Consequential Damages Provisions in Construction Contracts: Legal Issues (2022)

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NCHRP LRD 88 3 CONSEQUENTIAL DAMAGES PROVISIONS IN CONSTRUCTION CONTRACTS: LEGAL ISSUES Polly Jessen, Riley Cutner-Orrantia, Brandon Rattiner, and Diane Sung, Kaplan Kirsch & Rockwell LLP, Denver, CO; and Adam Giuliano and Emily Eads, Kaplan Kirsch & Rockwell LLP, New York, NY INTRODUCTION When a construction contract is breached or liability is allo- cated in accordance with its terms,1 through an indemnity pro- vision, for example, three types of damages are generally impli- cated: (i) direct or general damages; (ii) punitive damages; and (iii) indirect, special, or consequential damages. Consequential damages are generally dened as reasonably foreseeable indirect losses arising from a breach. Common examples include lost prots, loss of use of a facility, and damages related to third- party claims. Consequential damages oen are dicult to cal- culate in advance, given the unpredictable and idiosyncratic nature of indirect losses. While consequential damages can arise under many types of contracts, they are especially relevant to public transportation construction projects. e nature of required contractual per- formance in these projects, and these projects’ visible and im- portant context, both substantially increase the likelihood and magnitude of potential claims. Accordingly, parties to a public transportation construction project should consider how conse- quential damages may arise in the context of a particular project, and how they should be addressed through the contract’s terms. Parties can seek to limit or assign liability by including a clause to preclude or condition recovery of consequential damages— i.e., indirect losses “fairly and reasonably” arising from the breach of the contract. As a result, consequential damages are oen restricted in public transportation construction contracts in order to limit a state department of transportation’s (DOT)— and sometimes construction contractors’—exposure to poten- tial liability. Draing, negotiating, and applying such consequential damages provisions benets from a broader understanding of the issues involved because potential consequential damages claims are not something that can, or should, be simply toggled “on” or “o”. Instead, parties should consider various legal and commercial issues associated with limiting consequential dam- ages provisions in public transportation construction contracts. Without proper consideration and tailoring to ensure tness for purpose, consequential damages provisions that are too rigid or leave either party too exposed can derail or adversely impact pricing, bids, or negotiations. e objective of this research is to produce a digest of con- sequential damages law and to discuss how that law shapes the draing of provisions in public transportation construc- tion contracts that mitigate the risk of consequential damages awards. e digest discusses both relevant law and emerging 1 For clarity’s sake, this report usually groups both kinds of actions together under the umbrella term “breach.” practices and trends. It concludes with a checklist of consider- ations that parties—particularly state DOTs—should consider when draing or analyzing consequential damages provisions. I. UNDERSTANDING CONSEQUENTIAL DAMAGES is section introduces the distinction between direct and consequential damages in contract law and describes how the types of losses most common in public transportation construc- tion disputes are conventionally categorized. Next, it discusses how industry seeks to mitigate the risk of consequential dam- ages awards through certain provisions in model forms. Finally, it discusses how federal and state law bears on such provisions, and on consequential damages more broadly. A. What Are Consequential Damages? Damages are a legal remedy awarded to redress an injury. In a contract dispute, a party that has breached a contract may be required to pay damages to the non-breaching party. e amount of damages owed, under general principles of contract law, are meant to put the harmed party “in as good a position as he would have been in had the contract been performed, that is, had there been no breach.”2 is amount can be calculated various ways. It may be expressly stipulated in the liquidated damages provision of the breached contract, it may be derived from established statutory or common law principles, or it may be derived from some combination thereof. Regardless of the methodology used, calculating damages can be dicult. e directive to restore a party to the posi- tion they would have been in absent the breach encourages extrapolation and conjecture. Contract law is therefore always striving to further rene what damages are and are not recov- erable. At the most general level, contract law principles set boundaries on recovery that apply to every case equally. For example, damages must be proven with reasonable certainty, they must be the proximate result of the breach (or any other contractually dened event giving rise to a claim for damages, such as an indemnity), and they must be foreseeable.3 Contract law principles also operate on the level of individual cases. Spe- cically, contract law categorizes the damage caused by a breach as either direct or consequential, and in some instances, limits recovery to only certain categories of damages. 2 Restatement (Second) of Contracts § 344 cmt. a, Am. L. Inst. (1981). 3 See, e.g., Hadley v. Baxendale, 156 Eng. Rep. 145, 151 (Ex. Ch. 1854) (establishing the foreseeability doctrine).

