What Can Humpty Dumpty Recover If His Wall Wasn’t Finished On Time?

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Today, we return to the topic of “damages.” Our context will be “waiving” them. That way, we won’t feel as if we are duplicating postings of long ago such as the ones you can review by clicking: HERE or HERE or HERE.

The core “damages” one can expect to collect are designed to give the injured party “the benefit of its bargain.” That’s not the same as being made “whole.” Those core damages, ones that probably should never be “waived” are designed to give a party the money necessary to get what it “bought” in the first place. So, if the buyer was promised a car with a spare tire and the trunk turned out to be empty, the measure of its damages would be the cost of a spare tire. If a tenant was supposed to get trash removal “included” and the full container is surrounded by overflowing trash bags, the tenant is entitled to enough money to get the trash hauled away. If a builder contracted to put up a building and didn’t finish it, the customer would be entitled to the quantum of money that would pay to finish the building.

But, what about the cost of going out to buy that tire? What about the lost business from customers who ran from the store because of the “stink”? What about the cost to rent alternate space because the building was not completed by the contracted-for time?

[Another common situation is the one where one party has made certain representations about what it is selling or about its performance, and those turn out to be untrue to the detriment of the buyer. In those cases, in order to get the benefit of its bargain, the harmed party is entitled to enough money, as “damages,” to make up for what had been represented. So, for example, if one bought a postage stamp represented to be the only remaining one of its type and it turns out that the seller had the “second” one in a safe deposit box, the buyer would be entitled to receive an amount equal to the difference in value between the “only” one of its kind and “one of the two” remaining stamps of that kind. There is no compensation for lost pride.]

The damages we’ve placed in the “benefit of the bargain” category, those that get the injured party to the place it bargained for, are called “direct” damages. Case law, commentators, and general usage have named other categories, the most important one of which is “consequential” damages. [For a discussion of some other categories, click: HERE then HERE.]

If one were forced to define “consequential” damages, as in “neither party will be liable for the payment of consequential damages to the other,” the word “foreseeability” would certainly be heard. That’s because the hallmark of a “consequential” damage is that it should have been “foreseeable” to the defaulting party that the injured party would have incurred that kind of expense. BUT, “’foreseeability’ is the limit of all contract damages, not the distinction between ‘direct’ and ‘consequential’ damages.” That’s a quotation from a November 1, 2016 United States District Court Decision we’ll be looking at below, an opinion that can be seen by clicking: HERE. It also contains the following helpful thoughts:

Rather than turning on foreseeability, the difference between direct and consequential damages depends on whether the damages represent (1) a loss in value of the other party’s performance, in which case the damages are direct, or (2) collateral losses following the breach, in which case the damages are consequential.

Direct damages refer to those which the party lost from the contract itself—in other words, the benefit of the bargain—while consequential damages refer to economic harm beyond the immediate scope of the contract.

So direct damages are the costs of a plaintiff getting what the defendant was supposed to give—the costs of replacing the defendant’s performance. Other costs that the plaintiff may not have incurred if the defendant had not breached, but that are not part of what the plaintiff was supposed to get from the defendant, are consequential.

We didn’t know where this would fit with today’s text, so we’ll just plop it here. Basically, if one’s claimed damages are speculative or uncertain, it doesn’t matter what “category” you’d like to apply; you don’t get paid. Speculative or uncertain “damages” are not definitional distinctions among the various categories of damages. That are just plain not collectable.

All of the foregoing is the background to our promised topic – waivers. So, this is where we (try to) deliver.

The standard American Institute of Architects (AIA) “General Conditions” document used with many of the various contract forms it has promulgated (its Document A201) contains this “waiver” provision:

15.1.6  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 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

How did this work in the court opinion for which we provided a link? Here’s how.

A property owner contracted for the building of a motel using a contract that included the “Section 15.16” provision reproduced above. The contract had a guaranteed maximum price and a definite completion date. Even though the completion date was once extended, construction was delayed and, in a not surprising turn of events, the contractor walked off the job. The motel owner, after rightfully terminating the contract, acted as its own general contractor and proceeded to finish construction within about five months.

