“TIME IS MONEY!” IN CONSTRUCTION AND THIS IS WHY THERE IS A LIQUIDATED DAMAGES PROVISION

Posted on January 15, 2022January 16, 2022 by Edward Garber

In construction, the adage “Time is Money!” rings true for all parties involved on a project. This includes an owner of a project that wants a project completed on time, i.e., by a substantial completion date. While substantial completion is often defined as when an owner can use a project for its intended purpose, this intended purpose typically equates to beneficial occupancy (in new construction) and other factors as identified in the contract.

The best mechanism for an owner to reinforce time and the substantial completion date is through a liquidated damages provision (also known as an LD provision) that includes a daily monetary rate for each day of delay to the substantial completion date.

A liquidated damages provision is not designed, and should NEVER be designed, to serve as a penalty because then it would be unenforceable. Instead, it should be designed to reasonably compensate an owner for delay to the substantial completion date that cannot be ascertained with any reasonable degree of certainty at the time the contract is being negotiated and executed. (Liquidated damages are MUCH easier to prove than actual damages an owner may incur down the road.) As an owner, you don’t really want to assess liquidated damages because that means the project is not substantially completed on time. And, in reality, a timely completed and performing project should always be better and more profitable than a late and underperforming project. However, without the liquidated damages provision, there isn’t a great way to hold a contractor’s feet to the fire with respect to the substantial completion date.

There are numerous ways to equitably craft a liquidated damages provision if it is a negotiated provision (like in private projects). It can be based on project phases or milestones. It can be based on one substantial completion date. It can include a grace period. It can include gradual increases in the daily rate based on certain time periods associated with delay. It can be capped at a certain amount to cap the exposure. The bottom line is that it is a risk that gets factored into the contract and substantial completion date to emphasize timely completion.

Many construction contracts will contain a mutual waiver of consequential damages provision. This provision may include specific examples of consequential damages. In other words, regardless of whether such examples truly constitute consequential damages, these damages examples are contractually mutually waived by the parties. Two examples commonly include loss of use damages and increased or additional financing damages. These two examples are categories that do go hand-in-hand with an untimely project. For instance, if a project is late, the owner cannot use the project by the substantial completion date and will have increased and/or additional financing costs. Without a liquidated damages provision, and with a mutual waiver of consequential damages provision, an owner may be sh*t out of luck with recovering delay damages for a delayed project because primary actual delay damages they could prove have been waived. (Thus, there is nothing holding the contractor’s feet to the fire regarding the substantial completion date.) Hence, if you are going to negotiate having no liquidated damages provision, be mindful of the mutual waiver of consequential damages provision and what you may be conceding.

This is important: simply because there is a liquidated damages provision does not mean a contractor should unilaterally be exposed to liquidated damages for a delayed project. There may be legitimate excusable delay that needs to get factored in including excusable compensable delay meaning the contractor is owed its own delay damages. There could be concurrent delay that needs to get factored in. While an owner may not accept a contractor’s request for additional time or claimed excusable or concurrent delay, this does not mean a contractor is just going to cave when it comes to an owner’s assessment and withholding of sums associated with liquidated damages. Most contractors are not going to unless it is irrefutable that the delay to substantial completion was caused by them (more specifically, a trade).

A contractor agreeing to a liquidated damages provision needs to make sure that it flows the risk downstream to trades that may cause the delay. A contractor still needs to prove the trade caused the delay, but the contractor must flow-down that risk. If a trade is unwilling to assume that risk, that needs to be considered by the contractor. In any event, the contractor cannot agree that the trade is not liable for any delay because the risk the contractor has assumed is not transferred to a trade that may cause that risk meaning there is nothing that holds that trade’s feet to the fire.

A liquidated damages provision is neither uncommon nor unreasonable. It is a risk, oftentimes negotiated on private jobs but maybe not the case on public jobs, that is factored in at the onset of any project. It is a risk that cannot be overlooked but is the risk designed to best maximize the emphasis on time is of the essence as to the substantial completion date.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

Consequential Damages can be Recovered Against Insurer in Breach of Contract

Posted on July 5, 2019August 8, 2019 by Edward Garber

In a favorable case for insureds, the Fifth District Court of Appeal maintained that “when an insurer breaches an insurance contract, the insured is entitled to recover more than the pecuniary loss involved in the balance of the payments due under the policy in consequential damages, provided the damages were in contemplation of the parties at the inception of the [insurance] contract.” Manor House, LLC v. Citizens Property Insurance Corp., 44 Fla. L. Weekly D1403b (Fla. 5thDCA 2019) (internal citations and quotation omitted). Thus, consequential damages can be recovered against an insurer in a breach of contract action (e.g., breach of the insurance policy) if the damages can be proven and were in contemplation of the parties at the inception of the insurance contract.

