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Agreements Part 4 - Practical Pointers

Consequential Damages In Construction Contracts and Architects Agreements Part 4 -

Practical Pointers

Posted on June 10, 2009 by Joshua Glazov

In the last post on consequential damages, Why Treat Consequential and Direct Damages Differently, we
talked about why consequential damages are so much tougher to get. In this post we'll talk about practical
pointers and tips that you should keep in mind when you're dealing with consequential damages, especially
when you're negotiating a contract.

Consequential Damages Are The Big Money

The biggest damages are usually consequential. They're the "pain

and suffering" of a breach of contract claim. The owner's
consequential damages for late completion of the Sands casino in
the Perini case is the classic example. Some examples of big
consequential damages that litigants often ask for....

Owners asking for lost rents, lost sales, higher interest payments,
extra loan fees, and injury to the standing and reputation of the
owner and the project.

Contractors asking for home office overhead, profits from work

on other projects they had to turn away, lost bonding capacity,
and injury to company standing and reputation.

Architects, engineers, and other design professionals asking for

profits on work they had to turn away, extra expenses they incur
devoting more professional time and resources to a project than expected, and injury to their professional
standing and reputation.

Because consequential damages involve big money, they usually arouse dogged and protracted disputes.
That's why early consequential damage planning is important.

Proving Contemplation - Put It In Your Contract

From reading the earlier posts in this series you now recognize that if you're trying to get consequential
damages, the first line of defense you must get through is proving that the other side contemplated your
consequential damages at the time they entered into the contract. There's several ways to do this. But the
easiest is putting proof of contemplation right in the language of the contract itself. Where?

You can put this language anywhere in the contract. But I prefer putting it in what lawyers call the

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"recitals". This area is usually easy to identify because it's:

At the beginning of the contract

Often starts with silly and archaic words like Witnesseth and Whereas

Regardless of what introductory words you use, recitals are a narrative that tell the backstory of (1) who the
parties are, (2) why they're entering into the the contract, and (3) what they each expect it to do for them.
So it's a fitting place for language to mention what's at stake for you, and what kinds of bad things are likely
to happen to you, if the other side doesn't perform as promised. And you can use that language later to
prove the other side's contemplation.

You can use other parts of the contract too. If you're using form documents from one of the following
organizations, you'll have to. Their forms don't have recitals.

International Federation of Consulting Engineers (FIDIC)

American Institute of Architects (AIA)
Associated General Contractors (AGC)
Engineers Joint Contract Documents Committee (EJCDC)

Classifying Damages

Using language right in the contract to prove contemplation also gives you the opportunity to classify them
as consequential and direct. Judges don't have to adopt your classification, but your agreement can
influence how they decide.

But if you expect to be the one asking for consequential damages, be careful about how you classify your
potential damages. On one hand, to later help prove contemplation, you want to maximize the mention of
types of damages you may suffer. But if you waive your right to consequential damages in another part of
the contract, you don't want your classification of consequential damages to be too broad. A comprehensive
identification of consequential damages in your contract is a formidable weapon when you later pursue
consequential damages. But add a waiver of consequential damages and your opponent can seize that
weapon from your hand and give it to your opponent. More on consequential damage waivers below.

Who Decides Whether Damages Are Consequential or direct?

Generally, judges decide whether damages are consequential or direct. They say it's a "question of law."
That's law talk for: the judge decides without a trial. And the judge usually decides at a preliminary phase of
the lawsuit before trial starts.

If the dispute is in arbitration instead of in court, the arbitrators decide which damages are consequential and
which are direct.

Who Decides Whether The Other Side Contemplated Consequential Damages?

Generally, jurors decide whether the side who breached the contract (the "breacher") contemplated the
other side's (the "victim") consequential damages at the time they entered into the contract. Judges call this
a "question of fact." That's law talk for: the jury decides during a trial.

If the dispute is in arbitration, the arbitrators decide whether the breacher contemplated at the critical time.
In arbitration, the arbitrators decide both the issues of law and the issues of fact.

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Waivers

Because consequential damages are so contentious and they can be so financially devastating, many design
professional and construction contracts have waivers of consequential damages. These are usually mutual
waivers where each side waives their right to get consequential damages from the other.

But these waivers don't end consequential damage controversy. They just moves it to a different place. The
victim tries to convince the judge that their damages are direct and excluded from the waiver of
consequential damages. The breacher tries to convince the judge that victims damages are consequential,
and, therefore waived under the contract.

So, if you're opposing consequential damages, your best weapon is a contract that includes both:

A waiver of consequential damages

A detailed identification of which damages should be treated as consequential

The most well known example of this kind of combination is the waiver in the AIA's A201 General
Conditions of Construction Contract.

One more thing about waivers of consequential damages. I mentioned above that they're usually mutual. So
when one side asks for a waiver in the contract, the other side usually expects to get one in return. If you
ask for a waiver, expect to give one too.

Consequential Damage Alternatives

I'll bet you want to avoid protracted consequential damage negotiations on your next contract. Alternatives
can help.

One alternative is to put a cap on consequential damages. This assures the side who wants a complete
waiver that they're not accepting grossly disproportionate or unlimited liability like in the Perini case. It's a
partial waiver. One side can ask for consequential damages, but only up to a ceiling; they waive
consequential damages above the ceiling.

Another alternative is liquidated damages. Liquidated damages give something to both sides.

The victim need not prove what the breacher contemplated when they entered into the contract. Yet,
depending on the size of the liquidated amount, the victim may still receive all, or a big enough part, of
their consequential damages.
The breacher gets a ceiling on their liability.

But Liquidated damages don't work for every contract or all promises within a contract.

Some people just categorically refuse liquidated damages.

"No penalties!" they say.

"OK" I reply, "no penalties. But we still need to agree on the amount of liquidated
damages."

But many still decline and it's just not in the cards.

Sometimes people agree in principle on using liquidated damages, but can't agree on an amount.
Liquidated damages work well to compensate some kinds of breaches (e.g., late completion) and very

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poorly to compensate others (e.g., a design that doesn't comply with the Americans With Disabilities
Act).

Conclusion

Sooner or later you'll probably have to identify which damages are consequential and which are
direct. The Chinese Sign Test can help.
Consequential damages are usually tough to get. You must prove what the other side contemplated
when they entered into the contract. There's no Easy Button for that. Recall the rental car - teenager
comparison.
Start thinking about consequential damages while you're preparing your contract; don't wait until
you're about to sue, or about to be sued, to focus on them.
If you'll be the one asking for consequential damages, fortify your contract with language that
will ease your burden of proving that the other side contemplated your consequential damages.
The more specific you are, the smoother and the shorter your road to proving what you need to
prove. But be careful! A waiver elsewhere in the contract, including an amendment, can turn
the tables on you.
If you want to avoid liability for consequential damages, ensure that the other side waives them
in your contract.
And if you're getting a waiver, consider identifying the consequential damages they're waiving.
Consider alternatives to consequential damages before you start negotiating. Have a liquidated
damages amount in mind. You don't have to start out by proposing alternatives, but the odds are good
that something about consequential damages will become a sticking point while you negotiate. When
it does, that alternative you're holding in reserve might just be the thing that breaks a deadlock and
moves your negotiations along.

Tags: Damages (Consequential)

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