Construction Industry Effectively avoiding them By Jason L. Richey - PDF document

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 profi ts it incurred profi ts 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 fi nance charges, 24 times the contract fee. This amount lawsuit. However, this situation could loss of use of goods, additional labor represented the Sands’ lost profi ts 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-specifi c conse- costs, loss of productivity and effi ciency, sey Supreme Court affi rmed the arbitra- quential damages waiver. and additional home offi ce 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 profi ts. waiver of consequential damages in ages and “indirect or consequential” The ramifi cations of being held liable its contract with the Sands. Contrac- damages. However, distinguishing be- for lost profi ts 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 diffi cult 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 fi nd that work. Similarly, costs incurred to bring tional, the Sands anticipated that this classifi cation of damages is a legal a project up to contract specifi cations 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 fl ow 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. 10 May 5, 2008 CONSTRUCTIONEER acppubs.com 004-014_CNR_05-05-08_Feat.indd 010 004-014_CNR_05-05-08_Feat.indd 010 4/14/2008 12:12:09 PM 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 profi ts for a four-month delay to the project, yet it has happened . These courts fi nd 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-specifi c 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 specifi cally defi ned what the term “Con- construction industry. By defi ning 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 CONSTRUCTIONEER May 5, 2008 11 acppubs.com 004-014_CNR_05-05-08_Feat.indd 011 004-014_CNR_05-05-08_Feat.indd 011 4/14/2008 12:12:09 PM 4/14/2008 12:12:09 PM

CONSEQUENTIAL DAMAGES Look IN TODAY’S CONSTRUCTION INDUSTRY Thus, without holding any hearing, by consequential damages. Waivers the arbitration panel determined that should be “project-specifi c” in that damages for excessive scrap waste, lost they should anticipate and defi ne 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 amount of damages the owner could mutual, i.e., the list of consequential demand by over $10 million. damages should be the same for the When defi ning the scope of a owner and contractor. consequential damages waiver, it is While following these recommenda- ADVERTISE important for both contractors and tions does not guarantee a dispute-free owners to carefully draft the pro- project, following them will minimize vision in a way that will increase the chances of a prolonged litigation See how our publications 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 offi ce of consequential damages waivers that Kirkpatrick & Lockhart Preston Gates do not defi ne what the parties mean Ellis, LLP (K&L Gates). AVAILABLE IN OPEN OR CLOSED CIRCUIT IMPACT CRUSHERS M FINES ARE REJECTED BEFORE ENTERING CRUSHER M BOLT-ON LINERS AND APRON TIPS...STANDARD M 12:1 TO 18:1 REDUCTION RATIO M OPS (OVERLOAD PROTECTION 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 012 004-014_CNR_05-05-08_Feat.indd 012 4/14/2008 12:12:09 PM 4/14/2008 12:12:09 PM