NH Construction Law
  • Home
  • Blog
  • Links

#92:  Lost Profits and Waivers of Consequential Damages

8/13/2020

0 Comments

 
In the law of contracts, damages suffered by the nonbreaching party may be either “direct” (loss of the benefit of the bargain, measured by the cost of remedying the deficient performance) or “consequential” (other reasonably foreseeable harm caused by the breach).  Normally both types of damages, if adequately proven, are recoverable in a lawsuit by the nonbreaching party.  But many commercial construction contracts provide for mutual waivers of consequential damages in the event of a breach.  Typical is the AIA’s A201 General Conditions (2017) § 15.1.7:
 
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 courts have often made between lost profits as direct damages and lost profits as consequential damages.  In Mentis Sciences, Inc. v. Pittsburgh Networks, LLC, 173 N.H. 584 (2020),
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 . . . by the Service Provider,” id. at 587.  The New Hampshire Supreme Court concluded that the quoted language barred the plaintiff's claim for lost profits, noting that while "[l]ost profit damages may be direct or consequential depending on the circumstances . . . the claimed lost profit damages are not direct because the profits lost were not inherent in the contract, that is, the plaintiff did not stand to earn these profits as a direct result of its contract with the defendant."  Id. at 590..

The litmus test for distinguishing lost profits as direct damages from lost profits as consequential damages is “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.

A recent case suggests that consequential damages waivers can be undermined by provisions for capping damages – a common feature of engineering and architectural services contracts.  In Teatotaller, LLC v. Facebook, Inc., 173 N.H. 442 (2020), a lawsuit for wrongful deletion of an Instagram account causing the plaintiff to “lose business and customers,” the defendant’s contract stated that “we won’t be responsible . . . for any lost profits, revenues, information, or data, or consequential, special, indirect, exemplary, punitive, or incidental damages arising out of or related to [the Terms of Use], even if we know they are possible.  This includes when we delete your content, information, or account.”  Id. at 447.  The Supreme Court focused on the contract’s next sentence: “Our aggregate liability arising out of or relating to these Terms will not exceed the greater of $100 or the amount you have paid us in the past twelve months.”  Id. at 447-48.  The Court deemed damages “arising out of or relating to” the contract to be consequential, and concluded that the cap trumped the waiver.

0 Comments

    Author

    Frank Spinella

    Archives

    May 2025
    April 2025
    March 2025
    January 2025
    December 2024
    November 2024
    October 2024
    September 2024
    August 2024
    July 2024
    June 2024
    April 2024
    March 2024
    February 2024
    December 2023
    November 2023
    October 2023
    September 2023
    August 2023
    July 2023
    June 2023
    May 2023
    April 2023
    March 2023
    February 2023
    January 2023
    December 2022
    November 2022
    October 2022
    September 2022
    August 2022
    July 2022
    June 2022
    May 2022
    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    January 2019
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014

    Categories

    All

    RSS Feed

Proudly powered by Weebly