4 NCHRP LRD 88 to be direct results of a breach, but they are not remote enough to be unforeseeable results of a breach. As a result, contracting parties and courts still struggle to locate the line between direct and consequential damages, despite decades of cases trying to further distinguish these categories.9 Yet, a conventional wisdom about whether a kind of loss is direct or consequential has emerged. Contracting parties oen rely on this conventional wisdom—sometimes to the detriment of one, or both, of the parties. is section now turns to some of the more common kinds of losses experienced in public trans- portation construction contract disputes, discusses how those losses are conventionally categorized, and highlights relevant issues caused by this approach. 2. Categorization of Most Common Public Transportation Construction Losses Parties to a transportation construction contract can seek damages to either remedy a breach or in response to other con- tractual events giving rise to monetary claims, including “com- pensable events”10 or indemnity claims unrelated to a breach. Either way, these parties are oen seeking compensation for the following kinds of losses, which are categorized as follows: a. Costs to Complete Costs spent completing a project following a liability- generating event are categorized as direct damages.11 ese costs are typically incurred by owners forced to complete a project aer a contractor’s breach, most commonly by contract- ing with another party to complete the work. ese costs may be borne directly or through a surety—the latter approach can help mitigate additional out-of-pocket costs to complete. Ab- sent an agreement to the contrary, costs to complete encompass all the costs incurred by the owner in completing the work, including preliminary costs,12 project overhead costs,13 and 9 See Reid Hosp. & Health Care Servs., Inc. v. Conifer Revenue Cycle Sols., LLC, 8 F.4th 642, 648 (7th Cir. 2021) (observing that “[t]he denition of consequential damages is elusive, ambiguous, and equivo- cal.”) (internal alterations and quotations omitted). 10 Such events include compensable delays, excusable events, force majeure events, unforeseen events, supervening events, and other simi- lar descriptions. For present purposes, the term “compensable events” is used to describe an event outside of a party’s—typically a contractor’s— control and for which it will receive both contractual relief and mone- tary compensation. 11 See, e.g., Int’l Fid. Ins. Co. v. Cnty. of Rockland, 98 F. Supp. 2d 400, 413 (S.D.N.Y. 2000) (“[T]he excess cost of completion of the contract— that is, the amount in excess of the contract price that it costs to com- plete the construction in accordance with the original contract plans and specications—is the standard measure of direct damages.”). 12 Preliminary costs refer to one-time initial costs that are incurred in establishing the project and typically include: consultant costs for design and investigation, legal advice and other professional services, and in some cases, site mobilization, testing or sampling costs. See, e.g., Safstrom v. Comm’r, 64 T.C.M. (CCH) 971, 1992 T.C.M. (RIA) (charac- terizing costs incurred designing a prototype as a preliminary expense). 13 Overhead costs refer to ongoing costs including, but not limited to, management and administrative costs and site facilities. is is dis- tinct from corporate overhead, which is the general cost of keeping the 1. Consequential Damages vs. Direct Damages Direct damages are losses that are “sometimes said to be the ‘natural’ result of the breach, in the sense that its occurrence accords with the common experience of ordinary persons.”4 Examples of direct damages include unpaid invoices and costs incurred to repair defective or incomplete work. For instance, common sense suggests a subcontractor’s failure to perform will naturally cause their general contractor to hire another sub- contractor to perform the same work. e costs associated with this new hire are direct damages. Consequential damages, oen referred to as indirect dam- ages, are the opposite. ey are losses that are not “in the ordi- nary course of events, [but are still] foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract.”5 Again, under general con- tract law principles, only foreseeable damages are recoverable.6 erefore, “[r]ather than turning on foreseeability, the dier- ence 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.”7 Stated dierently, consequential damages are losses above and beyond direct damages that ow from a breach as a result of the party’s particular circumstances. e Tenth Circuit provides an especially helpful example: Direct damages refer to those which the party lost from the contract itself—in other words, the benet of the bargain—while consequen- tial damages refer to economic harm beyond the immediate scope of the contract. Lost prots, under appropriate circumstances, can be recoverable as a component of either (and both) direct and conse- quential damages. us, for example, if a services contract is breached and the plainti anticipated a prot under the contract, those prots would be recoverable as a component of direct, benet of the bargain damages. If that same breach had the knock-on eect of causing the plainti to close its doors, precluding it from performing other work for which it had contracted and from which it expected to make a prot, those lost prots might be recovered as “consequential” to the breach.8 e Tenth Circuit’s example is illuminating, but real-world contract disputes are rarely so tidy. Consequential damages exist in a hard-to-dene liminal space; they are not obvious enough 4 Restatement (Second) of Contracts § 351 cmt. b, Am. L. Inst. (1981). 5 Id. 6 See Commonwealth, Dep’t of Transp. v. Cumberland Constr. Co., 90 Pa. Commw. 273, 275, 494 A.2d 520 (1985) (rejecting an argument that a contractor whose business was destroyed by untimely govern- ment payments was entitled to recover for the destruction of its busi- ness through consequential damages, observing that the contractor’s resulting cash ow problems were not reasonably foreseeable even in these circumstances). 7 Atl. City Assocs., LLC v. Carter & Burgess Consultants, Inc., 453 F. App’x 174, 179 (3d Cir. 2011); see also Restatement (Second) of Contracts § 347 cmt. c, Am. L. Inst. (1981) (“Items of loss other than loss in value of the other party’s performance are oen characterized as incidental or consequential.”). 8 Penncro Assocs. v. Sprint Spectrum, L.P., 499 F.3d 1151, 1156 (10th Cir. 2007) (footnotes omitted).

