Source: https://www.klconstructionlawblog.com/2007/12/waiving-good-bye-to-consequential-damages-drafting-effective-waivers-in-todays-marketplace/
Timestamp: 2020-07-03 16:07:30
Document Index: 683673041

Matched Legal Cases: ['§ 11', '§ 4', 'art, 1994', '§ 3', '§ 66', 'art, 1994', '§10']

Waiving Good-Bye to Consequential Damages: Drafting Effective Waivers in Today’s Marketplace | Construction Law
Waiving Good-Bye to Consequential Damages: Drafting Effective Waivers in Today’s Marketplace
Browse archives for December 01, 2007
By K&L Gates attorneys Jason L. Richey and William D. Wickard
Contractual provisions that mutually waive the rights of the owner and contractor to recover consequential damages have become common-place in today’s construction contracts. Effective waivers will expressly define the type of consequential damages the provision is intended to bar. Such a provision will allow courts and arbitration panels to dismiss all or part of a construction case at an early stage if the waiver clearly bars a demand for certain types of consequential damages. However, a broad consequential damages waiver that is improperly drafted may cause contractors and owners to expend significant time and money defending claims that seek damages for delay, lost profits or other damages commonly thought to only be “consequential.”
This article provides an overview of the significance of properly drafting effective consequential damages waivers and provides recommendations on how such provisions should be drafted to improve the odds that courts and arbitration panels will enforce them. Section A discusses the difference between direct and consequential damages. Section B discusses the necessity for and general enforceability of consequential damages waivers. Section C considers cases where courts have interpreted consequential damages waivers and discusses when courts will enforce consequential damages waivers to bar a party’s claims and when they will allow claims for consequential damages to precede to trial. Finally, Section D provides recommendations for negotiating consequential damages waivers in today’s construction market.
A. Consequential Damages vs. Direct Damages.
When a party breaches a construction contract, the law generally requires that the non-breaching party be placed in the position that it would have been in absent the breach.[1] The non-breaching party may recover two types of damages – “direct or general” damages and “indirect or consequential” damages. What constitutes direct versus indirect damages, however, is not black and white. Unfortunately, the distinction between direct and indirect damages has generally been a grey area for courts that have considered this issue. The distinction is nonetheless critical because indirect damage usually can be barred by a contract while direct damages generally can not.
Generally, direct damages “follow naturally from the type of wrong complained of” and are “reasonably expected.”[2] For example, the costs incurred by the owner to complete a project following the contractor’s default or wrongful abandonment of the project are direct damages.[3] Many times, direct damages are also measured by the costs necessary to repair or replace a contractor’s defective work.[4] Similarly, costs incurred to bring a project up to contract specifications have been found to be a “direct, usual and foreseeable loss.”[5] Nonetheless, there is no general rule that direct damages are always limited to the difference between the value of the product or service contracted for and the value of the product or service actually provided.[6]
On the other hand, even though there is no universal definition for “consequential damages,” “consequential” or “indirect” damages are commonly thought of as losses or injuries that “do[] not flow directly and immediately from the act of the party, but only from some of the consequences or results of such act.”[7] For a party to be able to recover consequential damages from the breaching party they must have been reasonably foreseeable and within the contemplation of the parties at the time they made the contract.[8] Typical examples of consequential damages included lost profits, lost rents, damage to reputation, down or idle time, interest and finance charges, loss of use of goods, additional labor costs, material escalation costs, depreciation, rental costs, additional energy costs, loss of productivity and efficiency, and additional home office costs.[9] The most common and perhaps most costly example of consequential damages in a construction dispute are lost profits.[10]
B. Waivers of Consequential Damages Used Throughout the Construction Industry are Generally Enforceable and Beneficial to Contractors and Owners.
It is well established that contractual waivers of consequential or indirect damages between sophisticated parties are generally enforceable.[11] Courts are inclined to enforce contractual waivers of consequential damages because “[a] court is not at liberty to make a new contract for the parties who have spoken for themselves.”[12] However, a court will not enforce a waiver if it determines the provision is unconscionable,[13] against public policy,[14] or prohibited by statute.[15]
Perini Corp. v. Greate Bay Hotel & Casino, Inc. presents a telling example of why consequential damages waivers should be utilized in the construction industry. In Perini, Perini Corporation (“Perini”), entered into a construction-management agreement with an Atlantic City hotel and casino (the “Sands”) where Perini agreed to serve as the construction manager for major renovations to the casino. Perini’s fee was $600,000.[16] There were several components to the casino renovations, with the most notable aspect being the construction of a $400,000 ornamental, non-functional glass façade located outside the casino, facing the boardwalk. Previously, the Sands had no entrance visible from the boardwalk, and though the façade would be nonfunctional, the Sands anticipated that this “new glitzy glass façade on the east side of the building [] might act as a magnet to lure a new category of customers-strollers who might leave the boardwalk and walk the long block from the beach to the Sands.”[17] Although the contract contained no completion date, the parties ultimately agreed that the renovations would be substantially complete by May 31, 1984.[18] The ornamental façade, however, was not completed until August 31, 1984 and the project did not achieve substantial completion until September 14, 1984, approximately four months late.[19] The Sands ultimately terminated Perini in December 1984.
The parties engaged in an arbitration where Perini sought its unpaid fees and the Sands sought damages it incurred as a result of the delay to substantial completion. Even though the project was only delayed by about four months, the arbitration panel awarded Sands over $14,500,000 in damages for lost profits. This amount represented the Sand’s lost profits from the end of May to December.[20] Following the arbitration, the Sands sought judicial confirmation of the arbitrators’ award in the New Jersey Chancery Division. Perini requested the court vacate the arbitration award.[21] The Chancery Division confirmed the arbitration award and rejected Perini’s request to vacate the award. The New Jersey Supreme Court ultimately affirmed the Chancery Division’s decision.
