Consequential Damages: What Is In The Contemplation Of The Parties?
A supplier selling a $200 door to a building owner does not expect to assume the risk of hundreds of thousands of dollars of damages if the delivery of the door is delayed. The supplier may generally understand that the absence of the front door may keep the owner from renting the space to its tenants. But should the supplier be held liable for those damages, even though they are a direct consequence of the missing door?
The issue of responsibility for “consequential damages” consumes a disproportionate amount of time for lawyers drafting construction contracts these days. On one hand, everyone would agree that some consequences are so remote that nobody should have to bear them (e.g., if the stress and aggravation of a late construction project causes the owner to have to cancel a vacation to Bali, one would not expect the contractor to be liable for that). Other damages are clearly direct and contemplated (e.g., if a contractor fails to complete the project, the owner will have to hire someone else to finish the job, likely at additional expense).
So how about all those “damages” between the extremes? When a residential apartment building is delayed, does the contractor “contemplate” that there will be lost rents? Additional interest due to lenders? Loss of the developer’s reputation? Does the contractor “contemplate” that it will be required to absorb any of those damages?
Traditionally, what has determined who bears that risk is the language of the contract. If the nature of the likely damage is apparent within the four corners of the contract itself, the party in breach will likely have to bear that risk. That is why lawyers spend lots of time negotiating “waivers of consequential damage” clauses that expressly spell out what each party is, and is not, liable for (e.g., carrying costs, real estate taxes, lost business reputation, etc.).
If the contract is silent, but one party could nevertheless be found to have “contemplated” the result of the breach, will that party be liable for the damages flowing from that breach? A recent appellate case said “yes,” thereby expanding the risks previously assumed by contractors in New York.
In this case (also the subject of another blog post by this author, concerning waiver of the right to terminate a contractor), McPherson Builders (“Builder”) was hired to build a steel structure for Performance Premises (“Owner”). When the job ran late, the Owner sought to collect damages for lost income from this “performance arts and events venue.” The contract contained a “time of the essence” clause, but the case did not state that the contract allocated the risk of lost profits to the Builder, or even that the contract advised the Builder what purpose the steel structure was to serve.
In the Builder’s motion to dismiss the claim for lost profits, the court noted that the Owner “submitted an affidavit from one of its members, who averred that he advised the [Builder’s] project manager that the building, upon its completion, would be rented out to host plays, performances, and events.” This apparently was enough to permit the court to determine that such damages may have been “within the contemplation of the parties at the time the contract was entered into.”
Pretty scary stuff. While one may assume that a contractor usually knows what it is building and that it could easily assume what would ensue if the project were to be delayed, that is a far cry from concluding that the supplier of the $200 front door would ever agree to assume that enormous risk.
The takeaway might be that these risks need to be expressly allocated (or disclaimed) in the written contract, lest someone comes along and claims that they told you they had a trip planned to Bali.