Consequential Damages – What Are They?

By: Werner Sabo

Many construction agreements, including the AIA documents, include a waiver of consequential damages. For instance, the 2017 version of B101, the owner-architect agreement states as follows:

8.1.3 The Architect and Owner waive consequential damages for claims, disputes, or other matters in question arising out of or relating to this Agreement. This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination of this Agreement, except as specifically provided in Section 9.7.  

The General Conditions, AIA Document A201-2017, which is incorporated into the owner-contractor agreement states:

15.1.7 Waiver of Claims for Consequential Damages. The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to 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 Section 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

Thus, if the contractor causes a delay to a project and the owner loses several months of rent from prospective tenants, the owner cannot recover the lost rent from the contractor, although other types of damages may be available. The A201 document, in the language quoted above, provides some definition of consequential damages. What about other types of damages?

In Keystone Airpark Authority v. Pipeline Contractors, Inc., 2018 WL 6174666 (Fla. App. 1 Dist., Nov. 27, 2018), the issue was whether the damages sought by the owner from a contractor were consequential damages that were waived by the contract, or other types of damages that were not waived. The owner alleged that the contractor failed to supervise construction work on an airplane hangar and taxiways, resulting in deterioration to those facilities. The owner argued that the cost of repair to the hangars and taxiways constitutes general damages and not consequential damages because those damages were foreseeable. The contractor agreed that it is foreseeable that the failure to supervise construction work could result in the need for repairs, but nevertheless these damages were consequential. Thus, foreseeability was not an issue in the case. The court then proceeded to analyze the three types of damages: general, special and consequential.

According to the Keystone court (and citing to various other cases), general damages are those which naturally and necessarily flow or result from the injuries alleged and may fairly and reasonably be considered as arising in the usual course of events from the breach of contract itself. General damages are commonly defined as those damages which are the direct, natural, logical and necessary consequences of the injury.

Special damages are not likely to occur in the usual course of events, but may reasonably be supposed to have been in contemplation of the parties at the time they made the contract. They consist of items of loss which are peculiar to the party against whom the breach was committed and would not be expected to occur regularly to others in similar circumstances. General damages are awarded only if injury were foreseeable to a reasonable man and special damages are awarded only if actual notice were given to the defendant of the possibility of injury. Damage is foreseeable by the defendant if it is the proximate and usual consequence of the defendant’s action.

Finally, consequential damages do not arise within the scope of the immediate transaction, but rather stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting. The consequential nature of loss is not based on the damages being unforeseeable by the parties. What makes a loss consequential is that it stems from relationships with third parties, while still reasonably foreseeable at the time of contracting.

The Keystone court affirmed summary judgment for the contractor based on the damages being consequential and barred by the contract, but certified the question to the Florida Supreme Court. It is not clear from the opinion whether the contract consisted of AIA form documents. The definitions provided by this court also leaves room for interpretation and are not crystal clear as to whether any particular damage is consequential or not. What is clear is that the waiver of consequential damages is better for the contractor and consultants rather than the owner who is much more likely to have damages that can be classified as “consequential.”

 

 

Chicago, Illinois 312-377-1501 | Schererville, Indiana 219-488-2590

Chicago, Illinois

312-377-1501


Schererville, Indiana

219-488-2590