NCHRP LRD 88 5 Reynolds shows that the conventional categorization of repair costs as direct damages is of limited value. Without clear draing, it can be dicult to show how repair costs are distinct from collateral costs that may ow from a defective product. c. Lost Profits e example from the Tenth Circuit discussed in section I. A illustrates that lost prots can be categorized as direct damages, consequential damages, or both. But determining whether lost prots are directly or collaterally attributable to a breach is fraught. Such determination may depend on whether the con- struction contract expressly contemplates the prots at issue. For example, in Tennessee Gas Pipeline v. Technip United States Corporation, TGP sued their contractor to recover prots from gas they were unable to sell due to delayed construction at their facility.20 e scope of the operative contract was limited to the construction of the facility. Accordingly, a Texas appellate court held that “TGP’s expectation of prot through the sale of gas to its customers is incidental to the performance of TGP’s Contract with Technip USA concerning the installation of new equipment,” meaning the disputed lost prots were barred by the contract’s consequential damages waiver.21 Compare Tennessee Gas to Cherokee County Cogeneration Partners, L.P. v. Dynegy Marketing & Trade, where the buyer in a take-or-pay gas purchase agreement sought lost prots aer the seller was unable to provide gas.22 A dierent Texas appellate court held that such damages were direct because the contract expressly allowed the buyer to either use or resell gas to third parties.23 us, the categorization of seemingly straightforward lost prots—like ticket fares lost to delay—may ultimately depend on the specic language included in a contract. Some projects, like the operation of a roadway or transit system by a public entity, may not have an obvious prot component, whereas other projects, like the operation of private tollways or airports, may implicate large amounts of prots. Accordingly, recovery of consequential damages is more likely to occur in the latter group of projects. Other claims for lost prots are more obviously categorized as consequential damages. Examples include claims by con- tractors that a breach caused them to forego bidding on other projects,24 claims by contractors that a breach caused their prots to shrink or damages to accrue on a dierent project,25 20 Tenn. Gas Pipeline Co. v. Technip United States Corp., No. 01-06- 00535-CV, 2008 Tex. App. LEXIS 6419 (Tex. App. Aug. 21, 2008). 21 Id. at *29. 22 Cherokee Cty. Cogeneration Partners, L.P. v. Dynegy Mktg. & Trade, 305 S.W.3d 309 (Tex. App. 2009). 23 Id. at 315. 24 See Crawford v. Tex. DOT, 2004 Tex. App. Lexis 7638 (discussing lost business). 25 See Am. Indus v. Ga. DOT, 2021 Ga. Super. Lexis 2115 (describ- ing ripple-eect damages on other projects). additional materials and labor. ese costs are categorized as direct damages because the owner would have incurred them had the contractor completed the project, by way of progress payments or other types of payments to the contractor for work done. And even though an owner would not normally incur additional procurement costs like those associated with rebid- ding the work, such costs are a foreseeably direct consequence of the contractor’s breach. b. Costs to Repair Costs spent repairing a defective or damaged aspect, compo- nent, or product are usually categorized as direct damages. e justication for this is straightforward. A construction contract typically promises performance at a certain standard of quality, and if a contractor’s breach prevents that standard from being met, the necessity of additional work to achieve the bargained- for standard is a foreseeable direct consequence of the breach. However, a failure to plainly state the expected standard of performance in the contract can transform a routine costs-to- repair claim into a confusing—and potentially doomed—eort to recover consequential damages. In Reynolds Metals Company v. Westinghouse Electric Cor- poration, two companies entered into a contract for an elec- tric transformer unit.14 e contract entitled Reynolds to the machinery and two-days’ work from a competent service en- gineer to start-up the machine.15 When the transformer failed less than one year aer start-up, Reynolds alleged the engineer was inadequate and sued Westinghouse for repair costs, arguing they were direct damages.16 e Fih Circuit disagreed. Observ- ing that the contract promised Reynolds only two-days’ work from a competent engineer, the court stated the direct dam- ages were “the dierence in value to Reynolds at that time of the services provided and those promised,” which it calculated by subtracting the market value of the services Westinghouse’s engineer provided from the fee a competent engineer would have charged.17 e court noted that it was foreseeable that the inadequate engineer would cause Reynolds to incur repair costs, but it stressed that those costs were “consequential losses and do not reect the dierence-in-value damages attributable to the original breach of contract.”18 e court then held the contract’s waiver of consequential damages barred recovery of repair costs.19 company running and is usually spread out over multiple projects. See Crane-Hogan Structural Sys., Inc. v. State of New York, 930 N.Y.S.2d 713 (N.Y. 2011) (discussing both forms of overhead). See, e.g., Aircra Gear Corp. v. Kaman Aerospace Corp., 875 F. Supp. 485, 495 (N.D. Ill. 1995) (“Overhead is commonly dened as those costs which are expended for the benet of the business as a whole and which usually accrue over time.”). 14 Reynolds Metals Co. v. Westinghouse Elec. Corp., 758 F.2d 1073, 1074 (5th Cir. 1985). 15 Id. 16 Id. at 1075-1076. 17 Id. at 1080. 18 Id. (emphasis in original). 19 Id.

