Construction Contracts and Damages Provisions:
How to Avoid or Minimize the Chance of Costly Litigation
By Jarred W. Boyer, Attorney; Carmody MacDonald P.C.
Throughout the construction industry, from project costs to material costs to labor costs, prices are rising. As construction projects become more expensive, and more money is injected into the industry, there comes a significant increase in the likelihood of disputes and litigation.
A well-drafted damages clause in a contract can cap total exposure to claims and can waive certain claims altogether.
Common damages clauses include:
- Liquidated Damages
For liquidated damages during the contract negotiation phase, the parties agree on an amount to be owed if a breach of contract occurs by either party. Such provisions in the contract are typically limited to a specific type of breach or claim, such as a delay claim. For a delay claim, a liquidated damages provision could be agreed upon as a set amount owed for every day the project runs over schedule. The owner would only be able to recover the amount agreed upon multiplied by the number of days the project was over schedule, no more and no less. This allows for the parties to determine a reasonable and fair damages amount for a delayed project, without having to undertake a lengthy and expensive legal process to prove the damages.
- Limitations on – or Waiver of – Consequential Damages
Consequential damages are indirect damages incurred as a result of a breach of a contract. Such damages can include lost income, increased financing costs, continued staffing costs, and offsite storage costs. Consequential damages can become a contentious point in any dispute as they are not easily calculable and can accrue to become significantly larger than the direct damages caused by the party’s breach. Addressing such damages in the contract allows for the parties to limit their potential risk and liability in the event of an unforeseen breach. It also allows for the parties to ensure that the potential consequential damages will not accrue in excess of their potential revenue on the project.
- Limitations on Total Damages
While damages provisions that cover any and all claims are the best to include in a contract, they are the hardest for the parties to agree on. Owners are reasonably skeptical about total damages limitations which could potentially prevent them from recovering all of their direct damages in the event of a breach. One common approach is to tie the total damages limit to the value of the contract in some form, either as a percentage of the contract price or equal to the total amount of the contract.
Provisions such as these will likely add time to the contract negotiations but are invaluable protection if a dispute arises. Damages clauses, by limiting the amount in dispute, can allow for claims to be resolved faster, with less legal expenses, and for a lower settlement amount than they likely otherwise would be.
Any contracting party who is contemplating how damages provisions could help manage their risk and help protect them against potential claims should contact their attorney as every state has different statutes and caselaw governing damages provisions.
This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely upon advertisements.
Contact: Jarred W. Boyer, Attorney
Carmody MacDonald P.C. www.carmodymacdonald.com