The New Jersey Supreme Court rejected Perini’s argument that it would have never accepted such an enormous financial risk for a $600,000 fee and that the parties could not have anticipated that the failure to timely compete a “non-functional, ornamental façade” could lead to millions in lost profits.[22] According to the court, Perini was aware that the Sands intended to use the façade to increase its profits by attracting more patrons from the boardwalk and Perini was aware that the Sands desired to have the project completed prior to the beginning of the summer season, the casino industry’s busiest season.[23] Moreover, even though the Sands “conceded generally that most of the work had been completed by September 15, 1984,” the court found it would have been “inequitable” to not award the Sands the additional profits it lost after September because the “Sands never received what it bargained for – an ornamental glass façade that would attract clientele to its casino.”[24] The court also refused to vacate the award even if $14,500,000 was “grossly disproportionate to the $600,000 management fee.”[25] Even though the court was “troubled by the magnitude of this award,” it held that “[p]rojects of this magnitude are better left to the agreement reached by the parties in their contract.”[26]
As the Perini decision illustrates, an award of consequential damages could have devastating affects upon a breaching party in a construction dispute. Indeed, the four-month delay claim in Perini resulted in liability that was twenty-four times the contract fee.[27] In fact, the mere threat of such outlandish consequential damages awards cannot only prolong individual construction disputes, but can have detrimental ramifications throughout the entire construction industry:
By their subjective nature, these claims [for consequential damages] typically are the largest, most costly and the most likely to lead to a windfall to one party and economic disaster to the other. The possibility of a windfall recovery is one of the most substantial impediments to settlement in disputes over delays or change orders. Eliminating these exposures should substantially reduce the overhead cost of contractors for the benefit of the whole construction industry.[28]
As the court in Perini suggested, Perini could have avoided such a result by negotiating a contract that allocated the risk for such lost profits to the Sands by including a mutual waiver of consequential damages. In fact, in direct response to the Perini decision, the AIA included a mutual waiver of consequential damages in its 1997 version of the A201 – General Conditions of the Contract for Construction.[29] This pre-emptive waiver, was included at section 4.3.10 of the A201 and provided as follows:
Claims for Consequential Damages. The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating this Contract. This mutual waiver includes:
1. damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
2. damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Subparagraph 4.3.10 shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.[30]
Under the AIA provision, whether a type of damage is consequential depends upon the position of the litigant. From the owner’s point of view, damages for rental expenses, loss of use, income and profit; damages relating to additional financing costs; damages to business and reputation; and damages for loss of management or employee productivity are consequential damages. From the contractor’s point of view, damages for principal office expenses, loss of financing, business and reputation; and loss of profit (other than anticipated profits arising directly from its work under the contract) are consequential damages. In fact, this has led some to criticize section 4.3.10 as not really being a “mutual” waiver since the list of consequential damages waived by the owner is not identical to the list waived by the contractor.[31]
The AIA’s inclusion of the waiver was seen as a “bellweather event” because the AIA’s forms are the “benchmark” and the “most influential documents” in the construction industry.[32] Many contractors believed it was “unfair to expect a general contractor, which is earning a profit of perhaps 5 percent to 10 percent on a project, to assume the risk of lost profits or other economic losses that the owner will sustain in the event the project is delayed or not completed, even if the delay or non-completion is due to the negligence or default of the contractor.”[33] By limiting an owner’s recoverable damages to direct damages only, section 4.3.10 levels the risks between the owner and contractor so that a contractor’s potential exposure is proportional to its compensation under the contract. Under Section 4.3.10 even if a project runs amok and the contractor causes delay to the project or even fails to complete the project, the contractor should not face an outlandish demand for lost profits and consequential damages like those awarded to the owner in Perini. Not surprisingly, the AIA’s mutual waiver of consequential damages was also “roundly criticized” by owners.[34]
The AIA’s inclusion of a consequential damages waiver and the proliferation of these provisions throughout the industry by no means ended litigation over consequential damages. Section 4.3.10 is not exclusive, meaning that a court or arbitrator must determine whether a particular damage not listed in section 4.3.10 is a consequential or direct damage.[35] This presents a problem because “no two courts or treatises define consequential damages in the same way.”[36] In fact, some jurisdictions have even labeled lost profits as direct damages rather than consequential damages.[37] Tellingly, section 4.3.10 does not even address whether one of the most common types of damages in a construction dispute – delay damages – are a consequential or direct damage.[38]
C. Courts Have Taken Divergent Approaches to Interpreting Consequential Damages Waivers.
Courts have taken different approaches to applying waivers of consequential damages in construction disputes. As shown below, some courts have dismissed a party’s claim based on the express language of the waiver while others have allowed a jury to decide whether the claim in fact seeks consequential damages and is barred.
