Owner Precluded From Recovering Consequential Damages
In the construction industry, contractors, subcontractors and suppliers are naturally concerned with their liability for consequential damages arising from their breach of contract. Consequential damages must be foreseeable and directly traceable to the breach of contract. If the losses were reasonably foreseeable and within the contemplation of the parties at the time the contract was signed, consequential damages may be recovered. Typical examples of consequential damages include business interruptions, loss of anticipated profits, and loss of rents suffered by the owner from tenants who would have occupied the building but were unable to do so because the contractor walked off the job.
Contractors may shield themselves from liability for consequential damages in the event of a breach by including a clearly worded limitation of liability in the construction contract.
In the recent case of Slade Elevator Industries, Inc. v Eretz Group, Inc., the court ruled on the validity of a contractual clause that excluded liability for consequential damages.
In September of 2009, Eretz Group hired Slade Elevator to maintain the elevators at Eretz's various commercial properties. Eretz stopped making payments to Slade, at which point Slade ceased maintaining Eretz's elevators. Slade also sued Eretz to recover approximately $55,000 in unpaid bills. In response, Eretz filed a counterclaim seeking $500,000 in lost rental income suffered when Eretz's commercial tenants either moved out or were given rental credits because of their dissatisfaction with the operation of the elevators.
Slade moved to dismiss Eretz's counterclaim, arguing that the claim for consequential damages was barred by the contract. The contract provided that Slade would not be held "responsible or liable for any loss, damage, detention or delay caused by nonoperation of said equipment or authorities, or by insurrection or riot, or by any other cause which is unavoidable or beyond its control, or in any event for consequential damage". Eretz made various arguments in opposition, including claiming that this clause only applied to events beyond Slade's control and its ceasing of elevator maintenance work was fully within its control.
The court, relying upon the clear language of the contract, dismissed Eretz's counterclaim. The court held that the clause to exclude liability for consequential damages covers damages for loss of rents sought by the owner in its counterclaim.
Contractors, subcontractors and suppliers can exclude liability for consequential damages in the event of their breach of contract by negotiating an exclusion clause in the contract. This case illustrates that when a contract contains a properly drafted limitation of liability provision, a court will not permit recovery for consequential damages.
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