Construction Law: What Are “Consequential Damages”?

When a breach of contract occurs in the construction field, two types of damages are available. They apply whether the disagreement is between the project owner and general contractor or the general contractor and one of their subcontractors.

– Direct damages are intended to compensate the plaintiff for losses that result naturally from the breach. Common examples include unpaid invoice amounts, diminished project value due to substandard work, and any costs incurred to complete unfinished work or repair defective construction.

– Consequential damages are also a form of compensation. They must be both foreseeable and directly connected to the breach of contract. Examples include lost profits, reduced value of a piece of real estate, and lost bonding capacity. They are recoverable in New York unless their award is precluded in the contract.

There are two ways in which a project owner or construction professional can recover consequential damages. They are:

– Seeking compensation for actual and provable damages

– Pursuing a liquidated damages clause in the original contract

Liquidated Damages Explained

Construction contracts include liquidated damages clauses because actual consequential damages can be difficult to quantify. These clauses can save time and money by assigning a specific dollar value for each day that passes between the substantial completion date of the contract and the date that the contractor or subcontractor finishes the job.

To prevent liquidation clauses from being used as a penalty, courts will only enforce them if the anticipated damages are reasonable. High or burdensome estimates are not usually collectible. If the breach is due to the contractor or subcontractor passing away before work is complete, liquidated damages are not recoverable, although actual consequential damages may be pursued.

Precluding Consequential Damages

Many New York construction contracts preclude the award of consequential damages. Others contain clauses that require all parties to limit any recovery to liquidated damages only.

If a project owner refuses to remove clauses pertaining to actual or liquidated consequential damages, the contractor should demand a limit on the amount for which it can be held liable. A fair and reasonable cap is a percentage of the contract price or the profit that the contractor expected to make from the job.

If there is no cap on such damages, bonding companies may not underwrite a payment or performance bond. This is especially important because, theoretically, a contractor could enter into a contract valued at $2 million and end up defending a consequential damage claim for a lot more.

In summary, owners, contractors, and subcontractors need to understand the potential ramifications of consequential damages clauses in construction contracts. Unless the consequences are capped, they have the potential to put a construction professional out of business.

If you have questions about how a consequential damage clause can affect your livelihood, reach out to the construction law team at Rosen Law LLC. We can draw up new contracts that are fair to both sides or negotiate an existing one on your behalf. To schedule a consultation with an experienced construction attorney in New York or Florida, please call (516) 437-3400.

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