1. No Liability for Consequential Damages.
Some courts and arbitration panels will enforce consequential damages waivers to narrow the issues to be resolved without a trial.[39] These courts determine that because certain damages are clearly contractually-barred consequential damages, a trial regarding such damages would be futile and unnecessary.[40] For instance, several courts have interpreted general consequential damages provisions that do not specifically mention delay to bar delay damages.[41] Some commentators have stated that because damages for delay can only be the consequence of a breach of a construction agreement, there can be no recovery for delay if the parties disclaim all consequential damages, without defining what they mean by consequential.[42] On the other hand, it has also been suggested that catch-all waivers that do not specifically define delay damages as consequential, should not bar recovery of delay damages.[43] As such, other courts have refused to apply consequential damages waivers to bar delay damages where the waiver did not specifically define delay damages as a type of consequential damages.[44]
The court adopted the former approach in Otis Elevator Co. v. Standard Construction Co., finding delay damages were barred by a waiver even though they were not specifically defined as consequential damages. In Otis Elevator, a hospital claimed delay damages against an elevator installer when the installation of the hospital’s elevators was delayed.[45] According to the court, the hospital’s damages which arose “from failure to furnish the contract res in proper condition within the time required,” were contractually-barred consequential damages:
the cost of additional labor for operation of the hospital, the value of the time lost by employees because of faulty operation of the elevators, and the additional costs of construction in the new construction and alterations of the hospital which resulted from the delay in installing the elevators must also be rejected. They are consequential damages, here.[46]
The court then reached its decision on the pleadings and without “affidavits or other additional facts bases,” and held that the hospital’s “counterclaim fail[ed] as a matter of law.”[47] As Otis Elevator shows, some courts will find that delay damages or other types of damages are contractually-barred consequential damages, and dismiss those damages from the case without a trial.[48] However, as discussed in more detail below, the best practice is to have an attorney draft the waiver provisions so as to enumerate the specific types of damages the parties consider being consequential. As such, parties should not have to rely on decisions like Otis Elevator to convince a court to enforce the negotiated waiver provision.
2. Juries Must Decide Whether the Damages at Issue are Barred by the Waiver.
Many courts take an opposite approach than the court in Otis Elevator. These courts find that it is a question of fact for a jury to decide whether certain categories of damages are consequential and, thus, barred by a consequential damages waiver. As a leading treatise has recognized “[d]amages that might be consequential under one contract can be direct or ordinary under another. Among the circumstances most relevant to the classification is the scope of the broken promise itself.”[49] Further, the commercial context in which the contract was entered “is of substantial importance in determining whether particular damages flowing from its breach are direct or consequential.”[50] Moreover, courts repeatedly find that whether a loss constitutes direct damage or consequential damage is dependent on the specific circumstances of the case, and hence a question of fact:
In general, the precise demarcation between direct and consequential damages is a question of fact, and the commercial context in which a contract is made is of substantial importance in determining whether particular items of damages will fall into one category or the other.[51]
For instance, in Niagra Mohawk Power Corporation v. Stone & Webster Engineering Corp., the owner of a nuclear power plant sued its piping contractor for breach of contract, negligence and gross negligence.[52] The owner claimed its damages, which could be divided into twelve separate categories, totaled approximately $88,000,000.[53] The contractor moved for summary judgment on the grounds that four of the owner’s damage categories – financing costs, costs incurred in conjunction with government inspections, engineering oversight costs and overhead costs – were barred as a matter of law by a consequential damages waiver.[54] The language of the consequential damage waiver did not specifically define what the parties meant by “consequential damages,” and merely provided: “In no event shall the Contractor be liable for consequential damages arising out of the performance of erection work to the project.”[55] The court found that “[g]enerally, whether damages are direct or consequential is an issue of fact which must be reserved for trial.”[56] Consequently, the court declined to dismiss any categories of damages as barred by the consequential damages waiver, leaving the recoverability of much of the $88,000,000 in alleged damages to be decided at trial.[57]
Similarly, in ANR Prod. Co. v. Westburne Drilling Inc., an oil and gas development company sued its drilling contractor for damages incurred in connection with an oil drilling project. [58] The contractor moved for summary judgment on the basis that the owner was contractually barred from recovering consequential damages such as the cost of drilling a replacement well, rig rental, additional wages and materials purchased due to delay.[59] The parties’ contract barred the owner from recovering consequential damages, but did not define what the parties meant by “consequential damages.” The court refused to grant summary judgment, stating:
The parties agreed that the drilling contract expressly bars recovery of consequential damages. But they differ in their respective definition and characterization of consequential damages. I do not find it appropriate to resolve this question at this juncture because it is more than a simple dispute about definitions. The consequential damage issue raises important factual questions about each damage claim. Consequently, it renders summary judgment inappropriate.[60]
As these cases show, because there is no exact formula or bright-line test for courts to apply to determine whether certain damages are direct or consequential, even where the parties have mutually waived their right to recover consequential damages, they still run the risk that a court will find that classification of damages as direct or consequential is a question of fact which must be determined by a jury at trial. Such an approach inevitably leads to protracted litigation or arbitration, where all sides engage in costly pre-trial discovery and then proceed to a trial or hearing where a fact-finder ultimately determines whether a particular category of damages is direct or consequential.
3. Courts Are More Likely Not to Hold a Trial Regarding the Recovery of Consequential Damages Where the Parties have Specifically Defined Consequential Damages in Their Waiver.