Initially, the project owner sued for lost profits and loss of income. In the course of the litigation that followed, it dropped those claims because such losses are expressly excluded by the cited contract provision. That was an easy call for this dispute. But just because “loss of profits” is a component of “consequential” damages doesn’t mean that every “loss of profits” falls within the umbrella of “consequential” damages. [We’ll save that though for a later blog posting.]

The motel owner also sought a “project completion fee.” One of its managers took a leave from his normal operational duties and from pursuing other business ventures in order to get the building completed.  That would seem to be excluded because “loss of management or employee productivity or of the services of such persons” is specifically waived in the AIA General Conditions. Not so fast, however. Here, the court took a “closer look,” and considered whether the motel owner was, in fact, asking for “reimbursement of overhead costs for the time period during which it served as its own contractor after [its] contractor quit.” The owner quantified its claim by charging for the services of that manager and by applying an overhead cost analysis. As the court saw it, had the motel owner hired a replacement general contractor instead of doing that work itself, it would have been charged an overhead fee (or that charge would have been embedded in the contract price). Consequently, it held that the owner was entitled to recover that kind of provable cost as a “direct” damage. It would not be an excluded “consequential” damage.

The motel owner made a claim for insurance costs, but it wasn’t clear what “kind” of insurance had been carried. Under the construction contract, the contractor was required to carry certain kinds of insurance, mostly the kinds that covered damage that the contractor might cause in the course of its work. What the motel owner carried between the time the construction contract had been terminated and when the building was finished, was motel operation insurance. The best that could be figured out was that the motel owner had purchased coverage for its motel business so that it would be in place on the day the business opened. Basically, these would have been unnecessary payments and not recoverable. In the court’s words, “[t]he insurance costs that appear to be involved here are at best consequential and not recoverable.” Whether paying for insurance months too early was foreseeable was an unanswered question. Had it been, the payments might have been consequential damages, but not recoverable by reason of the damages waiver. If the insurance costs were to replace what the contractor was obligated to pay during construction, they would have been recoverable.

The motel owner, expecting that the building would be finished by the promised date, put up a highway billboard and engaged in some print and online advertising. These extra (wasted) costs, “may have increased or been rendered wasteful by the delay, but were not part of [the contractor’s] performance.” That made those costs into “consequential” damages, excluded by the waiver, and (therefore) not recoverable.

The construction contract obligated the contractor to provide a storage container for the motel’s furniture, fixtures, and equipment. The motel owner, however, did not buy such items. Instead, it leased them. Nonetheless, the motel owner claimed the “extra” lease payments as damages. In the court’s view, “[p]roviding a storage container is not the same thing as paying [for] equipment rental.” Therefore the basic consequential damages analysis applied and, because of the damages waiver, the leasing costs were not recoverable.

The damages waiver explained that consequential damages meant a list of particular items, including for “losses of financing.” Here, the motel owner made a claim for interest it paid on its construction loan during the seven month delay period. Unlike the owner’s election to carry business insurance during that period and unlike the owner’s decision to lease furniture during that period, the interest incurred was not a voluntary decision. So, the question became: “was the cost of financing an excluded consequential damage or a direct damage.”  Here the contractor agreed to finish the building within a certain period of time. It didn’t. The court likened the situation to the contractor running out of concrete. Here, it ran out of time. The extra cost incurred when one runs out of concrete is the cost of the needed material. The extra cost when the contractor ran out of time was the incremental interest. For that reason, the interest charges during the delay period were recoverable as direct damages and were not excluded as consequential damages. They were not the kind of financing “cost” thought of as a consequential damage.

The final category of damages claimed by the owner might have been the simplest to resolve. The contract called for the contractor to pay for utility services during construction. When the owner took over the work, it had to pay those charges. Payment of utility costs was expressly the contractor’s responsibility. Thus, what the owner paid while it finished the construction was recoverable as a direct damage.

We hope the examples given (from a real and recent case) help illuminate the issue of consequential damage and a waiver of those damages. In earlier postings, we defined the various categories of damages in detail. If today’s “taste” of how two of those categories work “as applied” whets your appetite, try clicking one or more of the links we’ve provided earlier in today’s posting.

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