Contractual Waiver of Consequential Damages

David Adelstein | Florida Construction Legal Updates | December 1, 2018

Contractual waivers of consequential damages are important, whether they are mutual or one-sided.  I believe in specificity in that the types of consequential damages that are waived should be detailed in the waiver of consequential damages provision. Standard form construction agreements provide a good template of the types of consequential damages that the parties are agreeing to waive. 

But, what if there is no specificity in the waiver of consequential damages provision? What if the provision just states that the parties mutually agree to waive consequential damages or that one party waives consequential-type damages against the other party?  Let me tell you what would happen.  The plaintiff will argue that the damages it seeks are general damages and are NOT waived by the waiver of consequential damages provision.  The defendant, on the other hand, will argue that the damages are consequential in nature and, therefore, contractually waived.   FOR THIS REASON, PARTIES NEED TO APPRECIATE WHAT DAMAGES ARE BEING WAIVED OR LIMITED, AND POTENTIALLY THOSE DAMAGES NOT BEING WAIVED OR LIMITED, WHEN AGREEING TO A WAIVER OF CONSEQUENTIAL DAMAGES PROVISION!

Interestingly, this issue appeared in the recent case, Keystone Airpark Authority v. Pipeline Contractors, Inc., 43 Fla. L. Weekly D2601d (Fla. 1stDCA 2018).   Here, a plaintiff sued a contractor and engineer for defects to an airplane hangar and taxiways.  The plaintiff claimed the engineer’s negligence through its failure to supervise the work as contractually required which resulted in defective construction.  The plaintiff claimed that the engineer was responsible for the costs to repair the airplane hangar and taxiways.   The engineer argued under a waiver of consequential damages provision that read:

“Passero [engineer] shall have no liability for indirect, special, incidental, punitive, or consequential damages of any kind.”  

The engineer argued that the damages the plaintiff was seeking due to its failure to supervise was excluded under the waiver of consequential damages provision in the contract.  The plaintiff argued that such damages are general damages and not barred.  The trial court, as affirmed by the appellate court, held that the damage was barred because the damage was consequential.  In doing so, the court examined the definitions of the types of damages:

General damages are ‘those damages which naturally and necessarily flow or result from the injuries alleged. . . . General damages  ‘may fairly and reasonably be considered as arising in the usual course of events from the breach of contract itself. Stated differently, [g]eneral damages are commonly defined as those damages which are the direct, natural, logical and necessary consequences of the injury.

In contrast, 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.  In other words, 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 carrier of the possibility of injury. Damage is foreseeable by the carrier if it is the proximate and usual consequence of the carrier’s action.

[C]onsequential damages do not arise within the scope of the immediate buyer-seller 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. 

Keystone Airpark Authority, supra (internal citations and quotations omitted).

Based on these definitions, the court agreed that the repairs to the hangars and taxiways were not special damages as “[i]t cannot be said that repairs stemming from improperly supervised construction work are unlikely to occur in the usual course of business.”  Keystone Airpark Authority, supra.   Such damages did not involve special circumstances for which the plaintiff would be required to give the engineer actual notice. 

BUT… these damages were CONSEQUENTIAL:

[T]he cost of repair here did not constitute general damages, either, because the damages were not the direct or necessary consequence of Passero’s [engineer] alleged failure to properly supervise the construction work.  The contractor could have completed the job correctly without Passero’s supervision.  Thus, the need for repair did not arise within the scope of the immediate transaction between Passero and the Airpark.  Instead, the need for repair stemmed from loss incurred by the Airpark in its dealing with a third party – the contractor.  While these damages ‘were reasonably foreseeable,’ they are consequential and not general or direct damages.

The appellate, however, certified the following question of great public importance:

WHERE A CONTRACT EXPRESSLY REQUIRES A PARTY TO SUPERVISE CONSTRUCTION WORK AND TO DETERMINE THE SUITABILITY OF MATERIALS USED IN THE CONSTRUCTION, BUT THE PARTY FAILS TO PROPERLY SUPERVISE AND INFERIOR MATERIALS ARE USED, ARE THE COSTS TO REPAIR DAMAGE CAUSED BY THE USE OF THE IMPROPER MATERIALS GENERAL, SPECIAL, OR CONSEQUENTIAL DAMAGES?

Thus, there could be a ruling in future from the Florida Supreme Court relating to construction industry, specifically relating to the damages associated with a supervising architect or engineer.

Court Denies Recovery of Public Adjuster Fees in Breach of Contract Action

Ashley Harris | Property Insurance Coverage Law Blog | December 16, 2018

In Kingshill Hospitality, Inc. v. American Economy Insurance Company,1 the policyholder’s hotel was damaged by a fire. Three days later the policyholder hired a public adjuster to assist in submitting its insurance claim. A dispute arose regarding the amount of loss and the policyholder filed suit for breach of contract.