As the above-described cases show, some courts will hold a trial to determine whether certain damages are direct or consequential while other courts will decide before trial whether certain damages are direct or consequential. Nonetheless, a court is most likely to determine whether certain damages are consequential without a trial when the waiver specifically defines what the parties meant by “consequential damages.” When interpreting these types of waivers, courts are inclined to apply these waivers to preclude the recovery of such damages without the need for a jury trial. In particular, “where the parties have gone a long way in defining the scope of consequential damages in the contract itself,” courts routinely find, “as a matter of law, that the damages sought by the [plaintiff] … constitute consequential damages, rather than direct damages,” without the need for a hearing.[61]
For instance, in Roneker v. Kenworth Truck Company, the court dismissed a trucker’s suit against the manufacturers of his truck and truck engine since the pertinent waivers included a detailed definition of consequential damages permitting the court to determine as a “matter of law” whether the trucker’s damages were direct or consequential.[62] In their contracts, the parties included the following categories as examples of consequential damages: loss of income; damage to vehicle, attachments, trailers and cargo; towing expenses, attorney’s fees; communication expenses; meals; lodging; overtime; loss of use of the Engine or vehicle (“downtime”); loss of time and inconvenience.[63] In fact, even damages traditionally thought of as direct damages, such as costs to repair or replace defective work, have been dismissed as a matter of law where the parties defined them as consequential damages.[64]
Like the parties in Roneker, the parties in Envirotech Corp. v. Halco Engineering, Inc. included an extensive definition of “consequential damages” in their contract. As such, the Supreme Court of Virginia held that the trial court erred by submitting the issue of consequential damages to a jury. In that case, a subcontractor on a sewage treatment project, Halco Engineering, Inc. (“Halco”), entered a contract with another entity, Envirotech Corporation (“Envirotech”) for the supply of equipment and start-up services for the project.[65] The contract between Halco and Envirotech included the following waiver of consequential damages which listed several categories of damages the parties deemed “consequential damages”:
Seller shall not be liable to Purchaser for any incidental or consequential damages for any reason whatsoever, including but not without limitation, damages in the character of (a) loss of profits or revenues resulting from the failure of the equipment to meet specifications or warranties, (b) damages suffered by Purchaser as a result of loss of production facilities or equipment, (c) cost of replacement equipment, (d) damages suffered by customers of Purchaser, or (e) any fines or penalties assessed for failure to comply with any law or governmental regulations.[66]
When the project was not completed on time, Halco sued Envirotech, claiming that Envirotech’s delays and failure to perform caused it to incur additional costs for office overhead, field supervision, tools and equipment, labor, and financing.[67] The parties proceeded to a jury trial where Halco obtained a $428,554 verdict.[68] On appeal, the court determined that all Halco’s damages were consequential damages and the trial court had erred by submitting the case to the jury:
when the trial court “determined that the exclusion of consequential damages was not unconscionable, it was obligated to rule as a matter of law that those damages were not recoverable by [the subcontractor] under any circumstances”…[F]rom a practical standpoint, where, as here, experienced parties agree to allocate unknown or undeterminable risks, they should be held to their bargain; courts or juries should not be permitted to rewrite the agreement.[69]
Consequently, the court annulled the jury verdict and entered a judgment for Envirotech.[70]
One category of damages that parties to construction contracts often contractually define as a consequential damage is lost or wasted product. In those instances where the parties have specifically defined lost product as a particular type of consequential damage, the courts have routinely held as a matter of law that claims for wasted/lost production caused by production inefficiency are barred by a consequential damages waiver.[71] For instance, in Wood River Pipeline Co. v. Willbros Energy Services Co., an owner and construction company negotiated a contract for the construction of an oil pipeline.[72] In the contract, the parties negotiated the following consequential damages provision:
Contractor shall not be liable under any circumstances or responsible to company for consequential loss or damages of any kind whatsoever including but not limited to loss of use, loss of product, loss of revenue or profit.[73]
Soon after construction, the pipeline ruptured causing lost and wasted oil. The owner then brought an action to recover the cost of the lost oil and disposal costs. The Kansas Supreme Court held that the above language was “clear and unambiguous” and prevented recovery for the costs associated with the lost product caused by the rupture.[74] Consequently, it affirmed the trial court’s grant of summary judgment to the construction company based on the consequential damages provision.[75]
Similarly, in Pfaudler Co. v. American Beef Packing Co., the plaintiff executed a contract with the defendant to provide engineering services and equipment for a system in the defendant’s meat packing plant which would convert inedible products into marketable products such as dried meat scraps and liquid tallow.[76] The system experienced various breakdowns and failures which resulted in the destruction and disposal of unsaleable products which were of no value.[77] The court found as a matter of law that the loss of these products were consequential damages and prevented the defendant from recovering these losses, because the parties had specifically excluded consequential damages, including loss of product, in their contract.[78]
Another category of damages that parties may define as consequential damages are delay damages. When delay damages are specifically defined as consequential damages, courts will hold that they are barred as a matter of law.[79] For instance, in McNally Wellman Company v. New York State Electric & Gas Corporation, New York State Electric & Gas Corporation (“NYSEG”) contracted with a construction company to supply spillway gates for the refurbishment of a dam.[80] The parties’ contract contained the following waiver of consequential damages:
In no event and not withstanding [sic] any other provision of this Contract shall Contractor be liable for any special, incidental, indirect, or consequential damages, or for any damages of a similar nature arising out of or in connection with this Contract, … regardless of whether any such liability shall be claimed in contract, equity, tort (including negligence) or otherwise. By way of example of the foregoing limitation of liability, but without limiting in any manner its scope or application, Contractor shall not be liable for all or any part of any of the following, no matter how claimed…: loss of profit or revenue, … cost of capital, … loss or reduction of use or value of any facilities … or increased costs of operations or maintenance. The limitation of liability contained in this Article shall be effective without regard to Contractor’s performance or failure or delay of performance under any other term or condition of this Contract, including those contained in any warranty article.[81]
NYSEG claimed that delay in delivery of each of the gates caused it to incur delay costs, which included standby costs assessed by the subcontractor hired to install the gates.[82] As an initial matter, the court found it was “axiomatic that parties to a contract must remain free to allocate risks and shield themselves from liability.”[83] As such, the court found that the parties had contractually defined delay damages as consequential damages: “While ordinarily the precise demarcation between direct damages and incidental or consequential damages is an issue of fact, in this case the parties themselves defined the scope of the excluded damages in the contract…. All of NYSEG’s delay damages thus fall under [the waiver]….”[84]
Notably, in rare cases, even if the parties “have gone a long way in defining the scope of consequential damages in the contract itself,” courts are reluctant to classify damages as consequential as a matter of law and instead leave “the precise scope of direct damages [] for resolution at trial” even if it is likely that certain damages will ultimately be deemed consequential damages.[85] Nonetheless, this appears to be the exception rather than the rule.