6 NCHRP LRD 88 several projects. Moreover, in cases where a parent company of a contracting party becomes insolvent, it becomes even harder to demonstrate insolvency was the consequential result of a spe- cic project or breach. *** e above examples show that case law and industry cus- tom have combined to create a conventional wisdom regarding the categorization of certain kinds of losses. ese examples also show how quickly that conventional wisdom may falter in the face of imprecise draing and unpredictable litigation. Ac- cordingly, parties should exercise caution and be diligent when draing transportation construction projects. A failure to treat consequential damages with care—or mitigate the risk conse- quential damages present—can be costly. B. Mitigating the Risk of Consequential Damages Awards Through Consequential Damages Provisions Contracting parties oen attempt to manage the risk of large consequential damages awards by adding dierent kinds of mitigatory “consequential damages provisions” in contracts. Such provisions, which are discussed in greater detail in section III, include mutual waivers of the right to recover consequen- tial damages, clauses disclaiming liability for certain kinds of losses per se, and clauses including or excluding specic kinds of losses from the denition of consequential damages. is Section describes the need for such provisions and provides ex- amples of such provisions in model forms commonly used by industry stakeholders. 1. Risk of Consequential Damages in Construction Contracts Although it is now fairly common practice to include con- sequential damage provisions in public construction contracts, such provisions were uncommon before 1992. Industry practice largely changed as a result of the Supreme Court of New Jersey’s decision in Perini Corporation v. Greate Bay Hotel & Casino, Inc. Although the case did not arise out of a public transportation construction project, its resulting impact aected these projects and contracts. In Perini, a casino owner sought judicial enforcement of an arbitration award for lost prots against a general contractor.31 e owner paid a general contractor $600,000 (plus reimburse- ment costs) to supervise a casino renovation.32 e renovation took longer to complete than anticipated, particularly the con- struction of ornamental façade, and the casino was not fully operational for its peak summer season.33 e construction con- tract required the parties to arbitrate certain disputed matters including lost prots, and an arbitration panel ultimately awarded the owner $14.5 million dollars in damages for prots 31 Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 610 A.2d 364 (1992). 32 Id. at 367. 33 Id. or claims by private businesses that certain construction activity lowered their future earning potential.26 d. Fees and Other Administrative Costs Various fees can arise when a project is delayed or canceled. Some of these fees should be understood as costs to complete or costs to repair—they are levied in order to obtain the promise that was bargained for.27 Examples include fees spent acquiring new subcontractors or vendors, lost deposits on materials, and fees paid to stabilize a site or store and preserve construction materials. However, delays and canceled projects may trigger other fees that are collateral to the promised-for bargain to build a trans- portation project. ese fees are categorized as consequential damages. Examples include additional interest or fees that be- come due and payable when a project nanced by construction loans or bond issuances is delayed, or supplemental insurance and/or premiums paid during a delay.28 e. Loss of Bonding Capacity A breach may result in a negative impact on the contractor’s balance sheet, which may indirectly result in the loss of bond- ing capacity.29 Loss of bonding capacity claims must be carefully evaluated to determine whether the loss was reasonably foresee- able. Proof of loss of bonding capacity can be shown through specic jobs the contractor would have bid on but for the loss on their balance sheet preventing them from securing a bid bond. Loss of bonding capacity is commonly categorized as a conse- quential damage.30 f. Insolvency Insolvency of a contracting party can lead to potentially sig- nicant costs, like those associated with resolving various party debts. However, it can be dicult to show that a party’s insol- vency was the result of one project, as most parties in transpor- tation construction contracts will be simultaneously involved in 26 See DOT v. Wallace Enters., 234 Ga. App. 1, 505 S.E.2d 549 (1998) (describing how condemnation, occurring as part of a transportation construction project, permanently impaired a gas station’s access to trac, which led a Georgia state court to award consequential lost prots to the gas station’s owner). 27 See Bruno v. Mona Lisa at Celebration, LLC (In re Mona Lisa at Celebration, LLC), 472 B.R. 582, 624-625 (Bankr. Fla. 2012) (noting “professional fees and expenses are essential to the overall development of a real estate project,” so costs like “bank extension fees, loan costs, engineering expenses, design expenses, and construction management fees can reasonably be characterized as costs related to the overall con- struction and development of” a project). 28 See C. J. Langenfelder & Son, Inc. v. Commonwealth, Dep’t of Transp., 44 Pa. Commw. 585, 597, 404 A.2d 745, 752 (1979) (dredging contractor entitled to recover premiums paid for insurance on dredge during period the dredge was idled by fault of the Department of Transportation). 29 See Crawford v. Tex. DOT, 2004 Tex. App. Lexis 7638 (discussing lost bonding capacity). 30 See, e.g., or Electric, Inc. v. Oberle & Assocs., Inc., 741 N.E.2d 373, 381-82 (Ind. Ct. App. 2000) (recognizing that loss of bonding capacity is a form of consequential damages).

