The Jigsaw Puzzle of Consequential Damages

In contract law, courts have characterized damages in a number of ill-defined and confusing ways. Monetary claims have been called direct, indirect, actual, speculative, estimated, liquidated, special, consequential, incidental, and punitive. The moniker applied is not inconsequential; it can make the difference between recovery and loss. Certain types of costs are inevitably involved in change orders and claims. Extra labor, supervision, equipment, supplies-these categories of expenses flow naturally from the extra work. Generally, documentary support can be found in field and payroll reports, invoices, rental agreements, cancelled checks, and other standard business records for these "direct" and "actual" damages. Where these costs are estimated, they are still "direct" in the sense that they are directly associated with performing the extras. The concept is important. Many mechanics' lien statutes and bonding laws restrict a contractor's recovery to direct damages. The straightforward question in those states where other "impact" costs may need to be forgotten is, "What value has been added and how much did it cost the contractor to get there?" Speculative damages At the other end of the spectrum are speculative damages. If you hear that word, the claim is gone. Speculative damages cannot be proven with certainty. They are based on what could have been instead of what actually occurred. In contract law, the courts avoid issues of personal aspirations that cannot be documented, and which can be invented after the fact. Such damages are described as: "If I had made a profit on this job, I could have opened a restaurant," or "If the condo conversion had not completed so late, I could have sold the units for twice the price." Consequential damages Consequential damages lie in the great divide between "actual" direct and "speculative." They are among the hardest to document and prove and, without substantial proof, are among the most likely to be discounted. In addition, it is hard to define the term. Under the Uniform Commercial Code (UCC), which generally does not apply to construction contracts, the following distinction is made: - 2-715. Buyer's Incidental and Consequential Damages (1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. (2) Consequential damages resulting from the seller's breach include (a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty. The UCC calls damages "incidental" if they are "reasonably incurred" and involve the actual goods. Consequentials are "any loss" relating to the "requirements and needs" of the buyer. There is an added restraint: the needs of the buyer, not the buyer's potential damages for not meeting those needs, must be of a kind which the seller had reason to know (even if he did not actually know) at the time of contracting. Aside from determining whether the UCC definitions are clear, the courts often do not make an effort to separate incidental and consequential damages for contracts that the UCC doesn't cover. For example, a Texas court reasoned: [W]hat amounts to consequential damages is largely dependent on the circumstances of each case which should charge the wrong doing party with constructive knowledge that the resulting injury would be a consequence of his wrongful act and is essentially a question of fact. In another case, a Tennessee court ruled: Consequential damages are such as are not produced without the concurrence of some other event attributable to the same origin or cause. The term may include damage that is so remote as not to be actionable. It has also been defined as synonymous with the term "special damages." The above rulings do not give much predictability to the term. But here are examples where a court found that the damages were "consequential": - Excess labor incurred by a sprinkler contractor caused by defective sprinklers. - Increased material costs caused by delays. - Increased field office costs resulting from delays. Excess supervision during a delay caused by defective pipe. - The cost of idled equipment. - Cost of borrowed money. - Lost profits. Essentially, the test for whether damages can be considered "consequential" is whether they were foreseeable by the breaching party. For example, if an electrical failure in a shopping mall causes the cancellation of a gala opening party for the mall, the losses relating to the party are consequential damages if the contractor had no reason to know that its faculty work would cause such a result. On the other hand, had the contractor been retained expressly for preparing the gala affair, the damages would be "direct." Relation to liquidated damages Where a project is delayed, most of an owner's damages will be of the "consequential" variety. Those damages may include lost business opportunities, lost market share, losses caused by a change in the market or changes in interest rates, extended consulting fees, and the like. Because proof of these forms of delay damages can be difficult, owners often insert a liquidated damages provision to cover them. A common form is a specified dollar amount for every day of delay caused by the contractor. A discussion of liquidated damages is contained in a prior issue of Electrical Contractor. Exclusion of consequentials It is increasingly common for construction contractors to place an "exclusion of consequential damages" clause in their contracts. On an existing facility, such as a commercial establishment or a factory, a contractor's mistake could shut down the operation, potentially exposing the contractor to a large consequential damages claim by the owner (lost production, lost profits, excess overhead, etc.). The practice of contractually waiving these types of damages has become even more widespread since the most recent revision to the popular "AIA A201 General Terms and Conditions." In that standard form agreement, both the owner and the contractor waive exposure to each other for consequentials. This creates added confusion, particularly concerning itemized damages waived, including lost labor productivity, extended home office overhead, and idle equipment. And what does the waiver do to an indemnity clause for personal injury? What does a waiver do to the warranty clause? However, the addition of a clause to your contract stating you will not be held accountable for consequential damages can do no harm. These contractual exclusions of consequential damages are legally enforceable, so care should be exercised in drafting them. Conclusion A basic working knowledge of monetary claims that can be recovered and those that cannot is necessary for every contractor. Without this knowledge, you will not understand your contract, and you may be losing valuable rights in not knowing what you are entitled to receive. ITTIG, of Ittig & Ittig, P.C., in Washington D.C., specializes in construction law. He can be contacted at (202) 387-5508, e-mail:, or his Web site,

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