D. Owners and Contractors Should Negotiate Mutual Consequential Damages Waivers that are Project Specific and Explicitly Define What the Parties Mean by “Consequential Damages.”
When negotiating construction contracts, it is important for both contractors and owners to keep in mind that the current market conditions of the construction industry have afforded contractors unprecedented negotiating power. There are simply not enough qualified contractors to go around and contractors have the freedom “to turn down onerous contract clauses or simply walk away.”[86] Accordingly, a contractor should not enter a construction contract without a waiver of consequential damages that protects it from potentially devastating economic effects like in Perini.
As the case law discussed in this article shows, “the definition of consequential damages may change depending upon the type of loss and the relationship between the parties.”[87] As a result, even where the parties have agreed to waive their right to recover all consequential damages, courts may still find that whether a particular damage is a consequential damage is a question of fact that should be decided by a jury. As such, owners and contractors should retain counsel to carefully draft consequential damages waivers to fit the particular type of construction project at issue to increase the odds that (i) the parties will not dispute what types of damages are recoverable under the contract; and (ii) if there is such a dispute, the waiver will be found to be enforceable.
An attorney reviewing a construction contract should carefully review the waiver of consequential damages to ensure it properly allocates risk between the owner and contractor. As the case law shows, the safest method to avoid a subsequent protracted litigation involving a question of fact over consequential damages is to negotiate a clearly worded project-specific consequential damages waiver that defines what the parties meant by “consequential damages.” Both owners and contractors should avoid general boiler-plate “catch-all” consequential damages waivers that do not define what the parties mean by consequential damages. Waivers should be “project-specific” in that they should anticipate and define the potential types of damages that could arise with this project and ensure they are clearly waived. Moreover, the parties should ensure the waiver is mutual. In other words, the list of consequential damages should be the same for the owner and contractor (unlike the AIA form). While following these recommendations does not guarantee a dispute-free project, following them will minimize the chances of a prolonged litigation regarding what constitutes a consequential damage.
[1] Oelschlegel v. Mut. Real Estate Inv. Trust, 633 A.2d 181, 184 (Pa. Super. Ct. 1993).
[2] Black’s Law Dictionary 417 (8th ed. 2004). See also Wartsila NSD N. Am. Inc. v. Hill Int’l, Inc., 436 F.Supp. 2d 690, 697 (D.N.J. 2006) (“Direct damages are these that flow naturally and ordinarily from the alleged breach.”); Shared Communications Servs. of 1800 & 1880 JFKBlvd., Inc.v. Bell Atlantic Props., 30 Pa. D. & C.4th 323, 371 (Pa. Com. Pl. 1996) (direct damages flow directly and immediately from the harm and acts of the breaching party).
[3] Oelschlegel, 633 A.2d at 184.
[4] Wartsila, 436 F. Supp. 2d at 698. See Barrack v. Kolea, 651 A.2d 149, 156 (Pa. Super. Ct. 1994); Bayuk v. Edson, 46 Cal. Rptr. 49, 54 (Cal. App. 1965); 21st Century Props. Co. v. Carpenter Insulation & Coatings Co., 694 F. Supp. 148, 152 n.4 (D. Md. 1988) (holding that “the cost of replacing the allegedly defective roofs which plaintiffs seek to recover constitutes the direct damage, not incidental damage or consequential damages, caused by the wrongs alleged”).
[5] Clark v. Fero Corp., 237 F. Supp. 230, 239 (E.D. Tenn. 1964). See also Foxfire Village, Inc. v. Black & Veatch, Inc., 404 S.E.2d 912 (S.C. App. 1991) (court affirmed owner’s damage award for remedial engineering fees and remedial construction costs necessary to make mobile home park legally compliant after engineer breached its design contract by making numerous defects and omissions rendering mobile home park noncompliant).
[6] See Wartsila, 436 F. Supp. 2d at 697. See also Applied Data Processing, Inc. v. Burroughs Corp., 394 F. Supp. 504, 509 (D. Conn. 1975) (rejecting argument that “direct damages [are limited] to the different value of the equipment as warranted and its value as delivered”).
[7] Black’s Law Dictionary 416 (8th ed. 2004). See also Pulte Home Corp. v. Panex, Inc., 579 S.E.2d 188, 193 (Va. 2003); DP Serv., Inc. v. Am Int’l., 508 F. Supp. 162, 167 (N.D. Ill. 1981).
[8] Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854). See also Taylor v. Kaufhold, 84 A.2d 347, 351 (Pa. 1951); Civic Ctr. Dr. Apts. Ltd P’nshp v. Southwestern Bell Video Servs., 295 F. Supp. 2d 1091, 1105 n.7 & 1108 (N.D. Cal. 2003) (“Plaintiffs do not dispute that lost rent and diminution in value constitute consequential damages. Moreover, the Court concludes that these damages are properly classified as such … in the absence of a valid contractual limitation on liability provision [in a construction contract], Plaintiffs are entitled to lost rent [and lost profits] if such damages were foreseeable at the time of contracting.”).
[9] See Wright Schuchart, Inc. v. Cooper Indus., Inc., 40 F.3d 1247, 1994 WL 1247, at *2 (9th Cir. 1995) (listing examples of typical consequential damages).
