References to consequential damages are often found in construction contracts, without appropriate appreciation as to what, exactly, those damages are. These references are most often found in mutual waivers of such damages; but the question is begged as to what, exactly, is being waived. In the recent case of Lam Platt Street Hotel LLC v Golden Pearl Construction LLC, an appellate court reminds us that waivers of consequential damages are strictly enforced. Accordingly, contractors would be well advised to appreciate the full import of such clauses.
In 2011, Lam Platt Street Hotel LLC entered into an agreement to construct a hotel near the South Street Seaport, and Golden Pearl Construction was retained as the general contractor. The form of contract was an AIA A101/201 combination, which contained a time of the essence clause requiring completion before Super Bowl XLVII, which was held in February of 2014 in (as much as the “New York” football teams eschew the name) nearby East Rutherford, New Jersey. The contract also contained provisions governing termination for cause, which required certification by the project’s architect that the general contractor was in default (and which would also permit Lam Platt to suspend its obligation to make further payments to Golden Pearl until the completion of the project), and for convenience (which required that Lam Platt pay Golden Pearl for all work completed through the termination date). Finally, the contract contained a mutual waiver of consequential damages, which expressly included “rental expenses, loss of use, income, profit, revenue, financing, business and reputation”.
During construction, disputes arose between Lam Platt and Golden Pearl over extra work and payments, and Golden Pearl’s alleged failure to properly staff the project. In December of 2014, Lam Platt and Golden Pearl ostensibly resolved their differences, and the project’s time and price were increased. Unfortunately, this agreement was not the last word on these subjects, and the relationship broke down. In June of 2015, Lam Platt terminated Golden Pearl’s contract, without specifying whether the termination was for cause or for convenience, but also without any certification by the architect. Because there was no architect’s certification, Golden Pearl rejected any claim that the termination was for cause. (Ultimately, the architect refused to certify that the termination was for cause, citing its own contract and claiming that it had no such responsibility to do so.) Golden Pearl subsequently filed a mechanic’s lien against the property, claiming that it was owed nearly $3.2 million.
In February of 2017, Lam Platt sued Golden Pearl for breach of contract, seeking, amongst other damages, delay costs and the profits it would have realized if the project had been completed in time for the Super Bowl. Golden Pearl moved to dismiss this claim, arguing that the damages that Lam Platt sought were specifically barred by the waiver of consequential damages contained in the contract.
The motion court granted Golden Pearl’s motion, and the appellate court affirmed. In doing so, both courts cited to well settled case law that an agreement between the parties to allocate the risk of loss via a waiver of consequential damages must be enforced as written.
As the courts here noted, a waiver of consequential damages is, essentially, an agreement as to how the risk of a breach is to be allocated. To best understand that risk, one must understand what “consequential damages” really are: damages which flow indirectly from the breach (as a consequence of that breach), rather than those which are caused directly by the breach. Unfortunately, this language is not often clear to attorneys, and is frequently the subject of endless argument and court ruling. The best way to illustrate the difference is by example: direct damages often include the cost to repair defective work, the cost to complete incomplete work, the payment owed under the contract, the loss of value of a project as a result of improper work, and the profit the contractor would have received if it had been permitted to complete the job and not improperly terminated; consequential damages, on the other hand, often include lost profits from the intended use of the project, lost rents, or lost profits on jobs not taken because the contractor was tied up on the disputed project (to be contrasted from lost profits on the revenues not realized because of an improper termination, which are considered direct damages), extended overhead and delay costs, increased financing costs, and even lost bonding capacity. Because these items can vary widely—and are often difficult to prove—parties frequently include a liquidated damages provision, as an estimate of damages, along with the waiver of consequential damages. To better understand what would be included and excluded from recovery on any particular project under the applicable contract, contractors would be well advised to consult with experienced construction counsel so that they can fully understand how they are allocating the risks of a breach of the contract they are about to enter.
Parenthetically, it must also be noted that a significant issue in Lam Platt was whether the termination was one for cause or convenience. Crucially, under the contract at issue, no termination could be made for cause without the actions of a third-party to the contract—here, the architect—certifying that the general contractor was in default. The architect declined to issue any such certification because his own contract did not require him to do so. This dichotomy shows the importance of harmonizing all upstream, downstream, and parallel contracts for the consistency of obligations, and making sure that if one contract provides that a third-party is to act as a condition precedent to any action by the contracting party, that such third-party is actually under his or her own obligation to do so.
About the author: Thomas H. Welby, an attorney and licensed professional engineer, is General Counsel to the Construction Industry Council of Westchester and the Hudson Valley, and is the Founder of, and Senior Counsel to the law firm of Welby, Brady & Greenblatt, LLP, with offices located throughout the Tri-State/Greater Metropolitan Region. Gregory J. Spaun, General Counsel to the Queens and Bronx Building Association, and an attorney and a partner with the firm, co-authors this series with Mr. Welby.