The Consequences of Betting the Ranch
The Consequences of Betting the Ranch

Different types of damages may be recoverable from a breach of a design, construction, EPC or other construction-related contracts. The baseline damages are “direct” damages, which are necessarily caused by a breach and compensate for the losses, for example the costs to repair faulty work. “Consequential” damages are those that result naturally, but not necessarily, from the breach, for example lost profits.

Most negotiations for these contracts will address the issue of whether to waive claims for consequential damages or to waive claims for other types of damages, such as punitive damages when a party commits fraud. A prime example of this is seen in the widely-used AIA contract forms, which contain a mutual waiver of consequential damages. The form language of AIA’s core document A201 calls for the owner and contractor to mutually waive claims for consequential damages. The language in A201 even cuts past the question of what types of losses are “consequential” damages by listing major categories of them.[1]

.1   The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes

.2   damages incurred by the Contractor 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.

The stakes can be huge in deciding whether to agree to these waivers. Consider the “loss of use” damages incurred when the (leaning and sinking) 30-story Ocean Tower condominium on South Padre Island had to be imploded in 2009. Almost no consequential damages are that extreme. But, when a design or construction mistake amounts to a breach of contract, bearing the cost of lost rental income or process plant downtime, for example, can be catastrophic.

Parties that agree to such waivers should count on them being enforced, even in extreme circumstances. The lawsuit Bombardier Aerospace Corp. v. SPEP Aircraft Holdings [2] concerned Bombardier selling a supposedly new twin-engine jet that turned out to be built with used engines, one of which had been damaged. The jury found that this was fraud. The Texas Supreme Court looked at whether a contractual waiver of punitive damages was enforceable by Bombardier even though Bombardier committed fraud. The waiver of punitive damages clause in the purchase agreement contained an “as is” clause in addition to barring any punitive damages. An “as is” clause can be held invalid for fraud by non-disclosure, such as Bombardier’s non-disclosure about the engines. Although the jury found that Bombardier committed fraud by non-disclosure, and fraud may vitiate an “as is” clause, the “as is” clause had no effect on the buyer’s inability to recover punitive damages under the waiver clause. The Texas Supreme Court found the punitive damages waiver enforceable even though there was fraud.[3]

It all comes down to allocation of risk for losses other than the direct costs to repair faulty work. Many savvy owners will strongly resist waiving the ability to recover consequential damages from those it contracts with. The potential cost to the owner of lost use, income and profit is just too high. Designers and contractors, of course, fight hard to keep the waiver for the same reasons and will not potentially bet the company for one project. These waivers can be just one sentence long in a contract with scores of pages, but few terms carry more consequences.

[1] AIA Document A201-2017 Section 15.1.7.
[2] Cause No. 17-0278, 2019 WL 406075 (Tex. 2019).
[3] Id. at *11-13.

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