Since construction projects involve numerous parties, they are inherently complex. Even with careful planning and execution, things can go wrong and cause delays or damage. When something goes wrong and causes disruptions or damage to the project, the affected party might seek compensation, including consequential damages. Here is what to know about consequential damages in construction contracts from Florida construction lawyer Jonathan P. Cohen, Esq.
What are Consequential Damages?
Consequential damages, sometimes called indirect or special damages, are losses that do not flow directly from a breach of contract but result from its effect on the injured party’s particular business or circumstances, such as lost profits, lost rental income or loss of use. They are caused by the consequences of a breach rather than the breach itself. In construction, this might include lost business opportunities or profits and other indirect losses that result from a contract breach. Since the losses are indirect, they are typically harder to prove than direct damages.
The following are a few examples of indirect or consequential damages in construction:
- Delay in the project’s completion
- Lost rental income or business profits caused by the interruption or delay
- Other expenses the business incurred because of the breach
- Damage to the business’s reputation
- Increased materials costs because of a change in the scope due to errors
- Property damage caused by construction errors
For example, if the contractor doesn’t complete a project on time, the property owner’s consequential damages might include lost rental income, negative customer reviews, and additional financing costs. No matter how they occur, consequential damages are a financial hardship on the developer, contractor, or property owner.
Contractors suffer consequential damages too. If an owner wrongfully stops paying or terminates the contract, the contractor’s direct damages are the unpaid contract balance and the profit it would have earned on the job. Losses such as other work it had to turn down, higher financing costs or reduced bonding capacity are consequential.
Direct vs. Consequential Damages
Direct damages, also called general damages, are the losses that flow naturally and necessarily from the breach itself: the losses anyone in the injured party’s position would suffer. Consequential damages depend on the injured party’s own circumstances, such as its other contracts, tenants or financing.
The dividing line comes from Hadley v. Baxendale, an 1854 English case that courts across the United States, including Florida’s, still apply. A party that breaches a contract is liable for the losses that arise naturally from the breach, and for other losses only if both parties could reasonably have anticipated them when they made the contract.
| Direct damages | Consequential damages |
|---|---|
| What they are | |
| Losses that flow naturally from the breach itself | Losses that result from the breach’s effect on the injured party’s particular circumstances |
| Construction examples | |
| Cost to correct defective work or to finish the job with another contractor; the unpaid contract balance; the contractor’s profit on the breached contract | The owner’s lost rent, income or use of the property; added financing and interest; the contractor’s lost profits on other projects; damage to reputation |
| When they can be recovered | |
| Generally whenever the breach is proven | Only if foreseeable when the contract was made and proven with reasonable certainty |
| Effect of a waiver of consequential damages | |
| Generally not affected | Barred, to the extent the waiver covers them |
Lost profits show why the label matters. A contractor’s lost profit on the contract that was breached is usually treated as direct damages, while profits lost on other business are usually consequential. Because a waiver of consequential damages usually bars only consequential losses, unless its wording lists specific losses such as all lost profits, how a loss is classified can decide whether it can be recovered at all.
Preventing Contract Breaches
Implementing effective strategies in advance can help to avoid potential errors and contract breaches. Before you begin a project, ensure its scope is clearly defined and that everyone involved understands their roles and responsibilities. Be realistic when setting deadlines and timelines to avoid mistakes and delays. Make sure that all work is completed to the highest standards and adheres to safety regulations and building codes. Establish open, clear communication channels between every involved party, and outline the consequences of a default or breach clearly in the contract.
While doing these things won’t prevent all potential mistakes, these steps can greatly reduce the risk of error and potential breaches. This can help to save your company money while also building and maintaining its positive reputation in the construction industry.
Liability for Consequential Damages
Typically, the breaching party or the party that causes the damage is liable for the injured party’s foreseeable losses. However, the contract might include a waiver of indirect damages.
For example, the parties might include a waiver clause to waive consequential damages that states that the parties will not be liable for remote or indirect losses no matter the cause. If the waiver is unambiguous, fair, and clear, it might be enforceable. However, it might not prevent the assessment of liability for foreseeable damages.
