The Construction Advantage, Consequential Damages, A Reminder from the ME Attorney General’s Office for Contractors & The Eichleay Formula
Consequential Damages: What Are They and Why Should You Be Afraid of Them?
“For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the battle was lost.
For want of a battle the kingdom was lost.”
So goes the old proverb that would teach most normal people the virtue of attention to detail. Lawyers and construction lawyers, not being normal people, read this differently. The question for us is “who bears the risk of the loss of the kingdom?” And the corollary: “who pays for it?”
If your client is the former king, rotting in a dungeon and fretting over his lost kingdom and shattered dreams of perpetual wealth and power for his heirs, what are his remedies? Can he recover the value of his kingdom from the poor distracted blacksmith? Is there anyone else out there who might be liable? What about insurance?
And if your client is the poor distracted blacksmith, with the entire aristocracy bearing down on him/her, is he or she really on the hook for the whole kingdom? Whence his or her dreams of a burgeoning blacksmith business to pass on to children and grandchildren?
Taking this nail situation to a more current construction setting, when the wrong nails are applied, is the contractor responsible to replace the paneling that blows away? The water damage inside the building? The car that the paneling hit when it blew off the building? The people hurt in the car accident that caused? The owner’s interest and rental expenses during the construction delay? The owner’s lost profits on another project it was financing with the profits they expected on this project?
The legal concept for these types of injury is “consequential damages.” Most construction contracts include sections addressing consequential damages in the part of the contract that clients generally refer to as “boilerplate,” meaning “not as interesting as stuff like price, time, the specifications, and retainage” or “let the lawyers worry about it.” But as the possible magnitude of damages in the above examples illustrate, the importance of these “boilerplate” provisions can far outweigh the initially more interesting ones if things on a project start going wrong.
Black’s Law Dictionary defines “consequential damages” as “[s]uch damage, loss, or injury as does not flow directly and immediately from the act of the party, but only from some of the consequences or results of such act.” First year law students in their required contracts classes all read an old English case called Hadley v. Baxendale to learn the concept. It is a classic delay case: a critical component of a mill broke and forced the mill to shut down, and the miller rushed the part off to have a new one fabricated. The blacksmith was late delivering the component, and the miller sued for its lost profits during the shutdown. The court held for the blacksmith, finding that this sort of damage is not what the blacksmith would normally expect if its work were late, and the blacksmith had no way of knowing the delayed delivery would cause a shutdown.
The Black’s definition of “consequential damages” continues to say:
“[t]he term “consequential damage” means sometimes damage which is so remote as not to be actionable; sometimes damage which, though somewhat remote, is actionable; or damage which, though actionable does not follow immediately, in point of time, upon the doing of the act complained of.”
Arguing after the fact about whether some sort of injury was foreseeable or predictable and arguing over semantics which can be interpreted in multiple ways by lawyers can be tremendously expensive and risky both because of the stakes and the uncertainty of the outcome. It’s the sort of thing that makes people hate lawyers and makes good lawyers want to try to address these issues before problems arise.
The potential cost and the uncertainty of consequential damage claims leads many parties to waive consequential damages in their contracts. The popular AIA A201 includes a consequential damages waiver and also helpfully includes a list of common types of consequential damages from the perspective of the contractor and the owner so that alert parties may understand just what they are letting go. For the owner: damages incurred “for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity…”. For the contractor: damages incurred “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.”
These types of damages can all be costly and hard to prove, and often the parties can improve good long-term relationships and decrease the chances of expensive litigation by agreeing to take them off the table. At the same time, these damages can be real and deep, and parties should fully consider the risks before waiving them. They may also consider other ways to address the risks, including liquidated damages – a good topic for a future Construction Briefings article.
A Reminder from the ME Attorney General’s Office for Contractors
In today’s market, contractors are busier than ever. At a time when the work is plentiful, the ME Attorney General’s Office just provided contractors with a stark reminder that they need to be realistic about how much work they can handle and that the trust of clients, especially consumer clients, must be respected.
Earlier this month, the ME Attorney General’s Office announced that a Knox County Grand Jury returned a criminal indictment against general contractor Malcolm Stewart, who did work as Castle Builders. Stewart was indicted on charges of theft by deception from 57 consumers in the Mid-Coast area. Specifically, the indictment alleges that Stewart induced consumers to pay deposits totaling over $400,000 for home construction projects that he knew he did not have the capacity to complete. The State further alleges that for the majority of the consumers, Stewart performed no work and for a few, he performed minimal substandard work.
The state alleges that Stewart closed the business in September 2019 with no notice to his clients and left the state for South Carolina. A warrant has been issued for his arrest. In addition, the State has filed a civil action against Stewart and his wife under the ME Unfair Trades Practices Act. That December 2019 civil action is still pending.
With his announcement of the indictment, Attorney General Aaron M. Frey issued a reminder to consumers: “ME does not license home construction contractors so consumers must proceed with caution when hiring a contractor. Ask your friends and family for the names of people who have done good work for them. Check references and do some research to determine if the contractor is reputable or has many complaints.”
As a construction lawyer, I am happy to say that I work with so many wonderful contractors who meet Attorney General Frey’s standard. Therefore, I do not expect any of you to have legal issues as serious as the one described above facing you or your company, but for anything less than that an early call to counsel can go a long way to resolving the issue, and helping you sleep at night.