[10] See Perini Corp. v. Greate Bay Hotel & Casino, Inc., 610 A.2d 364, 374 (N.J. 1992) (“Lost profits fall under the category of consequential damages.”), overruled on other grounds by, Tretina Printing, Inc. v. Fitzpatrick & Assocs., Inc., 640 A.2d 788 (N.J. 1994); Kultura, Inc. v. S. Leasing Corp., 923 S.W.2d 536, 539 (Tenn. 1996) (“Lost profits fall under the category of consequential damages.”); Drews Co., Inc. v. Ledwith-Wolfe Associates, Inc., 371 S.E.2d 532 (S.C. 1988) (“Profits lost by a business as a result of a contractual breach have long been recognized as a species of recoverable consequential damages in this state.”). See alsoSteven G.M. Stein, Construction Law, § 11.02[3][d][ii] (2002) (“[C]onsequential damges due to the contractor’s defective performance … include lost profits due to the owner’s inability to operate an improperly constructed facility…”).
[11] See, e.g., Trinity Indus., Inc. v. McKinnon Bridge Co., 77 S.W.3d 159, 171 (Tenn. Ct. App. 2001) (enforcing exclusion of consequential damages in steel fabrication contract); N.Y. State Elec. & Gas Corp. v. Westinghouse Elec. Corp., 564 A.2d 919, 924 (Pa. Super. Ct. 1989) (“[U]nder Pennsylvania law, contractual provisions … excluding liability for special, indirect and consequential damages are generally valid and enforceable.”); Laidlaw Envtl. Servs. (TOC), Inc. v. Honeywell, Inc., 966 F. Supp. 1401, 1413-14 (D.S.C. 1996) (enforcing consequential damages exclusion in computer installation contract); Logan Equip. Corp. v. Simon Aerials, Inc., 736 F. Supp. 1188, 1195 (D. Mass. 1990) (“Limitations on recovery of consequential damages in a corporate context represent ‘a reasonable accommodation between two commercially sophisticated parties’ which dies not offend any public policy of the state.”); Civic Ctr. Dr. Apts. Ltd P’nshp, 295 F. Supp. 2d at 1105-06 (“Generally, provisions limiting liability in construction contracts are enforceable under California law so long as the parties negotiated and expressly agreed to the limitations. However, such a provision is unenforceable if it is unconscionable or otherwise contrary to public policy.”); Trinity Prods., Inc. v. Burgess Steel, L.L.C., 486 F.3d 325, 332 (8th Cir. 2007) (“Disclaimers of consequential and incidental damages in commercial contracts are generally enforceable under Missouri law.”). See also Robert F. Cushman, 1 Construction Law Handbook, § 4.04[B] (1999) (“The parties to a professional services agreement may contract to limit the remedy of the parties. For example, the parties can agree to a clause barring the recovery of any special or consequential damages.”).
[12] Petty v. Sloan, 277 S.W.2d 355, 359 (Tenn. 1955).
[13] See N.Y. State Elec. & Gas Corp., 564 A.2d at 729; Antz v. GAF Materials, 719 A.2d 758, 761 (Pa. Super. Ct. 1998); Civic Ctr. Drive Apartments Ltd. P’ship, 295 F. Supp. 2d at 1105-06; Logan Equip. Corp. v. Simon Aerials, Inc., 736 F. Supp. 1188, 1195 (D. Mass. 1990); Shepherd v. Weather Shield Mfg., Inc., No. W1999-00508-COA-R3-CV, 2000 WL 34411064, at * 6 (Tenn. Ct. App. Aug. 21, 2000); Southern Ill. Riverboat Casino Cruises, Inc. v. Triangle Insulation & Sheet Metal Co., 302 F.3d 667, 676 (7th Cir. 2002); Martin v. American Med. Sys, Inc., 116 F.3d 102, 104 (4th Cir. 1997).
[14] See Canal Elec. Co. v. Westinghouse Elec. Co., 548 N.E.2d 182 (Mass. 1990); Valhal Corp. v. Sullivan Assocs., Inc., 44 F.3d 195 (3d Cir. 1994); Civic Ctr. Drive Apartments Ltd. P’ship, 295 F. Supp. 2d at 1105-06; Mark Singleton Buick, Inc. v. Taylor, 391 S.E.2d 435, 437 (Ga. App. 2007).
[15] See Mark Singleton Buick, 391 S.E.2d at 437.
[16] 610 A.2d at 367.
[20] See id. at 368.
[22] See id. at 374.
[23] See id. at 374.
[27] See id. at 380.
[28] Lynn R. Axelroth, Mutual Waiver of Consequential Damages – The Owner’s Perspective, 18 – JAN Construction Law. 11, n.1 (1998) (quoting Howard Goldberg, Memorandum to Documents Committee Apr. 18-20, 1996, p.1).
[29] Werner Sabo, Legal Guide to AIA Documents 293 (4th ed., Cumulative Supplement 2005).
[30] Werner Sabo, Legal Guide to AIA Documents 292-93 (4th ed. 1998).
[31] See Lynn R. Axelroth, Mutual Waiver of Consequential Damages – The Owner’s Perspective, 18 – Jan. Construction Law. 11 (1998) (“[T]he owner is precluded from recovery of its lost profit and income but the contractor is specifically allowed profit arising directly from its work.”).
[32] Gregory K. Morgan & Albert E. Phillips, Design Professional Contract Risk Allocation: The Impact of Waivers of Consequential Damages and Other Limitations of Liabilities on Traditional Owner Rights and Remedies, 33 J.C. & U.L. 1, 14 (2006).
[33] Bruce Baker, AIA Construction Contract: Waiver of Damages and other Surprises, 5/12/98 N.Y.L.J. 1.
[34] Charles R. Schrader, Consequential Damages Waiver Controversial, available at www.jordanschrader.com/articles/article0008.html.
