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, 2020 WL 5637697 (N.H. Supreme Ct. Sept. 22, 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 or equipment supplied by the Service Provider . . .” 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."
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., 2020 WL 4248507 (N.H. Supreme Ct. July 24, 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.” 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.” The Court deemed damages “arising out of or relating to” the contract to be consequential, and concluded that the cap trumped the waiver.
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, 2020 WL 5637697 (N.H. Supreme Ct. Sept. 22, 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 or equipment supplied by the Service Provider . . .” 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."
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., 2020 WL 4248507 (N.H. Supreme Ct. July 24, 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.” 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.” The Court deemed damages “arising out of or relating to” the contract to be consequential, and concluded that the cap trumped the waiver.
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