LEGAL
Beware the Consequences
of Consequential Damages
Mitigate your risks with a mutual waiver
When a contractor breaches a construction contract, the
contractor knows that the other party to the contract
will suffer damages due to the breach and that the
contractor may be required to pay the other party to compensate
for the damages. For example, if a contractor fails to complete the
project, the contractor may be held responsible to pay the owner’s
costs to complete the work with another contractor. Similarly, if a
subcontractor fails to complete the work in accordance with the
contract specifications, the subcontractor may be held responsible
to the contractor for the costs to replace or repair the defective
work. These sorts of damages – the types that can be said to
almost always follow naturally from the specific contract breach
and compensate for the value of the promised performance – are
known under the law as direct damages. Direct damages, while they
can be costly, are generally a known and quantifiable risk that the
contractor undertakes when entering into a construction contract
in exchange for the opportunity to earn a profit for properly and
timely completing the work under the contract.
However, direct damages are not the only type of damages a
contractual party can be awarded for the other party’s breach. There
are also consequential damages, which can be much more of an
unknown risk and can lead to disastrous liability in certain circumstances.
Consequential damages, also known as special damages,
are losses or injuries that are not the type that would almost always
flow directly and immediately from breach, but that result as a consequence
of the breach in a particular case, and may be recoverable
if they can be said to have been within the contemplation of the
parties at the time they made the contract. Typical examples of consequential
damages include, among others, lost profits, lost rents,
loss of use, damage to reputation and interest and finance charges.
While consequential damages are oftentimes more difficult to
prove and recover in court, because the amounts can be so unpredictable
and can oftentimes be very large, they can present a significant
risk for contractors that is difficult to quantify. For example,
suppose a contractor is required to complete the construction of
250-unit apartment complex within nine months. The contractor
completes the work timely, but during the inspection process it’s
determined that the fire-safety system is not working, and it takes
30 days and costs $25,000 to repair the issue. However, the repairs
also delay issuance of the certificate of occupancy for 60 days, and
the apartment owner claims it lost $1,000 a month in profit on
each unit for the two months the opening of the complex was
delayed. The contractor could potentially be liable not just
for the $25,000 in direct damages, but also for the
$500,000 in consequential damages for the owner’s
lost profits caused by the breach. Similarly,
By C. Ryan Maloney, Foley & Lardner LLP
Brian A Jackson/Shutterstock
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