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

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NCHRP LRD 88 11 *** Given the dierent approaches states take to allowing for the recovery of consequential damages and the enforcement of provisions limiting them, parties constructing public transpor- tation projects must closely review the statutory and common law in the relevant state. II. CONSEQUENTIAL DAMAGES CLAUSES AND DRAFTING ISSUES In the transportation construction context, consequential damages usually result from a project being behind schedule, defective, or over budget. Delayed completion means delayed revenue collection, which may lead to claims for consequential damages. Partial completion due to cost overruns can also lead to losses deemed consequential damages. As previously discussed, Perini demonstrated the importance of limiting consequential damages given the devastating costs that could result from a failure to do so. And other cases illustrate the reverse—when consequential damages clauses can restrict recovery too broadly. Only a well-draed provision can achieve the intended eect. is section therefore describes the pros and cons of including consequential damages clauses in public trans- portation construction contracts. It then highlights certain issues parties should keep in mind when draing such provisions. A. Benefits of Including Consequential Damages Clauses Well-draed consequential damages clauses can signi- cantly benet the contracting parties. Four key benets are de- scribed below. (i) Lower the total amount of damages paid in litigation: Most obviously, a well-draed consequential damages provision can lower the total amount of damages paid by a party in breach. For example, in Kiewit Oshore v. Dresser-Rand, Dresser-Rand sued its contractor, Kiewit, aer a delay caused Dresser-Rand to incur liq- uidated damages under a contract with a third party.69 e court denied recovery, holding that the requested liquidated damages were of a consequential nature and therefore barred under the consequential damages waiver included in the contract between Dresser-Rand and Kiewit.70 (ii) Cost savings from more clearly dened damages risks: It is common, particularly in construction contracts, for contractors to include a “risk premium” in their price to complete the work. Including consequential dam- ages clauses provides certainty as to what risks, if real- ized, would be payable by the contractor in the form of damages. is allows for the contractor to more appro- priately price their “risk premium” with the potential 69 Kiewit Oshore Servs. v. Dresser-Rand Glob. Servs., 2016 U.S. Dist. LEXIS 117835, at *2–3 (S.D. Tex. Sep. 1, 2016). 70 Id. at *33–35. for savings. A consequential damages waiver can be an eective tool in limiting exposure for both contractors and subcontractors and, therefore, minimizing the “risk premium” an owner may be subject to. (iii) Ensuring the parties are a good t for the contracted work: By clearly dening the bounds of liability, con- tracting parties can evaluate a project with their pre- ferred level of legal exposure in mind. It is to both parties’ benet to have a realistic and quantiable ex- pectation of their potential liability to ensure that both parties are equipped to satisfy their obligations with respect to damages, should the need arise. (iv) Acting as a deterrent to litigation: e presence of a con- sequential damages clause also lessens the possibility that contracting parties will litigate future disputes, as their rights to recovery are set out explicitly in the gov- erning contract. B. Challenges of Including Consequential Damages Clauses Still, consequential damages clauses do pose certain chal- lenges. Several of these issues are discussed below. (i) Draing issues that may prevent parties from receiving their bargained-for benet: If a party is ambiguous in its draing and mistakenly believes certain costs are direct and not consequential, a consequential dam- ages waiver may prevent them from recovering costs they believed they had bargained for. Reynolds, dis- cussed earlier, demonstrates this risk.71 Reynolds likely entered into the contract believing that it had bar- gained for a functioning transformer and that it could recover costs caused by a nonfunctioning transformer. However, a broad consequential damages waiver that did not expressly set out the scope of the recover- able damage prevented Reynolds from receiving this benet. (ii) Draing issues that may lead to large losses and claims: In Perini, the complete absence of a consequential damages clause led to an award of damages that was substantially greater than the original contract sum.72 But a poorly draed consequential damages clause may yield a similar result. Specically, there is poten- tial for signicant losses if the clause is not draed in a way that limits liability or the scope of those damages. For example, seemingly tangential lost prots could still be included as direct damages if a contract does not clearly dene the scope of the project and revenues at issue. 71 Reynolds Metal Co. v. Westinghouse Elec. Corp., 758 F.2d 1073, 1074 (5th Cir. 1985). 72 Perini Corp. v. Greate Bay Hotel & Casino, Inc., 129 N.J. 479, 529, 610 A.2d 364, 390 (1992).