NCHRP LRD 88 7 lost during the summer.34 Perini challenged the award in court, arguing inter alia, that such lost prots were not foreseeable as “it would not have accepted such a great risk for the minimal fee of $600,000.”35 Citing testimony that the owner clearly established the façade was meant to “increase its prots by attracting more patrons from the [adjacent] boardwalk,” the court stated that “Perini had to be aware of [the owner’s] motive at the time it en- tered into the contract.”36 It further noted that “[o]n numerous occasions [the owner] informed Perini that it wished to have the project completed prior to the beginning of the summer sea- son, the casino industry’s busiest season.”37 From this, the court upheld the arbitrators’ conclusion that the disputed lost prots were reasonably foreseeable38—and the entire construction in- dustry thus took note that it was possible for a court to award consequential damages in gross excess of the anticipated fee. 2. Mitigating Risk Through Industry Practice and Model Forms To address the huge exposure to consequential damages contractors faced aer Perini, two major trade organizations— the American Institute of Architects (AIA) and the Associated General Contractors of America (AGC)—began including con- sequential damages waivers in their standard contracts in 1997. ese contractual provisions partially or completely disclaim a party’s right to recover such damages. Waivers can signicantly reduce the breaching party’s liability, and the harmed party’s compensation, by barring recovery of otherwise recoverable in- direct damages. ey can also promote certainty by eliminating or reducing unanticipated costs. Since 1997, other construction stakeholders have adopted similar waivers—and craed new kinds of provisions to miti- gate their legal exposure (collectively, “consequential damages provisions”). ese provisions sometimes seek to demarcate losses that can and cannot be recovered as consequential dam- ages through mechanisms like robust denitions or categorical exclusions. Some may disclaim consequential damages in cer- tain circumstances, for example, where such damages would be paid by an insurer. And others may seek to limit consequential damages through liquidated damages clauses, like those limit- ing recovery of damages to a maximum dollar amount, a per- centage of the contract sum, or a value pegged to a contractor’s fee. Section II discusses specic kinds of consequential damages provisions in greater detail. is section provides an overview and summary of the con- sequential damages provisions of a few commonly used model forms oered by organizations involved with the construction industry. It is important to note that these forms reect the per- spectives of the organizations creating them. Furthermore, most major projects have sophisticated legal teams on both sides of 34 Id. at 368. 35 Id. at 374. 36 Id. 37 Id. 38 Id. the table, which will oen use bespoke (or public agency specif- ic) forms that are materially dierent from industry templates. Still, these forms provide a useful starting point for understand- ing dierent approaches used to mitigate risk. a. American Institute of Architects e AIA is a professional architectural organization in the United States that supports architects and the broader profes- sion, in addition to working with other construction industry stakeholders. e AIA publishes numerous sample contracts and forms for use across the construction industry. e forms are divided into six series by document use or purpose. All “Owner/ Contractor Agreements” are found under the “A-Series,” includ- ing the “General Conditions of the Contract for Construction” model form (Form A201-2017).39 Form A201-2017 can be a useful resource for design-build and other major construction projects, and relevant here, it specically includes a mutual waiver for consequential damages: 15.1.7 Waiver of Claims for Consequential Damages e Contractor and Owner waive Claims against each other for con- sequential damages arising out of or relating to this Contract. is mutual waiver includes 1. damages incurred by the Owner for rental expenses, for losses of use, income, prot, nancing, business and reputa- tion, and for loss of management or employee productivity or of the services of such persons; and 2. damages incurred by the Contractor for principal oce ex- penses including the compensation of personnel stationed there, for losses of nancing, business and reputation, and for loss of prot except anticipated prot arising directly from the Work. is mutual waiver is applicable, without limitation, to all consequen- tial damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.40 is provision was inserted following the decision in Perini,41 and it goes further than some comparable model forms in de- ning consequential damages.42 is denitional certainty helps clarify what kinds of losses the parties are waiving, which fur- ther reduces a party’s exposure to unexpected (but reasonably foreseeable) losses. e provision specically carves out “antici- pated prot arising directly from the Work”—a direct damage— from damages incurred by the contractor for loss of prot. e provision also distinguishes liquidated damages as a form of consequential damages. 39 General Conditions of the Contract for Construction, Am. Inst. of Architects (2017), https://help.aiacontracts.org/public/wp-content/ uploads/2020/05/Preview_A201-2017.pdf. 40 Id. at 36. 41 Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 610 A.2d 364 (1992). 42 See Standard Form of General Conditions of Contract Between Owner and Design-Builder, Design Build Inst. of Am. (2010), https://21i.b41.mypupload.com/wp-content/uploads/2019/08/DBIA- Contracts-535-Sample.pdf.

