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I WAIVED WHAT?

What it Means to Contractually Waive Consequential Damages

By: Mark T. Snelson

Effective risk management in the

construction industry begins with properly

drafting a contract that shields away the

unanticipated consequences of a project

gone wrong. No matter where your

company lies in the hierarchy of a

construction project (owner, design

professional, design subconsultant, general

or prime contractor, subcontractor, sub-

subcontractor, or material supplier), you

are no doubt aware that the rights and

remedies enjoyed by you and the party

with whom you have contracted are

primarily determined by the terms of your

contract. One of the quintessential risk

management provisions often included in

construction contracts is a waiver of the

right to recover consequential damages in

claims between the contracting parties.

You have almost certainly seen such

provisions (commonly used AIA contract

forms include clauses waiving

consequential damages), and you may have

signed contracts containing them in the

past. However, have you ever wondered

what exactly a “consequential damage” is,

and, therefore, what you were agreeing to

give up in the event your contractual

relationship sours? The purpose of this

article is to explain the differences

between “direct” or “general” damages

and consequential damages, and to identify

certain categories of damages typically

considered to be consequential, so that

you can be fully informed before agreeing

or disagreeing to these often-arising

contract provisions.

In Florida and many other jurisdictions,

parties are generally free to contractually

limit or waive claims for certain damages

that may arise as a result of a breach of

their contract, including claims for

consequential damages.

A typical example

of a contractual waiver of consequential

damages may read as follows:

The Contractor and Owner

waive Claims against each other

for consequential damages

arising out of or relating to this

Contract.

Many times the contract will then list

specific examples or categories of damages

being waived. Such provisions are not the

exclusive province of owner-contractor

agreements; consequential damage waivers

frequently appear in contracts between

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owners and design professionals and

between general contractors and

subcontractors.

An important question, then, is “What is a

consequential damage?” To answer that

question we have to understand the nature

of “direct” or “general” damages that flow

from a breach of contract. Direct or

general damages are those costs that

immediately and necessarily follow the

violation of a contract. They “are

commonly defined as those damages

which are the direct, natural, logical, and

necessary consequences of the injury.”

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These are expenses that “follow

immediately upon the act done” and

“naturally and necessarily flow” from the

breach of contract.

Examples of direct

or general damages are easy to understand.

An owner and a contractor agree to a

contract that requires the contractor to

replace the windows in the owner’s

building for a price of $15,000. The

contractor mobilizes, removes the

windows on the front of the building, and

begins installing new windows. After the

contractor has installed the first new

window the contractor leaves the job and

never returns to finish. The owner then

hires a replacement contractor to finish

the project at a price of $20,000. In this

example the owner has direct or general

damages of $5,000, the difference between

the amount he would have paid to the

original contractor to perform the job as

contracted and the higher amount he had

to pay the replacement contractor.

There are many other examples in the

context of deficient construction services.

Let’s say a hotel owner retains a pool

building contractor to expand and

renovate the hotel pool, and, after

completion and full payment to the

contractor, the parties discover that the

renovated pool leaks. Assuming the leak

was a result of an act or omission on the

part of the contractor, the hotel owner’s

direct damage would be the cost to repair

the leak.

By contrast, consequential damages are

defined as damages that “do not flow

directly and immediately from the act of

the party, but only from some of the

consequences or results of such act.”

While they are the result or consequence

of a breach of contact, they do not

immediately spring from the breach

because, to some extent, their existence

depends on both the breach of contract

and other circumstances. Florida courts

have defined consequential damages as

those expenses that are specific to the

non-breaching party which typically stem

from losses incurred by that party’s

dealings with third parties that were

reasonably foreseeable by the breaching

party at the time of contracting.

It is

evident from the definitions attached by

legal authorities and commentators that,

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next to the directness, immediacy, and

necessity of the expense, a key factor in

segregating consequential damages from

general damages is whether the expense

arose, at least in part, due to the

involvement of a third party or

circumstances other than the wrongful act

itself. For instance, in the construction

context, delay damages such as material

escalation costs and additional interest and

finance charges are typically classified as

consequential damages.

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The

classification is to be expected considering

these types of damages arise due to the

impositions or requirements of parties that

are outsiders to the breached contract.