In Manor House, the trial court entered summary judgment against the insured holding the insured could not seek lost rental income in its breach of contract action against Citizens Property Insurance because the property insurance policy did not provide coverage for lost rent. However, the Fifth District reversed this ruling because the trial court denied the insured the opportunity to prove whether the parties contemplated that the insured, an apartment complex owner, would suffer lost rental income (consequential damages) if the insurer breached its contractual duties.

This ruling is valuable to insureds because Citizens Property Insurance, a creature of statute, cannot be sued for first-party bad faith. However, the Fifth District found that the consequential damages in the form of lost rental income did not require the insured to prove the insurer acted in bad faith, but merely, breached the terms of the policy. This holding can be extended to other breach of contract actions against an insurer when the insured suffered and can prove consequential-type damages caused by the breach.

CONSEQUENTIAL DAMAGES CAN BE RECOVERED AGAINST INSURER IN BREACH OF CONTRACT

Posted on June 1, 2019April 24, 2020 by Edward Garber

In a favorable case for insureds, the Fifth District Court of Appeal maintained that “when an insurer breaches an insurance contract, the insured is entitled to recover more than the pecuniary loss involved in the balance of the payments due under the policy in consequential damages, provided the damages were in contemplation of the parties at the inception of the [insurance] contract.” Manor House, LLC v. Citizens Property Insurance Corp., 44 Fla. L. Weekly D1403b (Fla. 5^thDCA 2019) (internal citations and quotation omitted). Thus, consequential damages can be recovered against an insurer in a breach of contract action (e.g., breach of the insurance policy) if the damages can be proven and were in contemplation of the parties at the inception of the insurance contract.

CONTRACTUAL WAIVER OF CONSEQUENTIAL DAMAGES

Posted on December 1, 2018April 24, 2020 by Edward Garber

Contractual waivers of consequential damages are important, whether they are mutual or one-sided. I believe in specificity in that the types of consequential damages that are waived should be detailed in the waiver of consequential damages provision. Standard form construction agreements provide a good template of the types of consequential damages that the parties are agreeing to waive.

But, what if there is no specificity in the waiver of consequential damages provision? What if the provision just states that the parties mutually agree to waive consequential damages or that one party waives consequential-type damages against the other party? Let me tell you what would happen. The plaintiff will argue that the damages it seeks are general damages and are NOT waived by the waiver of consequential damages provision. The defendant, on the other hand, will argue that the damages are consequential in nature and, therefore, contractually waived. FOR THIS REASON, PARTIES NEED TO APPRECIATE WHAT DAMAGES ARE BEING WAIVED OR LIMITED, AND POTENTIALLY THOSE DAMAGES NOT BEING WAIVED OR LIMITED, WHEN AGREEING TO A WAIVER OF CONSEQUENTIAL DAMAGES PROVISION!

Interestingly, this issue appeared in the recent case, Keystone Airpark Authority v. Pipeline Contractors, Inc., 43 Fla. L. Weekly D2601d (Fla. 1^stDCA 2018). Here, a plaintiff sued a contractor and engineer for defects to an airplane hangar and taxiways. The plaintiff claimed the engineer’s negligence through its failure to supervise the work as contractually required which resulted in defective construction. The plaintiff claimed that the engineer was responsible for the costs to repair the airplane hangar and taxiways. The engineer argued under a waiver of consequential damages provision that read:

“Passero [engineer] shall have no liability for indirect, special, incidental, punitive, or consequential damages of any kind.”

The engineer argued that the damages the plaintiff was seeking due to its failure to supervise was excluded under the waiver of consequential damages provision in the contract. The plaintiff argued that such damages are general damages and not barred. The trial court, as affirmed by the appellate court, held that the damage was barred because the damage was consequential. In doing so, the court examined the definitions of the types of damages:

General damages are ‘those damages which naturally and necessarily flow or result from the injuries alleged. . . . General damages ‘may fairly and reasonably be considered as arising in the usual course of events from the breach of contract itself. Stated differently, [g]eneral damages are commonly defined as those damages which are the direct, natural, logical and necessary consequences of the injury.

–

In contrast, special damages are not likely to occur in the usual course of events, but may reasonably be supposed to have been in contemplation of the parties at the time they made the contract. They consist of items of loss which are peculiar to the party against whom the breach was committed and would not be expected to occur regularly to others in similar circumstances. In other words, general damages are awarded only if injury were foreseeable to a reasonable man and . . . special damages are awarded only if actual notice were given to the carrier of the possibility of injury. Damage is foreseeable by the carrier if it is the proximate and usual consequence of the carrier’s action.