To recover consequential damages, the injured party generally must prove that:
- The loss was reasonably foreseeable to both parties when the contract was made
- The breach actually caused the loss
- The amount can be proven with reasonable certainty, not just estimated
Losses the injured party could reasonably have avoided after the breach are generally not recoverable. Lost profits are the most common consequential damages claim and often the hardest to prove. In W.W. Gay Mechanical Contractor, Inc. v. Wharfside Two, Ltd., 545 So. 2d 1348 (Fla. 1989), the Florida Supreme Court held that a business may recover lost prospective profits, even if it is new and has no track record of profits, as long as it proves them with reasonable certainty.
Reasons to Include Consequential Damages in a Contract
The following are reasons why you should include consequential damages in a construction contract:
- Consequential damages compensate you for foreseeable losses arising from your interactions with third parties while performing your contractual duties.
- A consequential damages clause provides a framework to resolve disputes that might arise.
What Is Included in a Waiver of Consequential Damages?
You must be specific about the types of damages that are covered and how to calculate them. Start by defining consequential damages. Your definition should clarify the types of damages that you consider consequential such as lost profits, opportunities, or other indirect losses. Think about all potential, reasonably foreseeable problems that could arise and address them in your waiver clause. When you define these damages in your contract, you can prevent misunderstandings.
Most standard-form construction contracts already contain such a waiver. The AIA A201 General Conditions, for example, include a mutual waiver of consequential damages: the owner gives up claims for items such as rental expenses and lost use, income, profit and financing, and the contractor gives up claims for items such as principal office expenses and lost profits other than its anticipated profit on the project itself. The same provision preserves liquidated damages, so an owner can still recover agreed delay damages when the contract provides for them. ConsensusDocs contracts include a similar mutual waiver. Because these provisions are often accepted without being read closely, review them with a construction contract lawyer before signing and negotiate any changes your project needs. For how Florida courts read these clauses, and why ambiguous wording can make a waiver unenforceable, see Understanding Florida Construction Consequential Damages Waiver Clauses.
To ensure your consequential damages waiver clause is included correctly in your construction contract, you should work with Florida construction lawyer Jonathan P. Cohen, Esq. An attorney can properly draft your contract and its consequential damages clause so that it will be enforceable. They can also guide how to manage disputes if they arise.
Frequently Asked Questions About Consequential Damages
Are consequential damages the same as special damages?
Courts and contracts often use “consequential damages,” “special damages” and “indirect damages” for the same kind of loss: one that depends on the injured party’s particular circumstances rather than flowing directly from the breach. A contract’s own definitions control, so read them closely.
Can you recover consequential damages for breach of a construction contract in Florida?
Yes, if the losses were foreseeable when the contract was made, were caused by the breach and can be proven with reasonable certainty, and the contract does not waive them.
Are lost profits consequential damages?
It depends. The profit a contractor expected to earn on the breached contract is usually a direct loss. Profits lost on other projects or other business are usually consequential.
Does a waiver of consequential damages also bar liquidated damages?
Not under the standard AIA waiver, which expressly preserves liquidated damages. Other contracts may say otherwise, so check the wording of both clauses.
Are delay damages consequential?
Some are direct, such as a contractor’s added field costs to keep working on a delayed job, while others, such as an owner’s lost rent, are usually consequential. Delay claims also raise contract issues of their own, such as no damage for delay clauses.
Consult Florida Construction Lawyer Jonathan P. Cohen, Esq. to Learn More About Consequential Damages in Construction Contracts
When they occur, consequential damages might affect homeowners and contractors. Understanding consequential damages and how to avoid them can help parties to a construction contract protect their interests and manage their risks. The Florida construction law firm of Jonathan P. Cohen, P.A. has years of experience handling legal matters in all areas of construction. To learn more about consequential damages and how to protect yourself, contact us to schedule a consultation at (954) 462-8850.
The information provided in this article does not, and is not intended to, constitute legal advice. The content in this article is presented for general informational purposes only.