What is the Consequence of Excluding Consequential Damages from a Construction Contract?
What is the Consequence of Excluding Consequential Damages from a Construction Contract?

Excluding consequential damages has become a regular part of negotiating engineering and construction contracts. A typical clause excludes recovery of indirect, exemplary, and consequential damages for both parties. Beyond these broad categories, there is often little negotiation as to the specific types of damages that are excluded.1

The lack of more extended negotiations, however, can result in unintended consequences. Most courts agree that lost profits unrelated to the contract at issue are consequential in nature.2 Beyond these types of lost profits there are few categories of damage that courts consistently classify as consequential. Instead, courts have held that common damages arising out of construction projects (i.e. delay damages3 and repair costs4) are direct in some circumstances and indirect in others. 

Accordingly, when drafting or negotiating a consequential damages waiver, keep in mind that case law provides very little certainty with respect to the classification of damages as direct or consequential. To avoid unintended risks, consider a definition of consequential losses. Would your definition of consequential losses include some or all of the following losses relating to:

  1. Revenue or profits
  2. Anticipated savings
  3. Goodwill or injury to reputation
  4. Business opportunity
  5. Corruption to data
  6. Use or opportunity
  7. Financing or bonding capacity
  8. Loss of product or production
  9. Business interruptions
  10. Principal office expenses including compensation of personnel stationed there

Also consider whether it makes sense to carve out certain damages from the definition of consequential damages — for example those provided for elsewhere in the contract — to avoid inconsistent interpretations.

1 In fact, the Texas Supreme Court recently wrote “the line between direct and consequential damages often is not a bright one.” James Constr. Group, LLC v. Westlake Chem. Corp., No. 20-0079, 2022 WL 1594955, at *18 (Tex. May 20, 2022).

2 See e.g. County of Galveston v. Triple B Services, LLP, 498 S.W.3d 176, 185 (Tex. App.—Houston [1st Dist.] 2016, pet. denied).  “However, lost profits that represent the benefit-of-the-bargain measure of damages required to restore the plaintiff to the economic position he would have enjoyed if the contract had been performed are 'direct' damages when shown to be 'conclusively presumed' to have been foreseen by the parties as a usual and necessary consequence of a breach.”  DaimlerChrysler Motors Co., LLC v. Manuel, 362 S.W.3d 160, 181 (Tex. App.—Fort Worth 2012, no pet.)

3 Zachry Const. Corp. v. Port of Houston Auth. of Harris County, 449 S.W.3d 98, 114 n. 71 (Tex. 2014) (“Delay damages are consequential damages”) but see Tennessee Gas Pipeline Co. v. Technip USA Corp., 01-06-00535-CV, 2008 WL 3876141, at *8 (Tex. App.—Houston [1st Dist.] Aug. 21, 2008, pet. denied) (holding that certain delay damages were direct).

4 Powell Elec. Sys., Inc. v. Hewlett Packard Co., 356 S.W.3d 113, 119 (Tex. App.—Houston [1st Dist.] 2011, no pet.) (holding that certain  repair costs were not consequential) but see Reynolds Metals Co. v. Westinghouse Electric Corp., 758 F.2d 1073 (5th Cir. 1985) (holding certain repair costs were consequential under specific facts of the case).

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