–

[C]onsequential damages do not arise within the scope of the immediate buyer-seller transaction, but rather stem from losses incurred by the non-breaching party in its dealings, often with third parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting. The consequential nature of loss . . . is not based on the damages being unforeseeable by the parties. What makes a loss consequential is that it stems from relationships with third parties, while still reasonably foreseeable at the time of contracting.

Keystone Airpark Authority, supra (internal citations and quotations omitted).

Based on these definitions, the court agreed that the repairs to the hangars and taxiways were not special damages as “[i]t cannot be said that repairs stemming from improperly supervised construction work are unlikely to occur in the usual course of business.” Keystone Airpark Authority, supra. Such damages did not involve special circumstances for which the plaintiff would be required to give the engineer actual notice.

BUT… these damages were CONSEQUENTIAL:

[T]he cost of repair here did not constitute general damages, either, because the damages were not the direct or necessary consequence of Passero’s [engineer] alleged failure to properly supervise the construction work. The contractor could have completed the job correctly without Passero’s supervision. Thus, the need for repair did not arise within the scope of the immediate transaction between Passero and the Airpark. Instead, the need for repair stemmed from loss incurred by the Airpark in its dealing with a third party – the contractor. While these damages ‘were reasonably foreseeable,’ they are consequential and not general or direct damages.

The appellate, however, certified the following question of great public importance:

WHERE A CONTRACT EXPRESSLY REQUIRES A PARTY TO SUPERVISE CONSTRUCTION WORK AND TO DETERMINE THE SUITABILITY OF MATERIALS USED IN THE CONSTRUCTION, BUT THE PARTY FAILS TO PROPERLY SUPERVISE AND INFERIOR MATERIALS ARE USED, ARE THE COSTS TO REPAIR DAMAGE CAUSED BY THE USE OF THE IMPROPER MATERIALS GENERAL, SPECIAL, OR CONSEQUENTIAL DAMAGES?

Thus, there could be a ruling in future from the Florida Supreme Court relating to construction industry, specifically relating to the damages associated with a supervising architect or engineer.

WAIVER OF CONSEQUENTIAL DAMAGES AND LOSS OF USE DAMAGES (IN CONSTRUCTION / DESIGN DEFECT DISPUTE)

Posted on January 24, 2015January 24, 2015 by Edward Garber

In construction / design defect cases, a plaintiff (party proving defect) may assert a category of damages referred to as loss of use damages. Importantly, if your contract includes a waiver of consequential damages, these types of damages will not be recoverable. This is a significant issue to consider when entering into a construction contract, especially when you are the owner of the project, because if you do not want to waive a party you hire of consequential damages (such as loss of use damages), then you do not want to include a waiver of consequential damages in your contract or, at a minimum, you want to carve out exceptions to the waiver of consequential damages. Stated differently, this is an issue and risk you want to consider on the front end because even though construction / design defects are not anticipated, they do occur.

In a construction / design defect scenario, an owner’s consequential damages would generally be those damages unrelated to repairing the defect. For instance, loss of use of the property or lost rental income to an owner during the implementation of the repairs would be a consequential damage that would be waived by a waiver of consequential damages provision in an owner’s contract.

An example of a waiver of consequential damages provision found in the AIA A201 (general conditions of the construction contract between an owner and contractor) is as follows:

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.

This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

(See AIA A201-2007, s. 15.1.6)

Now, if loss of use damages are not contractually waived, the recent decision in Gonzalez v. Barrenechea, 40 Fla. L. Weekly D258a (Fla. 3d DCA 2015), illustrates how an owner can recover these types of damages when there is a construction / design defect. In this case, an owner sued its architect for design errors with the HVAC system in a newly constructed home. The owner was forced to engage a new design professional to address the deficiencies. It took the owner 20 months to repair the deficiencies during which the owner claimed he could not live (or use) his new house. Although the owner did not live in the house, there was evidence that the owner had some use of the house. For instance, the owner’s son slept in the house on an intermittent basis, the owner docked his boat at the dock behind the house, furniture was stored in the house, and the owner had cars parked in the garage.

Notwithstanding some use of the house, the owner put on testimony of an expert real estate appraiser that testified that the owner incurred lost rental value of approximately $15,500 per month during the 20-month repair period. The architect argued that this rate was flawed because the expert failed to factor in the use the owner had of the house during the 20-month period. The trial court agreed and denied the owner the loss of use damages.

The Third District Court reversed the trial court finding that the owner was entitled to loss of use damages:

Under Florida law, a homeowner that loses the use of a structure because of delay in its completion is entitled to damages for that lost use. Florida courts have held that “[d]amages for delay in construction are measured by the rental value of the building under construction during the period of delay.”