As part of the damages claimed, the policyholder sought recovery of the public adjuster fee as consequential damages. The insurance carrier moved the court to strike the claim for consequential damages, which the court granted.

The policyholder argued that “it had to retain the services of an insurance claims professional (Public Adjuster) to pursue its claim.” The court disagreed, reasoning that consequential damages are “[l]osses that do not flow directly and immediately from an injurious act but that result indirectly from the act,” and here, the policyholder hired the public adjuster only three days after the fire occurred and before the insurance carrier made a coverage determination. The court concluded:

Because these costs were incurred in May – before the alleged breach occurred when American Economy partially denied coverage on June 1 – Kingshill’s public adjuster expenses cannot be categorized as consequential damages.

While not relevant under the facts of this case, the court noted:

If an insured believes that its insurer is not attempting to settle a claim in good faith and hires a public adjuster to refute the damage estimate or coverage determination proferred by an insurer, such expenses could be considered consequential damages. And under those facts, the consequential damages would be extracontractual damages that could only be recovered in a bad faith action, pursuant to QBE Ins. Corp. v. Chalfonte Condominium Apartment Ass’n, Inc., 94 So.3d 541 (Fla. 2012).

It should be noted that courts in Florida have found that consequential damages can be recovered in a breach of contract action.2 Here, however, where the public adjuster was hired before a dispute arose regarding the loss or coverage, the public adjuster fees were not recoverable.
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1 Kingshill Hospitality, Inc. v. American Economy Ins. Co., No: 5:18-cv-520, 2018 WL 6427681 (M.D. Fla. Dec. 5, 2018).
2 See e.g.Trident Hospitality Florida, Inc. v. American Economy Ins. Co., No.: 6:08-cv-289, 2008 WL 11334515 *2 (M.D. Fla. May 30, 2008) (“Plaintiff is entitled to consequential damages if it can prove that damages ‘were within contemplation of the parties when the contract was formed.’” Citing Martin v. Monarch Life Ins. Co., No. 94-1182, 1995 WL 127157, at *1 (M.D. Fla. Mar. 21, 1995)).

Federal Court in Pennsylvania Analyzes Which Types of Damage are Barred by Contractual Waiver of Consequential Damages

Kristopher Berr | Pepper Hamilton LLP | January 26, 2017

Jay Jala, LLC v. DDG Construction, Inc., No. 15-3948, 2016 US Dist. LEXIS 150969 (E.D. Pa. Nov. 1, 2016)

Jay Jala, LLC was the owner of a motel construction project in Allentown, Pennsylvania. DDG Construction, Inc. was the contractor.  The project was delayed during construction and, four months after the specified completion date, DDG abandoned the project.  Jay Jala terminated DDG for default, completed the project, and initiated this action.

The contract provided that the parties “waive Claims against each other for consequential damages arising out of or relating to this Contract.” During litigation, DDG stipulated that it breached the contract but moved for partial summary judgment, arguing that Jay Jala’s damages were consequential, and thus waived.

The question presented by DDG’s motion was: “what distinguishes available direct damages from the consequential damages waived by the contract?” The Court reasoned that the distinction turns on whether the damages represent the loss of DDG’s performance (direct damage), or the loss of something collateral (consequential damage).  The Court then undertook to determine which of Jay Jala’s damages “was a separate business arrangement that [Jay Jala] made” and which damages represented something Jay Jala “had to pay in an effort to replace the performance [DDG] failed to provide.”

Utilizing this distinction, the Court granted DDG’s motion with respect to Jay Jala’s damages for: pre-purchased insurance premiums for operation of the completed motel, costs for additional months of advertising the motel, and additional months of furniture, fixtures and equipment leasing expenses. The Court reasoned that under the contract, DDG was not required to cover any of these costs, and thus these losses were not incurred to replace any portion of DDG’s performance.  Instead, each related to a separate business arrangement made by Jay Jala, and was therefore covered by the waiver of consequential damages.

But, the Court denied DDG’s motion with respect to three of Jay Jala’s claims. With respect to Jay Jala’s “project completion fee,” the Court understood that term to encompass Jay Jala’s overhead during the period when it acted as its own contractor following DDG’s breach.  The Court reasoned that if Jay Jala had hired a replacement contractor, that contractor’s fee, including overhead, would have been recoverable as direct damage.  The fact that Jay Jala itself acted as completion contractor did not bar recovery.

Next, the Court held that Jay Jala could recover utility costs it paid during the months following DDG’s breach. The contract expressly required DDG to pay monthly utility costs until completion of the project.  Therefore, utility costs were direct damages because Jay Jala’s payment of those costs replaced a portion of DDG’s expected contract performance.

