The Sands Casino was demolished nearly 10 years ago, but it may be decades, if ever, before the notoriety surrounding the old Atlantic City, N.J., hotel fades.
That infamy, as any construction lawyer worth their salt will tell you, was established when arbitrators awarded $14.5 million in mostly “consequential damages” against the hotel’s prime contractor, Perini Corp.
Consequential damages are the “pain and suffering” of a breach of contract claim.
Perini, nowadays known as Tutor Perini Corp., had finished the work late, prompting the owner to claim all of those millions in damages for lost profits during the time the casino was not open to the gaming public.
The New Jersey Supreme Court affirmed the arbitrators’ award and, presto, legal history was made. Today, the word “Perini” remains synonymous with consequential damages. All because of four months of delays in a project that cost $24 million to build.
So, what are consequential damages and, most importantly, what can general or subcontractors do to avoid them?
Perhaps the best way to understanding consequential damages is to compare them to direct or general damages. Those damages arise directly as a consequence of a breach of contract. For example, the costs incurred by the owner to complete a project or repair defective work.
Consequential damages, on the other hand, are commonly thought of as indirect losses that result from a breach.
Typical examples of consequential damages include, among other things, lost rents, damage to reputation, down or idle time, interest and finance charges, loss of use of goods, additional labor costs, material escalation costs, depreciation, rental costs and additional energy costs.
A big award, of course, can wreak havoc on a contractor’s finances, obliterating years of profits and even triggering bankruptcy. Even in less-serious cases, a negative outcome can limit a contractor’s bonding capacity for years.
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The good news is that, to be able to recover consequential damages, the damages must have been reasonably foreseeable at the time the contract was made. In other words, the degree of proof required is higher than for direct damages.
That, however, doesn’t go far enough in protecting contractors, and so in the years since the Perini case, the incorporation of mutual waivers of consequential damage clauses have become more common in contracts.
Simply stated, under these waivers, each side forgoes their right to seek consequential damages from the other.
Owners and contractors hold decidedly differing views on these waivers. Contractors tend to view them as merely ensuring that their potential exposure is proportionate to their compensation under the original contract. Owners generally believe the contractor should be accountable for damages caused by its failure to manage risks within its control, regardless of the extent of the risks.
Owners, in fact, often won’t always allow the waivers, so the next best strategy is to modify the language so that the owner can recover consequential damages only to the extent that they are covered by insurance.
There’s also the option of negotiating a dollar cap on consequential damage exposure.
The bottom line is that a clearly worded, project-specific waiver of consequential damages in construction contracts has become critically important. By defining the scope of consequential damages in the contract itself, there’s a much better chance that a court or arbitration panel will dismiss a claim without the expense and hassle of a trial.
Tom Patton is a Surety Advisor with CCIG. Reach him at TomP@thinkccig.com or 720-330-7922.Back to Resources