[35] Werner Sabo, Legal Guide to AIA Documents 293 (4th ed. 1998).
[36] Lynn R. Axelroth, Mutual Waiver of Consequential Damages – The Owner’s Perspective, 18 – JAN Construction Law. 11 (1998).
[37] See, e.g., Oliver B. Cannon & Son, Inc. v. Dorr-Oliver, Inc., 394 A.2d 1160, 1163 (Del. 1978) (finding lost profits to be a direct loss although method used to calculate lost profits was speculative); Northern Petrochemical Co. v. Thorsen & Thorshov, Inc., 211 N.W. 2d 159, 166 (Minn. 1973) (awarding lost profits for the delayed occupancy of an industrial building). See also Springs Window Fashions Div., Inc. v. Blind Maker, Inc., 184 S.W.3d 840, 883 (“Lost profits can be component of benefit-of-the-bargain direct damages…”); Vistar Energy, LLC v. Motorola, Inc., 2006 U.S. Dist. LEXIS 78331, at *7 (S.D. Ind. Oct. 26, 2006) (“[L]ost profits are sometimes treated as consequential damages and sometimes as direct damages.”).
[38] Werner Sabo, Legal Guide to AIA Documents 293 (4th ed. 1998) (“One question that may arise is to what extent delay damages are waived by this provision. That question is not addressed by ¶ 4.3.10, so the parties may consider adding a clause to cover this issue.”).
[39] See, e.g., Performance Abatement Servs., Inc. v. Lansing Bd. of Water & Light, 168 F. Supp. 2d 720, 740 (W.D. Mich. 2001) (“classification of damages is a legal issue for the courts” and delay damages were consequential damages excluded by contract); Long v. Monaco Coach Corp., No. 3:04-CV-203, 2006 WL 2564040, at *6 (E.D. Tenn. Aug. 31, 2006) (finding under Tennessee law that consequential damages were unavailable pursuant to exclusionary clause); Intercarbon Bermuda Ltd. v. Caltex Trading & Transp. Corp., 146 F.R.D. 64, 73 (S.D.N.Y. 1993) (arbitration panel correctly dismissed case without hearing where contract barred recovery of consequential damages). Accord Island Creek Coal Co. v. Lake Shore, Inc., 832 F.2d 274, 278 (4th Cir. 1987) (holding as a matter of law that contract clause limiting consequential damages was enforceable and limiting plaintiff’s recovery to direct damages); World Enters., Inc. v. Midwest Aviation Servs., Inc., 713 S.W.2d 606, 610 (Mo. Ct. App. 1986) (because provision in contract which excluded consequential damages was clear and unambiguous whether provision excluded damages for loss of use was question of law for court). See also Pulte Home Corp., 579 S.E.2d at 192 (“Whether damages are direct or consequential is a matter of law for decision by the Court.”); R.K. Chevrolet, Inc. v. Hayden, 480 S.E.2d 477, 481 (Va. 1997) (same); Desco Corp. v. Harry W. Trushel Constr. Co., 413 S.W.2d 85, 91 (W.Va. 1991) (same).
[40] See Clark, 237 F. Supp. at 237, 239 (as an “issue of law,” owner could not recover costs of lost tile from designer/builder of tile kiln even though waiver did not specifically define “consequential damages”); American Tele. & Telegraph Co. v. New York City Human Resources Admin., 833 F. Supp. 962, 991 n.22 (S.D.N.Y. 1993) (finding as a matter of law that certain costs were consequential damages even though waiver did not specifically define “consequential damages”); Boone Valley Cooperative Processing Assoc. v. French Oil Mill Machinery Co., 383 F. Supp. 606, 610 (N.D. Iowa 1974) (granting summary judgment because lost profits as result of explosion and disruption of plant operations were consequential damages even though waiver did not specifically define “consequential damages”); Cryogenic Equip., Inc. v. Southern Nitrogen, Inc., 490 F.2d 696, 698 (8th Cir. 1974) (court erred by submitting issue of plant owner’s lost profits to jury where its contract with contractor waived consequential damages but did not specifically define “consequential damages”).
[41] See, e.g., Performance Abatement Servs., 168 F. Supp. 2d at 740 (finding as a matter of law that “delay damages” were excluded by consequential damages waiver that did not specifically define “delay damages” as consequential); Wright Schuchart, 1994 WL 1247, at *2 (finding there was no issue of material fact regarding whether plaintiff’s delay damages were direct or consequential damages); Monarch Brewing Co. v. George J. Meyer Mfg. Co., 13 F.2d 582, 584-85 (9th Cir. 1942) (finding as a matter of law that damages incurred during facility’s shutdowns were consequential damages).
[42] See, e.g., Steven G.M. Stein, Construction Law, § 3.03[4][c][iii] (stating that “[c]onsequential and incidental damages…include…delay damages” and waivers “cut off such claims”); Richard Lord, 24 Williston on Contracts § 66:64 (4th ed.) (“[T]he courts have upheld exclusions of consequential damages as against claims for damages due to delay …”).
[43] Werner Sabo, Legal Guide to AIA Documents 293 (4th ed. 1998) (“One question that may arise is to what extent delay damages are waived by this provision. That question is not addressed by ¶ 4.3.10, so the parties may consider adding a clause to cover this issue.”).
[44] See, e.g., Mead Corp. v. McNally-Pittsburgh Mfg., 654 F.2d 1197, 1208-09 (6th Cir. 1981) (finding that parties, when drafting their contract, never resolved the “critical question” of who would bear the risk of delay damages); Carbontek Trading Co. Ltd. v. Phibro Energy, Inc., 910 F.2d 302, 308 (5th Cir. 1990) (“In its brief Carbontek notes that the contract excluded claims for consequential damages. The damages for delay claimed by Phibro, however, are not consequential damages, but incidental damages…. Incidental damages may be recovered even when consequential damages are excluded.”).
