Casino contracted Perini Corporation to renovate the derelict Brighton Hotel. Unfortunately, Perini ran into delays and the renovated casino was not able to open until after Atlantic City’s lucrative summer months passed. Years of litigation ensued. At the culmination of the suit, the New Jersey Supreme Court found Perini liable for $14.5 million in lost profits. The Contract Sum? A mere $600,000. See Perini Corp. v. Great Bay Hotel & Casino, Inc., 610 A.2d 364 (N.J. 1992).
Ever since that fateful decision, nearly every form construction contract includes a waiver of consequential damages. The American Institute of Architects (AIA), for example, began to include a mutual waiver of consequential damages between the owner and contractor in 1997 and continues to do so today. But what are consequential damages? And is it always beneficial for a contractor to waive them?
Under Colorado law, “‘[g]eneral damages’ are those that flow naturally from the breach of contract, whereas ‘special’ or ‘consequential damages’ are other foreseeable damages within the reasonable contemplation of the parties at the time the contract was made.” Giampapa v. Am. Family Mut. Ins. Co., 64 P.3d 230, 237 n.3 (Colo. 2003). Admittedly, what
is or what is not a consequential damage can be a bit of
a gray area. Courts often determine whether a particular damage claim is general or consequential in different ways. In Michigan, for example, various kinds of delay damages (including loss of value of resale, idled equipment, and loss of efficiency) are considered consequential damages. See Performance Abatement Servs., Inc. v. Lansing Bd. of Water and Light, 168 F. Supp. 2d 720, 741 (W.D. Mich. 2001). Whereas in North Carolina, a court found that similar claims were better characterized as general damages because such damages are “common to the industry and naturally flow from such delays.” Metric Constructors, Inc. v. Hawker Siddeley Power Eng’g, Inc., 468 S.E.2d 435, 440 (N.C. App. 1996).
Although the delay itself may be categorized as a general damage depending on the jurisdiction, the consequences of that delay are usually recognized as consequential damages. Consequential damages commonly suffered by a contractor on a delayed or disrupted project include extended home
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office overhead, lost profits, lost bonding capacity and loss of reputation. Owners, on the other hand, often claim loss of use and lost profits/rents related to a building that is not completed on schedule.
Without a waiver built into the language of the prime contract, both the owner and the contractor could be liable for both consequential and general damages in the event
of a breach. In many instances, waivers protect contractors. But a mutual waiver of consequential damages (like the
one found in § 15.1.7 of the AIA) still comes with a price: contractors waive their own claim to consequential damages when signing a contract containing a mutual waiver of consequential damages. For example, imagine a scenario where an owner breaches by refusing to pay the contractor the agreed-upon fee after completion of the project. In this case, the indirect effect of the owner’s breach may be that the contractor does not have the expected cashflow to finance its next projects, or the bonding capacity to even bid on its next project. If the contractor waived consequential damages in the prime contract, it would not be able to recover for the lost anticipated profits of the new projects in a suit against the owner.
Unshielded by waiver, however, contractors historically
face more exposure to liability in the event of a breach than owners do. Therefore, in order to avoid a Perini-like scenario, it is generally prudent for risk-averse contractors to waive consequential damages when entering into a new contract.
Still, owners may not always agree to an outright mutual waiver. In that event, a contractor might consider
modifying the waiver so that (1) the owner can only recover consequential damages that would be covered by insurance, or (2) potential consequential damages are capped at a specific dollar amount.
In the end, the one-size-fits-all consequential waiver language of the AIA and similar form contracts may not fit your project. Just be aware that without adequate contractual protection, you may be opening yourself up to unnecessary liability. If you negotiate carefully when consequential damages are involved, you may be able to limit exposure while also looking out for yourself in the event the owner breaches.
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