The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes:
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.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 concluding phrase “except anticipated profit arising directly from the Work” enshrines a distinction that many courts were already making between lost profits as direct damages and lost profits as consequential damages.
In Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, Merrimack County Superior Court No. 2017-CV-00132 (June 8, 2017), a lawsuit against an IT service provider, the parties’ contract excluded liability for “any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of data, business interruption, or loss of profits, arising out of the work performed or equipment supplied by the Service Provider . . .” The Court concluded that the quoted language “can only be construed to exclude incidental or consequential damages, such as lost profits, resulting from the data breach. It cannot be construed to exclude damages for lost profits directly caused by Pittsburgh’s breach.”
The distinction between lost profits as direct damages and lost profits as consequential damages turns on “whether the lost profits flowed directly from the contract itself or were, instead, the result of a separate agreement with a nonparty,” Biotronik A.G. v Conor Medsystems Ireland, Ltd., 22 N.Y.3d 799, 808, 11 N.E.3d 676 (2014). A commercial owner's lost profits will always be of the latter type. A contractor's might or might not be; its lost profits on the contract breached will qualify as direct damages, but lost profits on concurrent or future projects will not.
Should you agree to a mutual waiver of consequential damages in your contract? As between owner and contractor, the mutual waiver generally favors the contractor; an owner is more likely to suffer consequential damages from the contractor’s breach than vice versa. While a waiver of consequential damages will preclude recovery for a contractor’s lost opportunity to perform other profitable work, that scenario normally arises only when its work is delayed by the owner – and if a “no damage for delay” clause is also in the contract, that ship will have already sailed.