Finally, the Court held that Jay Jala could recover as direct damage the additional months of construction loan interest it paid following DDG’s breach. The Court reasoned that because DDG agreed to construct the project within a specified period of time, it necessarily agreed that Jay Jala should incur only a specified amount of construction loan interest and, therefore, the additional interest was a direct damage.

For ease of reference the Court’s holding is represented in chart form below:

Direct Damage   Consequential Damage
Project Completion Fee Additional Months of Motel Insurance Premiums
Utility Costs Contractor had Contractually Agreed to Pay Additional Months of Advertising Costs
Additional Months of Interest on Construction Loan Additional Months of Furniture, Fixtures and Equipment Lease

To view the full text of the court’s decision, courtesy of Lexis®, click here.

Direct vs. Consequential Damages – What is the Difference, Really?

Stan Martin | Commonsense Construction Law LLC | November 3, 2016

Many people, even while negotiating the terms of a contract “mutual waiver of consequential damages” clause, fail to appreciate the distinction between direct and consequential damages. A federal district court judge in Pennsylvania has penned a thoughtful decision on this issue, worth noting.

The project was construction of a new Motel 6, and the contractor stopped work before it was complete, but already late. Hoping for a fall 2014 opening, the Motel 6 owner finally opened in the spring of 2015, using others to finish. The subsequent dispute has focused on damages, and specifically what damages are allowed as “direct” damages and what damages are barred by a contract clause prohibiting “consequential” damages.

The court first noted that foreseeability is not the standard:

[I]t is true in some sense that predictability is relevant to determining whether damages naturally flow from a breach and are considered direct or indirectly result and are considered consequential. But that definition has never been very instructive for analyzing particular damages, and foreseeability is the limit of all contract damages, not the distinction between direct and consequential damages. [citations omitted]

Quoting from a federal appellate decision, the court noted –

“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.” Atl. City Associates, LLC, v. Carter & Burgess Consultants, Inc., 453 F. App’x 174, 179 (3d Cir. 2011). “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.” Id. (quoting Penncro Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007))

Further, “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.”

Applying those standards to the current dispute, the court held that costs of completion, including a project manager’s fee, would be direct costs. Utility costs were also direct costs, being tied to what the contractor had agreed to cover during construction. On the other hand, lost income, and costs of advertising and insurance (in this instance, insurance for operating the hotel), were not part of what the original contractor was obligated to provide, and so would be considered consequential. Trickier were questions about extended rental of storage units holding furniture, fixtures and equipment which were to be installed in the hotel, and costs of financing. The former were considered consequential, but incremental interest costs incurred monthly during the period of delay were considered as direct damages. (The contract had standard AIA language, which includes the word “financing” among the list of potential costs or damages being waived by the owner. The court concluded that that word in context refers to replacement financing or line of credit financing, and not to already-existing construction loan monthly costs.)

To sum up, the court distinguished between “a loss in value of the other party’s performance” and “collateral losses following the breach,” to distinguish between direct and consequential damages. Something to keep in mind during the next contract negotiation. The case is Jala v. DDG Constr., 2016 U.S. Dist. LEXIS 150969 (E.D. Pa., Nov. 1, 2016) (LEXIS subscription required).

. A federal district court judge in Pennsylvania has penned a thoughtful decision on this issue, worth noting.

The project was construction of a new Motel 6, and the contractor stopped work before it was complete, but already late. Hoping for a fall 2014 opening, the Motel 6 owner finally opened in the spring of 2015, using others to finish. The subsequent dispute has focused on damages, and specifically what damages are allowed as “direct” damages and what damages are barred by a contract clause prohibiting “consequential” damages.

The court first noted that foreseeability is not the standard:

[I]t is true in some sense that predictability is relevant to determining whether damages naturally flow from a breach and are considered direct or indirectly result and are considered consequential. But that definition has never been very instructive for analyzing particular damages, and foreseeability is the limit of all contract damages, not the distinction between direct and consequential damages. [citations omitted]

Quoting from a federal appellate decision, the court noted –

“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.” Atl. City Associates, LLC, v. Carter & Burgess Consultants, Inc., 453 F. App’x 174, 179 (3d Cir. 2011). “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.” Id. (quoting Penncro Assocs., Inc. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007))

Further, “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.”

Applying those standards to the current dispute, the court held that costs of completion, including a project manager’s fee, would be direct costs. Utility costs were also direct costs, being tied to what the contractor had agreed to cover during construction. On the other hand, lost income, and costs of advertising and insurance (in this instance, insurance for operating the hotel), were not part of what the original contractor was obligated to provide, and so would be considered consequential. Trickier were questions about extended rental of storage units holding furniture, fixtures and equipment which were to be installed in the hotel, and costs of financing. The former were considered consequential, but incremental interest costs incurred monthly during the period of delay were considered as direct damages. (The contract had standard AIA language, which includes the word “financing” among the list of potential costs or damages being waived by the owner. The court concluded that that word in context refers to replacement financing or line of credit financing, and not to already-existing construction loan monthly costs.)

