Construction contracts can, depending upon the project, be extremely complicated. These signed agreements hold each side accountable for money, goods and services. When one party goes into material breach, the other side may be entitled to damages to compensate for the losses created by the breach.
Hard to define
Direct damages occur when the breach causes an additional billable expense, such as fixing design errors or adding cost to the work because it took longer than anticipated. Consequential or indirect damages are harder to define. The claimant must prove two points for the damages to be considered valid:
- These damages were reasonably foreseeable at the time when the parties signed the contract.
- The breach proximately led to damages.
Examples of consequential damages would be an owner’s loss of profits because the building did not open when promised. The contractor or designer could be unable to pursue other business opportunities because the breach slowed the project, damaged their reputation, caused a loss of bonding, or increased bonding costs.
These damages may be waived
Signing a waiver of consequential damages may be the only way to keep a project moving. Some may feel the risk of working on a complicated or large project is too dangerous. No contractor, designer or manufacturer wants to face undefined consequential damages for delaying a project with a hundred-million-dollar budget. Negotiating a mutual waiver may lead to more competitive bids for work. Liquidated damages that limit legal exposure and amounts may also be an option if the parties agree.
Contracts can protect your business interests
It is always smart for architects, designers, contractors and owners to review contracts with an attorney who handles this kind of work. These legal professionals can help clients avoid unnecessary or reckless exposure of consequential damages that can severely impact a business’s reputation or even their ongoing viability.