Phillip S. Oberrecht
Hall Farley Oberrecht & Blanton, P.A. Boise, Idaho
Significance of the Clause:
In a breach of contract claim, Restatement (2nd) of Contracts at Section 347 provides the general
measure of damages as follows:
Subject to the limitations stated in Sections 350-53, the injured party has a right to damages based on his expectation interest as measured by
(a) the loss of the value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided by not having to perform.
Typically, courts allow under subsection (a) the recovery of direct damages which represent the loss to the injured party by the other party’s failure of performance, such as the difference between the value that the full performance would have had to the injured party less the value of the performance actually rendered.
Incidental and consequential losses have not been consistently defined by the courts in construction contracts. This inconsistency has resulted from the concept that such losses are recoverable if they were reasonably foreseeable by the parties at the time of the contract, or in some circumstances, simply considered to be the natural and probable result of the breach of the contract. In contracts for the sale of goods, incidental and consequential damages have been defined in the Uniform Commercial Code, while in construction contracts, the parties themselves have attempted to define such losses and to limit their recovery in the contracts they enter.
Construction contracts are ordinarily a mixture of a sale of goods and a contract for services. To the extent such agreements are service contracts, the Uniform Commercial Code does not apply. Code provisions can, however, assist the courts in applying common law principles which generally were codified in the Uniform Commercial Code.
Incidental damages are defined in the Uniform Commercial Code as any commercially reasonable charges, expenses or commissions incurred relative to delivery, expenses for transportation, care and custody of goods, expenses in connection with obtaining other goods to cover the loss, plus reasonable expenses incident to delay. Uniform Commercial Code, Sections 2-710 and 2-715.
Under the Code, a buyer is entitled to recover consequential damages which are defined as losses resulting from general or particular requirements and needs of the buyer, of which the seller at the time of contracting had reason to know and which could not have reasonably been prevented by obtaining substitute goods or otherwise, and injury to person or property proximately caused by breach of warranty, without regard to whether the seller anticipated such injuries at the time of contract. Uniform Commercial Code Section 2-715.
In a sale of goods, the Uniform Commercial Code allows the parties to limit their damages and modify or limit their remedies by contract. The parties can contractually limit damages, determine that particular remedies are exclusive and even exclude consequential damages, so long as such exclusion is not unconscionable. Uniform Commercial Code, Sections 2-718 and 2-719. A limitation of consequential damages for injury to a person in a case of consumer goods is prima facie
unconscionable, but where a loss is commercial, limitation of such damages is not. Uniform Commercial Code, Section 2-719(3).
Examples of Incidental and Consequential Damages: Incidental Damages
Courts have dealt with many claims for incidental damages and have found the following to be types of incidental damages for which recovery is allowed, absent their limitation or exclusion: expenses incurred in rejecting non-conforming goods, expenses incurred in obtaining substitute goods and caring for, storing and insuring rejected goods, overtime labor, additional finance charges, handling charges in connection with rejected goods, such as restocking charges, testing the goods to determine if they comply with the contract, attempts to repair defective goods, reasonable resale expenses, and expenses of restoring premises to their original condition when rejected goods have already been installed and had to be removed.
Consequential Damages
Consequential damages are special damages which do not necessarily always result from the breach of contract. Instead, they flow from the breach of contract and were foreseeable. An award of consequential damages must be reasonable and cannot be punitive. Courts have found the following to be consequential damages: idle or down time, extra overhead, extra labor, loss of use, lost profits, lost reputation and lost good will.
Sample Clauses:
Although many construction contracts are custom contracts designed for particular projects, the industry has developed form contracts that have been widely used with varying degrees of modifications for individual projects.
AIA Document A201-2007, General Conditions for the Contract for Construction provides for a mutual waiver of consequential damages at Section 15.1.6. That clause states:
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
1. damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
2. damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.
Consensus Docs 200 Standard Agreement and General Conditions Between Owner and Constructor (Lump Sum Price) provides at Section 6.6 as follows:
Section 6.6. Limited Mutual Waiver of Consequential Damages. Except for damages mutually agreed upon by the Parties as liquidated damages in Section 6.5 and excluding losses covered by insurance required by the Contract Documents, the Owner and the Constructor agree to waive all claims against each other for any consequential damages that may arise out of or relate to the Agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below. The 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, profit or financing related to the Project, as well as the loss of business, loss of financing, loss of profits not related to this Project, loss of reputation or insolvency. The Constructor agrees to waive damages, including but not limited to loss of business, loss of financing, loss of profits not related to this Project, loss of bonding capacity, loss of reputation or insolvency. The provisions of this section shall also apply to the termination of this Agreement and shall survive such termination. The following are excluded from this mutual waiver: _________________________________.
Practice Notes:
Waivers of consequential damages are generally upheld in cases involving business entities such as contractors, subcontractors, suppliers and developers, unless the clauses are found to be too vague to apply, exercised in bad faith, in violation of a particular state’s anti-indemnity law or public policy, inconsistent with other contract provisions, inapplicable to tort damages because of the specific contract language, inapplicable to subcontractors or suppliers or violative of a particular state’s law regarding the doctrine of waiver.
Careful drafting of clauses for the waiver of consequential damages will include as many examples of consequential damages as possible, preceded by the phrase “including but not limited to.” The defense to application of such clauses naturally, therefore, is based on careful analysis of the wording of the clause, plus application of the particular jurisdiction’s law relating to the recovery of such damages and the enforceability of such waivers.
The courts have confused incidental and consequential damages, often using the terms interchangeably. That confusion can and should be overcome with careful drafting of waiver provisions which clearly delineate the damages the parties agree to refrain from asserting against each other in the event their good relations end in dispute.