8 NCHRP LRD 88 c. ConsensusDocs A coalition of design and construction industry associa- tions created ConsensusDocs, a collection of standardized con- tract documents that aim to incorporate best practices and fair risk allocation. As mentioned previously, the AGC was one of the rst major trade groups to include consequential damages waivers in their model contracts aer Perini. e AGC is a founder of ConsensusDocs, which now serves as the central re- pository for all AGC endorsed model forms.48 Included in the ConsensusDocs is a “Standard Agree- ment and General Conditions Between Owner and Con- structor (Lump Sum Price)” form (ConsensusDocs 200).49 ConsensusDocs 200 sets forth a limited mutual waiver of con- sequential damages: 6.6 LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES Except for damages mutually agreed upon by the Parties as liquidated damages in Paragraph 6.5 and excluding losses covered by insurance required by the Contract Documents, the Owner and the Contractor agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agree- ment, except for those specic items of damages excluded from this waiver as mutually agreed upon by the Parties and identied below. e Owner agrees to waive damages, including but not limited to the Owner’s loss of use of the Project, any rental expenses incurred, loss of income, prot or nancing related to the Project, as well as the loss of business, loss of nancing, principal oce overhead and ex- penses, loss of prots not related to this Project, loss of reputation, or insolvency. e Contractor agrees to waive damages, including but not limited to loss of business, loss of nancing, principal oce overhead and expenses, loss of prots not related to this Project, loss of bonding capacity, loss of reputation, or insolvency. e following items of damages are excluded from this mutual waiver: None, unless identied elsewhere in the Contract Documents. e provisions of this Paragraph shall also apply to the termination of this Agreement and shall survive such termination. e Owner and the Contractor shall require similar waivers in contracts with Subcontractors and Others retained for the project. is limited mutual waiver applies to consequential dam- ages, but liquidated damages and other specic items described in the waiver are excluded from its scope. d. Engineers Joint Contract Document Committee e Engineers Joint Contract Document Committee (EJCDC) is composed of three major organizations of profes- sional engineers. It develops standard contract documents for engineering design and construction projects. Unlike the model forms described above, the EJCDC’s construction contracts do not contain a general waiver of consequential damages. Instead, the EJCDC’s “Standard General Conditions of the Construction Contract” (Form C700) includes the following provision ad- dressing delays, which could be construed as a waiver of certain consequential damages that normally result from project delays: 48 Contracts & Law, AGC, https://www.agc.org/industry-priorities/ contracts-law (last visited July 1, 2021). 49 Daniel S. Brennan et al., The Construction Contracts Book, 55 (2d ed. 2014). b. Design Build Institute of America e Design Build Institute of America (DBIA) is a member- ship organization that promotes and advances the design-build process. In doing so, the DBIA also provides resources to help guide others through the design-build process. ese resources include various sample contracts, including a “Standard Form of General Conditions of Contract Between Owner and Design- Builder” (Form No. 535).43 In the instruction sheets attached to Form No. 535, the DBIA states that it “believes it is inappropriate for either Owner or Design-Builder to be responsible to the other for consequential damages arising from the Project.”44 Consistent with this prin- ciple, Form No. 535 includes a mutual waiver of consequential damages. However, the waiver does carve out liquidated dam- ages (to the benet of the owner and contractor) or lost early completion bonuses (to the benet of the contractor) from the waiver. Specically, Form No. 535 includes the following consequen- tial damages provisions: 10.5.1 Notwithstanding anything herein to the contrary (except as set forth in Section 10.5.2 below), neither Design-builder nor Owner shall be liable to the other for any consequential losses or damages, whether arising in contract, warranty, tort (including negligence), strict liability or otherwise, including but not limited to losses of use, prots, business, reputation or nancing. 10.5.2 e consequential damages limitation set forth in Section 10.5.1 above is not intended to aect the payment of liquidated dam- ages or lost early completion bonus, if any, set forth in Article 5 of the Agreement, which both parties recognize has been established, in part, to reimburse Owner or reward Design-Builder for some dam- ages that might otherwise be deemed to be consequential.45 e mutual waiver is broad in scope. It does not dene what kinds of losses are to be categorized as consequential damages, and it even waives damages arising in negligence. Addition- ally, Form No. 535 sets forth several indemnication provi- sions under Article 7.46 e general indemnication provisions (which are in addition to several specic indemnities concern- ing hazardous materials, intellectual property, etc.) require the design-builder to indemnify the owner from losses arising from negligent acts or omissions of the design-builder, and vice versa.47 Given the waiver of consequential damages, this indemnication would only be required for direct damages aris- ing from negligence. It is worth noting that nowhere in Form No. 535 is liability for fraud, recklessness, or extreme negligence addressed, so the presumption is that damages arising from such acts also would only be recoverable to the extent that they are direct costs and not indirect costs. 43 Id. 44 Id. at 3. 45 Id. at 18. 46 Id. at 13-15. 47 Id. at 14-15.

