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

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16 NCHRP LRD 88 IV. CONCLUSIONS AND FUTURE CONSIDERATIONS Ignoring consequential damages in public transportation contracts can result in lengthy disputes over the parties’ inten- tions, contemplations, and liabilities. Accordingly, the impor- tance of well-draed and carefully considered consequential damages provisions cannot be overstated. Draing issues—from ambiguous language to poorly dened consequential damages and exceptions clauses—can have expensive consequences. For- tunately, careful draing can help avoid these kinds of mistakes. Although the circumstances of each project should shape the contracting parties’ approach to consequential damages, there are certain considerations parties should take into account when draing contracts. e following checklist, which operationalizes the ndings and conclusions of this study, is intended to provide assistance for those draing consequential damages provisions. 1. What Is the Background Law Bearing on the Project? • Is project funding conditioned on terms that restrict pay- ment of consequential damages, like those provided by the federal government? • Does the relevant state allow recovery for consequential damages, and if so, against whom? Does the state condition or limit what can be recovered as a consequential damage? Does the state limit what provisions can be used in a contract to mitigate risks from excessive consequential damages? 2. Is There a Need to Limit Exposure to Consequential Damages? • Are damages that may be categorized as consequential likely to arise in the event of a breach of contract? If so, does the draing party want the right to recover such damages or limit recovery by the other party? Note: e absence of a consequential damages clause may be interpreted as evidence that consequential damages were not contemplated by the parties when entering into the contract, thereby limiting the party’s ability to recover such damages. erefore, if the answer to the rst two questions posed above is “yes,” it is best practice to include some kind of consequential damages provision. 3. What Are the Most Likely Consequential Damages Given the Specific Project? How Should They Be Defined in the Contract? • Is the project intended to generate ongoing revenue or prots? • Is the project outcome likely to impact either party’s reputa- tion, particularly if it involves a private party hoping to cite the project in future bids? • Will there be negative impacts to the public if the project is delayed? • Will the ongoing costs be considerable to either party if the project is not completed on time and in accordance with the project specication? • Are there project-specic losses likely or unlikely to occur that need to be specically discussed in the contract? • Are there jurisdictional considerations, based on state stat- utory or common law, that warrant including specic losses in the contract? Note: It is best practice for provisions mitigating the risk of con- sequential damages to be tailored and proportional to the kind and size of consequential damages likely to ow from a breach. Dening consequential damages is of critical importance as it will both show what the parties contemplated in entering into the contract, and it will ensure that the contract gives eect to the intended purpose. Even the best consequential damages pro- vision can be rendered impotent by a failure to dene the losses it covers. Courts have been reluctant to recognize waivers that are overbroad, meaning it is critical that parties clearly articulate what they intend to include as consequential damages. Further, it is just as important to make clear the limits of consequential damages, which may correspond to those damages which are already covered by insurance or other contractual mechanisms. 4. Would the Parties Rather Address Consequential Damages as a Matter of Liquidated Damages? • Are there broader project goals—like a damages cap—that could better mitigate the parties’ risks? Note: Liquidated damages provisions are also used to govern recovery of damages for delay, as both represent time-related damages. Whether this approach suciently mitigates the risk of consequential damages depends on the perspective of the contracting entity. Importantly, liquidated damages accrue only until substantial completion, presenting an opportunity to cra a consequential damages clause that allows for recovery of delay-related damages only following substantial completion, thereby eliminating the overlap. Draers should carefully con- sider the interplay between the liquidated damages and conse- quential damages clauses. 5. How Do Other Contract Clauses Bear on Consequential Damages Provisions? • Are there insurance and indemnity provisions that already limit consequential damages, or are better suited to address the risk of consequential damages? Note: e contract may already contain indemnity limitations that cap liability for damages at a dollar value which may cor- respond to insurance limits or a percentage of the contract fee. ese types of clauses, on their own, would be an eective limi- tation of consequential damages and would eliminate the need to dra and negotiate consequential damages clauses.