12 NCHRP LRD 88 C. Considerations When Drafting Consequential Damages Clauses To maximize the benets and minimize the challenges dis- cussed above, parties draing consequential damages clauses should keep the below considerations in mind. 1. Ambiguity in Drafting Ambiguity in a contract is found where the language used can have more than one reasonable interpretation.80 To resolve such disputes, courts will look to the broader written contract and aim to “ascertain the true intent of the parties as expressed in the instrument.”81 While ambiguous contract provisions are generally construed against the party that draed the agree- ment, “courts may not rewrite contracts, particularly com- mercial agreements arrived at following lengthy negotiations between two corporations of equal bargaining strength.”82 Ambiguous language oen leads to contract disputes and costly litigation between parties. Equally important, ambiguity can lead to high and unexpected damages awards. Dening what losses are and are not consequential is a factual question resolved by a jury.83 Allowing a jury to decide what the contract means introduces huge uncertainty and risk into the litigation and contracting process. Relatedly, ambiguous language may result in parties paying awards for losses they meant to disclaim in consequential damages provisions.84 When contract provisions are unambiguous, both parties should reasonably know what to expect and what is at risk if a breach of contract occurs. Ensuring that the consequential dam- ages waiver is draed unambiguously can greatly reduce the risk of exposure to unexpected damages. 2. Express Exceptions As a general rule, contractual waivers of consequential dam- ages are enforceable because “parties to a contract have the power to specically delineate the scope of their liability at the time the contract is formed.”85 Still, as demonstrated in U.C.C. Section 2719, contract law counterbalances this unfettered 80 Nat’l Union Fire Ins. Co. v. CBI Indus., 907 S.W.2d 517, 520 (Tex. 1995). 81 Id. 82 Lincoln Pulp & Paper Co. v. Dravo Corp., 436 F. Supp. 262, 269 (D. Me. 1977). 83 Am. Elec. Power Co. v. Westinghouse Elec. Corp., 418 F. Supp. 435, 459 (S.D.N.Y. 1976) (“In general, the precise demarcation between direct and consequential damages is a question of fact, and the com- mercial context in which a contract is made is of substantial importance in determining whether particular items of damages will fall into one category or the other.”); see also Team Contractors, L.L.C. v. Waypoint NOLA, L.L.C., 2017 U.S. Dist. LEXIS 160763, at *10 (E.D. La. Sep. 29, 2017); Civic Ctr. Drive Apartments Ltd. P’ship. v. Sw. Bell Video Serv., 295 F. Supp. 2d 1091 (N.D. Cal. 2003). 84 See Abercrombie & Fitch Stores, Inc. v. Penn Square Mall Ltd. P’ship., 2018 OK CIV APP 56, 425 P.3d 757 (holding that a consequen- tial damages waiver needed to be more explicit in order to bar tort dam- ages, which one party had argued were consequential damages). 85 Apache Bohai Corp. LDC v. Texaco China BV, 480 F.3d 397, 406 (5th Cir. 2007). (iii) Range of potential loss or damage claims: When a con- sequential damages provision is ambiguous, there may be a signicant number of claims it could encompass. Unless consequential damages are clearly dened, along with exceptions from a waiver, the expectations of the parties may not be aligned. In Balfour Beatty Rail, Inc. v. Kansas City Railway, Balfour was delayed in completing the construction of a rail line which caused Kansas City Railway to continue to incur track rental fees from Union Pacic for the two-month dura- tion of the delay.73 Although the contract contained a consequential damages waiver, Kansas City Railway sued to recover the track rental fees as direct damages under the contract clause, stating that time was of the essence.74 e court held that the costs were conse- quential as Balfour could not reasonably foresee them as being a result of the delay, despite the “time is of the essence” clause.75 Kansas City Railway failed to meet the standard required for foreseeability, although the court noted that it could have been met by setting out the consequences of delay in the contract.76 (iv) Methods of calculating the losses: Given that the nature of consequential damages is somewhat speculative, particularly for loss of opportunity and reputation damages, it may be dicult to provide a computa- tion of such damages. Clearly stating the availability and scope of these damages in a liquidated damages clauses can help ameliorate this concern. (v) Proving consequential damages: Contracting parties should also recognize that irrespective of contrac- tual language, proving consequential damages is dicult. In Compania Embotelladora Del Pacico, S.A. .v. Pepsi Cola Co., Compania sought consequen- tial damages for loss of prot due to Pepsi violating an exclusivity clause.77 In nding for Pepsi, the court held that Campania’s export report outlining the es- timated damages was “based on what the expert him- self concedes to be unreliable and inaccurate data [and] assumptions.”78 e court therefore held that Campania’s claim did not satisfy the “reasonable cer- tainty” standard for consequential damages, which was higher than the “reasonable estimate” standard used to recovery direct damages.79 73 Balfour Beatty Rail, Inc. v. Kan City S. Ry., 2012 U.S. Dist. LEXIS 106574, at *5 (N.D. Tex. July 31, 2012). 74 Id. at *40. 75 Id. at *59. 76 Id. at *60. 77 Compania Embotelladora Del Pacico, S.A. v. Pepsi Cola Co., 650 F. Supp. 2d 314, 322 (S.D.N.Y. 2009). 78 Id. at 319. 79 Id.