Many construction contracts refer to consequential damages. Some prohibit their recovery. Others assert a right to collect them in certain circumstances. Often the term is used without an accurate understanding of what consequential damages cover. A contractor, subcontractor or owner who agrees to waive consequential damages may not be aware the effect that waiver has on its potential exposure or recovery in the event of a contract breach.
Like many other legal terms, consequential damages has taken on a meaning that is somewhat different than a strict definition of the words might suggest. Consequential damages do not refer to losses that are a direct natural consequence of a breach of contract. Those losses are considered actual rather than consequential damages. For example, where a contractor breaches its contract by failing to comply with requirements of the plans and specifications, the owner's cost to correct any deficiencies in the contractor's work would be recoverable as actual damages.
Consequential damages are losses that go beyond actual damages. Like actual damages, they also result from breach of the underlying contract. But consequential damages are less direct than actual damages and depend upon other circumstances the parties knew or should have known when they entered into the contract. For example, where the contractor agrees to construct a new office building and completion is delayed because of the necessity of correcting the contractor's defective work that contractor may be liable for the owner's lost rental income in addition to the cost of correcting defective work. That loss of rental income would be considered a consequential damage.
Consequential damages may also be recovered by contractors. For example, where an owner wrongly terminates the general contract thus resulting in loss of the contractor's bonding capacity, business losses incurred by the contractor, because of its inability to obtain bonding, may be recoverable as consequential damages.
Courts in Massachusetts enforce contract provisions that limit recoverable damages. If the general contract in the prior examples included a general waiver of consequential damages, the contractor in the first example would be spared considerable exposure because the owner would be barred from recovering any lost rents; and the contractor in the second example would lose the opportunity to enhance its recovery for the owner's breach of contract because it would be barred from recovering consequential business losses.
It is not altogether clear where actual damages stop and consequential damages begin. Some courts have ruled consequential damages include delay damages as well as lost profits on the contract that is breached. The broader the definition the court assigns to consequential damages, the greater will be the effect of any waiver of consequential damages.
The 1997 version of AIA General Conditions (A201) contains a new article 4.3.10 listing specific examples of consequential damages waived by the project owner and the contractor against each other. Damages listed as waived by the owner include rental expenses, loss of use, loss of income and profit, damages relating to financing, business and reputation, and loss of management or employee productivity. The list of consequential damages waived by the contractor includes home office expenses and overhead, damages for loss of financing, business or reputation and for lost profit, except for anticipated profit on work included in this particular contract.
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