NCHRP LRD 88 9 FAR’s unique rules governing consequential damages. Most im- portantly, the federal government can terminate a procurement contract for convenience (i.e., without cause), and if it chooses to do so, the contractor is not entitled to anticipatory prots or consequential damages.53 2. Applicable State Statutory and Common Law States have not adopted a uniform approach to consequen- tial damages in transportation construction disputes. In fact, there is almost a total absence of state statutory and regulatory law discussing consequential damages in this specic context. As a result, contracting parties must pay careful attention to a wide variety of legal authorities—including state statutes and common law governing public procurement, sovereign immu- nity, and damages for breach of contract—when developing a strategy to mitigate risk of consequential damages. is section is not meant to provide an exhaustive look at each state’s law on consequential damages. Instead, it highlights divergence points between states and identies dierent paradigmatic approaches to regulating consequential damages. a. Waiver of Governmental Immunity for Consequential Damages Claims One key issue is whether state law allows the recovery of con- sequential damages against state or local governments at all. For example, New Jersey allows parties to sue the state for liabilities arising out of contract disputes. e state’s waiver of sovereign immunity, however, expressly provides “that there shall be no re- covery against the State for punitive or consequential damages arising out of contract.”54 In interpreting this statute, the Supreme Court of New Jersey stated the rationale behind the bar on con- sequential damages is a desire to protect the state from “losses that it could not foresee or for which it could not plan.”55 Other states take this same approach.56 But not all states have erected a statutory bar on consequential damages. Some states have enacted broad waivers of sovereign immunity, thereby allowing claims for consequential damages. Utah’s waiver of sovereign immunity, for example, provides that “[i]mmunity from suit of each governmental entity is waived as to any contractual obligation.”57 e Utah Supreme Court has construed the state’s waiver as authorizing private litigants to seek consequential damages against governmental actors for an alleged breach of contract.58 Other states have reached the same 53 See Praecomm, Inc. v. United States, 78 Fed. Cl. 5, 12 (2007) (“Under the termination-for-convenience clause, anticipatory prots and consequential damages are not recoverable.”). 54 N.J. Stat. Ann. § 59:13-3. 55 Allen v. Fauver, 167 N.J. 69, 768 A.2d 1055 (2001) (per curium). 56 See, e.g., Tex. Local Gov’t Code Ann. § 271.153(b)(1) (provid- ing that in most cases, “[d]amages awarded in an adjudication brought against a local governmental entity arising under a contract . . . may not include . . . consequential damages…”). 57 Utah Code Ann. § 63G-7-301(1)(a). 58 See Cabaness v. omas, 2010 UT 23, ¶ 57, 232 P.3d 486, 504-08 (Utah 2010). 12.03 DELAYS. D. Owner, Engineer and their ocers, directors, members, partners, employees, agents, consultants, or subcontractors shall not be liable to Contractor for any claims, costs, losses, or dam- ages (including but not limited to all fees and charges of Engineers, architects, attorneys, and other professionals and all court or arbitra- tion or other dispute resolution costs) sustained by Contractor on or in connection with any other project or anticipated project.50 C. Legal Considerations Bearing on Consequential Damages Provisions is section discusses the legal context parties must consider when designing consequential damages provisions or other mitigation strategies. It describes how applicable federal rules and state law bear on those commonly used provisions and strategies. 1. Applicable Federal Rules Federal rules generally do not dictate what consequential damages provisions can and cannot be included in public trans- portation construction contracts. More oen, the use of federal funds requires parties to consent to terms that supplant other provisions or contract law doctrines involving consequential damages. Parties using such funds must therefore consider how these federally imposed requirements shi risks, and if neces- sary, adjust other provisions as a result. An illustrative and important example in the public construc- tion transportation context are Federal Highway Administration (FHWA) funds. FHWA provides funds used for construction, reconstruction, and improvement of eligible federal-aid high- way and bridges. ese funds may also be used on various other special purpose programs or projects. Various eligibility require- ments and restrictions apply to the use of FHWA funds. Relevant here, FHWA funds cannot be used to payout consequential or punitive damages, anticipated prot, or any award or payment of attorney’s fees paid by a state to an opposing party in litigation.51 Many state transportation construction projects rely on fed- eral funds, including funds subject to FHWA and other United States Department of Transportation (USDOT) conditions and restrictions. In these scenarios, state DOTs typically require contractors to agree to a clause waiving the contractor’s rights to seek consequential damages, lest the state DOT bear the risk that they would need to nd alternative sources of funding to remedy a successful consequential damages claim. erefore, public owners on FHWA funded projects should include such provisions when contracting to accept liability for payment for these types of damages and losses. e other way federal rules commonly aect consequen- tial damages in public transportation construction contracts is through the Federal Acquisition Regulation (FAR). e FAR governs how federal agencies acquire supplies and services in most circumstances.52 Parties contracting with the federal gov- ernment to build public transportation must be aware of the 50 Id. at 123. 51 23 C.F.R. § 635.124(e)(2). 52 FAR 1.101.