[45] 92 F. Supp. 603, 605 (D. Minn. 1950).
[46] Id. at 608.
[47] Id. at 605-6.
[48] See also Performance Abatement Servs., 168 F. Supp. 2d at 740 (delay damages were consequential damages excluded by waiver); See, e.g., Wright Schuchart, 1994 WL 1247, at *2 (loss of productivity/efficiency were consequential damages barred by a waiver); Monarch Brewing, 130 F.2d at 584-85 (value of labor lost from shutdowns were consequential damages barred by a waiver).
[49] James J. White & Robert S. Summers, Uniform Commercial Code, §10-4, 573 (4th ed. 1995).
[50] Concord Plaza Assocs., Inc. v. Honeywell, Inc., 1987 WL 8884, at *2 (Del. Super. Ct. Mar. 20, 1987); Applied Data Processing, 394 F. Supp. at 509.
[51] Amer. Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435, 459 (S.D.N.Y. 1976) (despite contract’s detailed list of non-recoverable damages, court found what was excluded was a question reserved for trial). See also Mrazek v. Firs Bank Southeast, N.A., 572 N.W. 2d 901, 1997 WL 700868, at *14 (Wis. App. Nov. 12, 1997) (“The question of what constitutes consequential damages is not a discretionary decision, but is a question of fact.”); Long Island Lighting Co. v. Transamerica Delaval, Inc., 646 F. Supp. 1442 (S.D.N.Y. 1986) (whether the parties’ contractual limitation on consequential damages should be given effect is reserved for trial); United States v. The Boeing Company, 79 F. Supp. 2d 877, 895 (S.D. Ohio 1999) (“It remains a question of fact to be decided at trial whether the Government’s and Relator’s allegations and theories of injuries, damages, and recovery are consequential, direct, or incidental in nature. This Court also finds that it would be inappropriate, premature, and against the interest of fairness and justice to decide this issue on a motion for summary judgment.”); Colonial Life Ins. Co. of Am. v. Elec. Data Syst. Corp., 817 F. Supp. 235, 243 (D.N.H. 1993) (“What constitutes consequential, or incidental, as opposed to direct damages is a factual issue which must be decided at trial.”). Accord Shared Communications Servs., 30 Pa. D.&C. 4th at 373 (trial court did not err by submitting “the issue of directness of the damages to the jury”).
[52] No. 88-CV-819, 1992 WL 121726, at *27 (N.D.N.Y. May 23, 1992).
[53] See id. at * 28.
[55] Id. at *27, n.53.
[56] Id. at *28.
[57] Id. at *42.
[58] 581 F. Supp. 542, 549 (D. Colo. 1984).
[59] See id. at 545.
[60] Id. at 549.
[61] Roneker v. Kenworth Truck Co., 977 F. Supp. 237, 239 (W.D.N.Y. 1997) (granting summary judgment on all damages claims based on consequential damages exclusion).
[64] See Wausau Paper Mills Co. v. Chas. T. Main, Inc., 789 F. Supp. 968, 974 (W.D. Wis. 1992) (finding as a matter of law that “costs to repair or replace improperly designed piping, pumps and equipment” were contractually-barred consequential damages where engineer and owner defined them as such).
[65] 364 S.E. 2d 215, 220 (Va. 1988).
[66] Id. at 216.
[67] See id. at 217.
[69] Id. at 220.
[70] See id. at 221.
[71] See, e.g., Lincoln Pulp & Paper Co., Inc. v. Dravo Corp., 436 F. Supp. 262, 269-70 (D. Me. 1977) (applying clause excluding “loss of products” as a matter of law); Monarch Brewing Co., 13 F.2d at 584-85 (finding as a matter of law that value of beer and caustic soda that was lost due to failure of bottling machinery to properly function were contractually barred consequential damages); Rawlings v. Layne & Bowler Pump Co., 465 P.2d 107, 108 (Idaho 1970) (finding as a matter of law that clause excluding damage for loss of crops barred farmer’s claim against installer of malfunctioning irrigation equipment); Wallich Ice Mach. Co. v. Hanewald, 267 N.W. 748, 751 (Mich. 1936) (trial court erred by permitting defendant to claim the cost of lost meat caused by malfunctioning refrigeration plant where clause barred recovery of loss of refrigerant).
[72] 738 P.2d 866, 868, 872 (Kan. 1987).
[73] Id. at 868.
[74] Id. at 871.
[75] See id. at 872.
[76] 338 F. Supp. 701, 703 (S.D. Iowa 1972).
[77] See id. at 705.
[78] See id. at 709.
[79] See Wausau Paper Mills Co., 789 F. Supp. at 974 (W.D. Wis. 1992) (finding as a matter of law that “down time costs” were contractually-barred consequential damages where engineer and owner defined delay and disruption costs as consequential).
[80] 63 F.3d 1188, 1191 (2d Cir. 1995).
[81] Id. at 1193.
[82] See id. at 1195.
[85] American Elec. Power Co., 418 F. Supp. at 459.
[86] Gary J. Tulacz, The Top 400 contractors: Prosperity Allows Firms to Be Selective, ENR, May 21/28, 2007, p. 43.
[87] Gregory K. Morgan & Albert E. Phillips, Design Professional Contract Risk Allocation: The Impact of Waivers of Consequential Damages and Other Limitations of Liabilities on Traditional Owner Rights and Remedies, 33 J.C. & U.L. 1, 14 (2006).
The Termination for Convenience Clause: A Powerful Weapon in Contractual Disputes