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Consequential Damages
In Today’s
Construction
Industry Effectively avoiding them
By Jason L. Richey requires up-front clarity
and William D. Wickard
t seems unlikely that a project’s some of the consequences or results of completion until September 14, 1984,
construction manager, which agreed such act. To be able to recover consequen- approximately four months late.
to a $600,000 fee, could be held re- tial damages from the breaching party, In an arbitration, the Sands sought
sponsible for over $14 million in lost the damages must have been reasonably from Perini the lost profits it incurred
profits for a four-month delay to the foreseeable at the time the contract was as a result of the delay. Even though the
project, yet it has happened. By failing made. Typical examples of consequential project was only delayed by about four
to include a consequential damages damages include, among other things, months, the arbitration panel awarded
waiver in its contract, the construc- lost rents, damage to reputation, down Sands over $14.5 million in damages,
tion manager was left open to a costly or idle time, interest and finance charges, 24 times the contract fee. This amount
lawsuit. However, this situation could loss of use of goods, additional labor represented the Sands’ lost profits from
possibly have been avoided had the costs, material escalation costs, depre- the end of May until it terminated Perini
construction manager negotiated a ciation, rental costs, additional energy in December. Ultimately, the New Jer-
clearly worded, project-specific conse- costs, loss of productivity and efficiency, sey Supreme Court affirmed the arbitra-
quential damages waiver. and additional home office costs. The tors’ shocking and substantial award.
When a construction contract is most common and perhaps most costly Perini could have avoided such a
breached, two types of damages may example of consequential damages in a harsh result by including a mutual
be recovered – “direct or general” dam- construction dispute are lost profits. waiver of consequential damages in
ages and “indirect or consequential” The ramifications of being held liable its contract with the Sands. Contrac-
damages. However, distinguishing be- for lost profits were best illustrated in tual waivers of consequential damages
tween direct and indirect damages has Perini Corporation v. Greate Bay Hotel have become widespread throughout
long been a difficult task for courts. & Casino. Perini served as the construc- the construction industry. Indeed, since
Generally, direct damages fol- tion manager for major renovations to 1997, the American Institute of Archi-
low naturally from the type of wrong the Sands, an Atlantic City hotel and tects has included a mutual waiver of
complained of. For example, when a casino. Perini’s fee was $600,000 and consequential damages in its standard
contractor fails to complete a project, its contract with the Sands contained General Conditions for Construction.
the costs incurred by the owner to no consequential damages waiver. Many courts and arbitration panels
complete the work are direct damages. The project involved the construction have dismissed lawsuits without hold-
Many times, direct damages are also of a large ornamental glass façade ing a trial based on the presence of a
measured by the costs necessary to re- outside the casino, facing the boardwalk. consequential damages waiver. These
pair or replace a contractor’s defective Although the façade would be nonfunc- courts and panels generally find that
work. Similarly, costs incurred to bring tional, the Sands anticipated that this classification of damages is a legal
a project up to contract specifications glitzy display would lure customers issue for the courts, and a trial is un-
have been found to be direct and fore- away from the boardwalk and into the necessary where consequential dam-
seeable damages. Sands. The contract called for the work ages are excluded by contract. Yet, some
Consequential or indirect damages are to be substantially complete by May 31, courts and arbitration panels take an op-
commonly thought of as losses or injuries 1984. However, the façade was not com- posite approach to waivers and hold a
that do not flow directly and immediately pleted until August 31, 1984, and the trial or hearing to decide whether certain
from the act of the party, but only from entire project did not achieve substantial categories of damages are consequential.
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004-014_CNR_05-05-08_Feat.indd 010 4/14/2008 12:12:09 PM
It seems unlikely that a project’s construction manager, which agreed to a
$600,000 fee, could be held responsible for over $14 million in profits for a
four-month delay to the project, yet it has happened.
These courts find the precise demarca- the owner of a large manufacturing Nonetheless, the designer’s contract
tion between direct and consequential facility alleged it suffered over $15 with the owner stated: “In no event, how-
damages is a question of fact. million in damages because design er- ever, shall [the designer] be liable on any
As such, including a clearly worded, rors had caused the facility to endure theory of liability for any special, punitive,
project-specific waiver of consequential a delayed and extended startup pe- exemplary or Consequential Damages.”
damages in construction contracts has riod. These damages included, among Even more importantly, the contract also
become critically important in today’s other things, costs to remove waste specifically defined what the term “Con-
construction industry. By defining the produced during the facility’s startup; sequential Damages” included:
scope of consequential damages in the costs to hire temporary labor to manu- “‘Consequential Damages’ shall
contract itself, parties to a construction ally move the scrap; costs to hire a mean a consequential, indirect or inci-
contract can increase the likelihood a back hoe and driver to manage scrap; dental loss or damage, including but not
court or arbitration panel will dismiss and costs to pay the facility’s staff for limited to, loss of use, loss of product,
a claim without a trial. This was dem- months of idleness before the facility loss of replacement power and business
onstrated in a recent arbitration where was operational. interruption.”
CAT j
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CONSEQUENTIAL DAMAGES
Look IN TODAY’S CONSTRUCTION INDUSTRY
Thus, without holding any hearing,
the arbitration panel determined that
damages for excessive scrap waste, lost
by consequential damages. Waivers
should be “project-specific” in that
they should anticipate and define the
product and delay of the facility’s start- potential types of damages that could
up were consequential damages. As a arise with this project and ensure they
result, the panel dismissed the major- are clearly waived. Moreover, the
ity of the owner’s claims, reducing the parties should ensure the waiver is
to the
future
ADVERTISE
amount of damages the owner could
demand by over $10 million.
When defining the scope of a
consequential damages waiver, it is
important for both contractors and
mutual, i.e., the list of consequential
damages should be the same for the
owner and contractor.
While following these recommenda-
tions does not guarantee a dispute-free
owners to carefully draft the pro- project, following them will minimize
See how our publications vision in a way that will increase the chances of a prolonged litigation
the odds that (i) the parties will not regarding what constitutes a conse-
create response to your dispute what types of damages are quential damage. ■
recoverable under the contract; and
products and services. (ii) if there is such a dispute, the waiv- Jason Richey is a partner and Wil-
er will be found to be enforceable. liam Wickard is an associate in the
Both owners and contractors should Construction and Engineering Prac-
(800) 486-0014 avoid general boilerplate “catch-all” tice Group in the Pittsburgh office of
consequential damages waivers that Kirkpatrick & Lockhart Preston Gates
do not define what the parties mean Ellis, LLP (K&L Gates).
AVAILABLE IN OPEN OR CLOSED CIRCUIT
IMPACT CRUSHERS
FINES ARE REJECTED BEFORE
M
ENTERING CRUSHER
BOLT-ON LINERS AND APRON
M
TIPS...STANDARD
12:1 TO 18:1 REDUCTION RATIO
M
OPS (OVERLOAD PROTECTION
M
SYSTEM) FOR OPTIMAL
PERFORMANCE
Keystone Processing
Equipment Co.
Lititz, PA
(717) 625-2800
CNR_KPI-JCI-Keystone (Reg)_DI
12 May 5, 2008 CONSTRUCTIONEER acppubs.com
004-014_CNR_05-05-08_Feat.indd 012 4/14/2008 12:12:09 PM