Gonzalez, supra, quoting Fisher Island Holdings, LLC v. Cohen, 983 So.2d 1203, 1204 (Fla. 3d DCA 2008).

Furthermore, because the architect failed to put on any evidence as to what the rental value of the house should have been during the 20-month period factoring in the owner’s use of the house during this period, there was nothing to refute the owner’s rental rate.

This case touches upon important take-aways:

Consider the risk of a waiver of consequential damages provision on the front end, especially if you are an owner. Likewise, if you are a contractor or design professional, you want to consider the risk of not having such a waiver of consequential damages.
Loss of use damages are recoverable in a construction / design defect case absent a contractual waiver of consequential damages.
An owner can introduce evidence of loss of use damages through an expert real estate appraiser that can testify as to the rental rate of the property during the repair period.
A contractor or design professional defending a loss of use damages claim should engage its own expert to counter an owner’s expert. In this case, if the design professional had an expert real estate appraiser, it would have put on evidence of a rental rate much lower than the $15,500 per month factoring in the owner’s limited use of the house during this time period.

PROVING LOST PROFIT DAMAGES WITH A REASONABLE DEGREE OF CERTAINTY

Posted on October 13, 2013October 13, 2013 by Edward Garber

Lost profit damages are challenging damages to prove, but are an important form of consequential damages that parties seek based on the dynamics of the case. These damages must be proven with a reasonable degree of certainty. The recent Southern District of Florida opinion, Topp Paper Co., LLC v. ETI Converting Equipment, 2013 WL 5446341 (S.D.Fla. 2013), explained:

“Under Florida law, lost profits must be proven with a reasonable degree of certainty before the loss is recoverable. Courts have construed this standard as requiring that the mind of a prudent or impartial person be satisfied that the damages are not the result of speculation or conjecture. In unproven businesses such as Topp’s [plaintiff], Florida courts have allowed damages where the plaintiff proves that (1) the defendant’s action caused the damage and (2) there is some standard [yardstick] by which the amount of damages may be adequately determined.” Id. at *7 (internal citations and quotations omitted).

The first step is the causation requirement, i.e., that the defendant’s conduct caused the lost profit damages that the plaintiff seeks.

The second step is the lost profit methodology demonstrating the plaintiff’s lost profit damages with a reasonable degree of certainty and without speculation. Oftentimes parties retain experts to prove these damages based on the yardstick or standard in which the lost profit damages are determined. However, in Topp Paper, the Southern District maintained that both steps “may be satisfied without resort to expert testimony.” Topp Paper, supra, at *8. In this case, the plaintiff, a new business, planned to show lost profits without an expert by laying the foundation for cancelled contracts with its clients that were solely caused by the defendant’s actions. The plaintiff’s position was that but for defendant’s actions, it would have been able to satisfy the contracts with its actual clients and, because it was not able to, it lost the profit associated with those contracts.

On the other hand, the Southern District would not allow the plaintiff to prove its lost profit damages through income projections by comparing projected income with actual income to assess lost profits. The reason is that establishing lost profit damages through projections would be purely speculative, especially considering the plaintiff’s business was a new business without a history of profits.

In Topp Paper, the plaintiff could be in a position to establish lost profits because it actually had contracts with clients that had to be cancelled due to the defendant’s alleged actions. This was vital because the plaintiff could establish lost profits without the need to retain an expert. However, what if the plaintiff, as a new business, did not actually have cancelled contracts? It would not be able to prove damages through income or profit projections. In this scenario, the plaintiff would need to establish some yardstick to prove its damages with a reasonable degree of certainly. One yardstick could be the plaintiff’s past business and profit history. A plaintiff’s accountant or financial officer could assist in this methodology / calculation (although, if possible, it helps to have this supported by an expert). However, as a new business, the plaintiff did not have a business history. The other way would be to find a comparable business with a comparable business model as the yardstick to establish lost profits. This should require expert testimony and it will be important to work with the expert and cross-examine the expert to flesh out any speculative portion of the yardstick.

The bottom line is that lost profit damages are challenging and require a game plan that will be used to support (1) causation–that the defendant’s action caused these damages and (2) the standard or yardstick that will be utilized to support lost profit damages. A new business will likely have a different game plan than an established business unless there is documentary evidence (such as in Topp Paper) that the business had actual clients that would have been serviced but for the defendant’s actions. Also, knowing that income projections or pro forma profit and loss statements will be deemed speculative, getting an expert involved sooner than later is important to assist with establishing the yardstick or methodology that will be used to prove lost profits with a reasonable degree of certainty.

For more information on lost profit damages, please see https://floridaconstru.wpengine.com/the-difference-between-lost-profit-and-loss-of-use-damages/