For instance, while the owner of a

construction project has to pay more in

interest to its lender as a result of its

general contractor’s breach of contract

and delay in completing the job, the

requirement to pay that interest is imposed

by the terms of the agreement between the

lender and owner.

Going back to the previous examples, if a

storm came through between the time the

original window installation contractor left

the job and the replacement contractor

started, and the storm caused water

infiltration which ruined the hardwood

floors in the owner’s building, the costs to

repair the floors would be the owner’s

consequential damages. If the hotel pool

could not be used during the time it was

leaking and the hotel lost guests and

revenue as a result, the lost revenue or

profits would be the hotel owner’s

consequential damages.

It is difficult to identify all forms of

damages that are classified as

consequential, and the facts of each case

and the other terms in the contract will

influence whether a certain cost is

ultimately determined to be a direct or

consequential damage. However, as a

general proposition, typical examples of

consequential damages in the construction

context include lost rents, rental costs for

replacement property, damages to

business reputation or the loss of

goodwill, down time or idle time, material

escalations, home office overhead costs,

additional energy costs, increased

construction management/supervision

costs, and additional interest and finance

charges. If you sign a contract waiving

claims for consequential damages, these

are the types of expenses you will not be

able to recover from the party that

breaches the contract. Now that you

know what is at stake you can decide

whether agreeing to a contract containing

a waiver of consequential damages is

prudent for your business.

Mark Snelson is a Partner with the law firm Wright,

Fulford, Moorhead & Brown, P.A. in Altamonte

Springs, Florida. Mr. Snelson’s practice is devoted to

construction law. He has experience representing all

tiers of the construction industry, including owners,

design professionals, general contractors,

subcontractors, and material suppliers. He can be

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reached at (407) 425-0234, or

[email protected].

See Doctor Diabetic Supply, Inc. v. POAP Corp., 41 So. 3d

916 (Fla. 3d DCA 2010) (enforcing a contractual

provision barring the recovery of consequential

damages); Action Orthopedics, Inc., v. Techmedica, Inc., 759

F.Supp. 1566, 1568 (M.D. Fla. 1991) (contracts may

limit damages recoverable for breach of contract, and if

such provisions are made, greater damages may not be

awarded); Marriott Corp. v. Dasta Constr. Co., 26 F.3d

1057, 1067 n.17 (11th Cir. 1994) (no damage for delay

clauses in construction contracts are enforceable under

Florida law); Hardwick Properties, Inc. v. Newbern, 711 So.

2d 35, 38 (Fla. 1st DCA 1998) (commenting that

parties unquestionably enjoy the freedom to reasonably

limit their respective remedies under a contract).

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Florida Power Corp. v. Zenith Industries Company, 377 So.

2d 203, 205 (Fla. 2d DCA 1979).

Black’s Law Dictionary (6th ed. 1991); Hardwick

Props., 711 So. 2d at 39.

Black’s Law Dictionary (6th ed. 1991)

Hardwick Props., 711 So. 2d at 40; Saey v. Xerox Corp.,

31 F.Supp.2d 692 (E.D. Mo. 1998) (defining

“consequential damages” as “such damage, loss or

injury as does not flow directly from the act of a party,

but only from some of the consequences or results of

such act”); Trimed, Inc. v. Sherwood Medical Co., 977 F.2d

885, 893 n. 7 (D. Mass. 1990) (same). Florida’s

Uniform Commercial Code defines consequential

damages resulting from a seller’s breach to include

“[a]ny loss resulting from general or particular

requirements and needs of which the seller at the time

of contracting had reason to know and which could not

reasonably be prevented by cover or otherwise.”

§672.715, Florida Statutes.

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See Kenneth M. Block, Time is Money: Contractual

Treatment of Delay Damages, New York Law Journal

(Aug. 29, 2007) (“More often than not, consequential

damages in the construction context result from delays

in construction and can include . . . material escalation,

additional increased interest costs, consultant expenses

and lost profits.”); see also Jason L. Richey and William

D. Wickard, Consequential Damages in Today’s Construction

Industry, Constructioneer (May 5, 2008) <available at

http://www.klgates.com/files/Publication/d2f0d5fa-

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