10 NCHRP LRD 88 requires that public works contracts include a provision allowing the state and private contractors to negotiate “for the recovery of damages related to expenses incurred by the contractor for a delay for which the state governmental unit is responsible, which is un- reasonable under the circumstances and which was not within the contemplation of the parties to the contract.”64 California’s public contract code declares provisions in public contracts that state time extensions are the sole remedy for delay “shall not be construed to preclude the recovery of damages by the contractor or subcontractor” when a delay was unreasonable and not within the contemplation of the parties.65 d. The Uniform Commercial Code In addition to the state law discussed above, it is helpful to note that the Uniform Commercial Code (U.C.C.) also provides a statutory framework for sales and other commercial transac- tions. Although the U.C.C. does not necessarily apply to every public transportation construction contract—it applies to con- tracts for the sale of goods to or by a merchant—the U.C.C. oen provides background principles relevant to contracts it does not explicitly govern, as discussed in more detail below. Every state has adopted at least part of the U.C.C. For ex- ample, most states have incorporated elements of the U.C.C.’s “Contractual Modication or Limitation of Remedy” into their own state laws. Although there may be slight variations between the ultimate versions adopted by dierent states, this U.C.C. sec- tion provides that: (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequen- tial damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.66 is provision prevents contracting parties from exclud- ing consequential damages when such waivers would be unconscionable—for example, when a waiver does not allow the aggrieved party sucient damages to be made whole or when the party beneting from the waiver would be unjustly enriched. Courts have cited this section of the U.C.C. as a reason to nullify unconscionable consequential damages waivers in otherwise enforceable contracts. For instance, in Marvin Lumber & Cedar Co. v. Sapa Extrusions, Inc., the United States District Court for the District of Minnesota refused to enforce a consequential damages waiver when it was foreseeable to the breaching seller that “the purchase price amounted to only a small fraction of the overall repair cost when the product failed.”67 Additionally, courts have applied the doctrine of unconscionability outside of the U.C.C. context.68 64 Ariz. Rev. Stat. § 41-2617. 65 Cal. Pub. Cont. Code § 7102. 66 U.C.C. § 2-719(3). 67 Marvin Lumber & Cedar Co. v. Sapa Extrusions, Inc., 964 F. Supp. 2d 993, 1003 (D. Minn. 2013). 68 See Ford Motor Credit Co. v. Miller, 990 F. Supp. 107, 110 (N.D.N.Y. 1998) (describing the doctrine of unconscionability as a gen- eral principle of contract law). result by relying on basic contract law principles, which allow for recovery of consequential damages.59 b. Statutory Definitions of Consequential Damages A related issue is how state law conditions the recovery of con- sequential damages. Some states dene what can be recovered as a consequential damage. For example, Virginia’s state code pro- vides a cross-code, general denition of consequential damages. It denes them as including “(i) any loss resulting from general or particular requirements and needs of which the breaching party at the time of contracting had reason to know and which could not reasonably be prevented,” and “(ii) any injury to an individual or damage to property other than the subject matter of the trans- action proximately resulting from breach of warranty.”60 is de- nition closely resembles the common law understanding of con- sequential damages and provides little guidance as to what costs are recoverable as consequential damages. Virginia courts have oered some additional clarity, stating “[c]onsequential damages are recoverable only if it is determined as a matter of fact that the special circumstances which caused the consequential damages were not ordinarily predictable but were within the parties’ con- templation at the time the contract was formed.”61 c. Regulating Contractual Provisions on Consequential Damages States also take dierent approaches to regulating contrac- tual provisions that attempt to lessen exposure for consequen- tial damages. e disparate treatment of contractual provisions barring recovery for delay damages is illustrative. As previously discussed, parties can occasionally recoup lost prots caused by delays as consequential damages. As a result, contracting parties sometimes include a risk-shiing clause that eectively bars re- covery of any damages caused by delays. Several states have passed laws rendering such clauses un- enforceable and against public policy. Some states have banned the use of such clauses in construction contracts outright.62 Others have banned the use of such clauses in public works contracts spe- cically.63 And some take more idiosyncratic approaches. Arizona 59 See, e.g., Commonwealth, Dep’t of Transp. v. Cumberland Constr. Co., 90 Pa. Commw. 273, 281, 494 A.2d 520, 525 (1985) (holding Pennsylvania contract law allowed a construction company to seek con- sequential damages against the Pennsylvania Department of Transportation). 60 Va. Code Ann. § 59.1-501.2. 61 McDevitt & St. Co. v. Marriott Corp., 713 F. Supp. 906 (E.D.Va. 1989). 62 See, e.g., Ohio Rev. Code Ann. § 4113.62(c)(1) (“Any provision of a construction contract . . . that waives or precludes liability for delay . . . when the cause of the delay is a proximate result of the owner’s act or failure to act . . . is void and unenforceable as against public policy.”). 63 See, e.g., Colo. Rev. Stat. § 24-91-103.5 (“Any clause in a public works contract that purports to waive, release, or extinguish the rights of a contractor to recover costs or damages, or obtain an equitable adjustment, for delays in performing such contract, if such delay is caused in whole, or in part, by acts or omissions within the control of the contracting public entity or persons acting on behalf thereof, is against public policy and is void and unenforceable.”).