Construction contracts—whether between owners and architects or owners and contractors—often contain mutual waivers of consequential damages; however, before agreeing to such a waiver, owners and their counsel should fully understand the nature of consequential damages and the effect of the waiver.
Damages In General
When an owner of a construction project brings an action for damages arising from a breach of duty or contract against an architect or contractor, the owner, absent a contractual limitation, may seek compensation for (1) direct and immediate costs, or loss of contract value, that naturally and usually flow from that sort of breach (“direct damages”); and for (2) such incurred costs, or economic harm, which can reasonably be said to have been in the contemplation of the parties when the contract was made (“special” or “consequential damages”). The dollar value sought as damages, e.g., repair costs, the cost of cover, lost rents, lost profits, or extended administration costs, and its components must pass the legal tests of causation, certainty, and foreseeability.1 This is relatively straight forward with respect to direct damages. Consequential damages, however, are more difficult to establish and are subject to a higher burden of proof.2
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