To sum up, the court distinguished between “a loss in value of the other party’s performance” and “collateral losses following the breach,” to distinguish between direct and consequential damages. Something to keep in mind during the next contract negotiation. The case is Jala v. DDG Constr., 2016 U.S. Dist. LEXIS 150969 (E.D. Pa., Nov. 1, 2016) (LEXIS subscription required).

NJ Supreme Court Holds Insurers Liable for Subcontractor’s Defective Work

Practical Law | August 18, 2016

In a case of first impression, the Supreme Court of New Jersey recently held that insurers may be liable for consequential damages resulting from a subcontractor’s defective work under commercial general liability insurance policies.

 On August 4, 2016, in Cypress Point Condominium Association, Inc. v. Adria Towers, LLC, the Supreme Court of New Jersey held that insurers may be liable for consequential damages resulting from a subcontractor’s defective work under a commercial general liability insurance policy (2016 WL 4131662).

Background

A condominium association hired a general contractor to develop a condominium project. The contractor hired subcontractors that improperly installed the roof, flashing, and gutters, among other things, which caused mold and water damage in common areas, individual units, and concealed interior areas of the building.

The association sought coverage from the general contractor’s insurer under its commercial general liability (CGL) insurance policy. It asserted that the consequential damages caused by the subcontractor’s faulty work was “property damage” under the general contractor’s insurance policy. The general contractor’s policy was on the Insurance Services Office, Inc.’s (ISO) 1986 standard CGL form (the 1986 ISO form).

In the insurance industry, an insured generally assumes the business risk of paying for the cost of correcting defective work (referred to as the “Your Work” exclusion). The 1986 ISO form, however, carves out an exception to this exclusion for the work of subcontractors (the subcontractor exception).

In this case, the insurer asserted there was no “property damage” or “occurrence,” both of which are required to trigger coverage under the contractor’s CGL policy. The insurer relied on Weedo v. Stone-E-Brick, Inc. (81 NJ 233 (1979)) and Firemen’s Insurance Co. of Newark v. National Union Fire Insurance Co. (387 NJ Super. 434 (App. Div. 2006)). Both of these cases supported the insurer’s position, but interpreted ISO’s 1973 standard CGL form (the 1973 ISO form).

Critical distinctions between the 1973 ISO form and the 1986 ISO form relevant to this case include:

The trial court held that the faulty workmanship was not an “occurrence” and the consequential damages were not “property damage” under the 1986 ISO form policy. The appellate court reversed, holding that the damages claimed in this case were covered because they were unintended and unexpected consequential damages, not damages for replacement costs (see Legal Update, New Jersey Appellate Court: Insurers May be Liable for Subcontractor’s Defective Work).

Analysis

The New Jersey Supreme Court affirmed the appellate court’s decision. The Supreme Court distinguished Weedo and Fireman’s because:

  • Those cases interpret the 1973 ISO form rather than the 1986 ISO form applicable in this case.
  • This claim is for consequential damages caused by the work, not replacement costs of the work itself.

The Supreme Court took guidance from leading cases by the Florida Supreme Court and the Fourth Circuit, both of which held that a subcontractor’s defective work may constitute an insurable occurrence and resultant damages from the faulty work is covered under the 1986 ISO form. These courts emphasized that to hold otherwise would make the subcontractor exception to the Your Work exclusion meaningless.

The Supreme Court concluded that:

  • The consequential damages in this case resulted in a loss of use of the affected areas and qualify as “property damage” under the 1986 ISO form.
  • The definition of “occurrence” under the 1986 ISO form requires an accident, a term not defined in the policy. So the court:
    • looked to the plain meaning of the undefined term accident;
    • decided that the term accident means unintended and unexpected harm caused by negligent conduct;
    • determined that the consequential water damage to completed, non-defective portions of work as alleged in this case fall within this definition of accident; and
    • held that because there was an accident, there is an “occurrence” under the policy.
  • The Your Work exclusion would apply to exclude coverage.
  • The subcontractor exception to the Your Work exclusion applies to these facts and negates the Your Work exclusion.
  • Coverage exists.

Practical Implications

This case is significant for developers and construction professionals. New Jersey is one more state in line with the recent trend of courts affirming coverage under the 1986 ISO form for consequential damages caused by certain construction defects.

Counsel for developers, contractors, and insurance underwriters should review their CGL policies to determine how this decision affects their businesses.