www. NYLJ.com Volume 252—NO. 49 wednesday, september 10, 2014

Construction Law

Owner’s Claims By Kenneth M. For Consequential Block

onstruction — or extended administration costs, nance and marketing costs incurred whether between owners and its components must pass the by developer as a result of purchas- and architects or owners legal tests of causation, certainty, ers’ breach of the real estate and contractors—often and foreseeability.1 This is relative- were both reasonably foreseeable and contain mutual waivers of ly straight forward with respect to contemplated by the parties.6 consequentialC damages; however, direct damages. Consequential dam- Recovery of Damages before agreeing to such a waiver, ages, however, are more difficult to owners and their counsel should establish and are subject to a higher Consistent with Benjamin Frank- fully understand the nature of con- burden of proof.2 lin’s “Advice to a Young Tradesman, sequential damages and the effect In practice, the line between direct Written by an Old One,”—“time is of the waiver. and consequential damages can only money”—time-related damages be drawn in the context of the spe- attributable to a contractor’s “inex- Damages In General cific facts of an individual case. Thus, cusable” delay in project comple- When an owner of a construction for example, one form of damages, tion may lead to direct damages7 project brings an action for dam- e.g., lost profits, may be found to be or consequential damages. The ages arising from a breach of duty direct in the context of one case, and latter—additional expenses due to or contract against an architect consequential in another.3 The distin- delays—may include various costs or contractor, the owner, absent guishing characteristic in a given set or economic harm, such as (1) loss a contractual limitation, may seek of circumstances is that consequen- of use;8 (2) additional and extended compensation for (1) direct and tial damages do not always follow a construction financing;9 (3) substi- immediate costs, or loss of con- breach of that particular character. tute facilities;10 (4) extended project tract value, that naturally and usu- Direct damages, which flow natural- administration;11 and (5) lost prof- ally flow from that sort of breach ly or ordinarily from that type of a its,12 unless waived. (“direct damages”); and for (2) such breach, compensate for the value of Lost profits are typically the fore- incurred costs, or economic harm, the promised performance.4 Conse- most among consequential damages which can reasonably be said to quential damages, although not an sought by owners. Lost profits are have been in the contemplation of invariable result of every breach of recoverable if they: are directly the parties when the contract was that kind, may nevertheless be award- traceable to the breach; are not made (“special” or “consequential ed if, under the circumstances, such remote or the result of other inter- damages”). The dollar value sought additional costs can reasonably be vening causes; can be proven to a as damages, e.g., repair costs, the said to have been in the contempla- reasonable certainty; and, lastly, cost of cover, lost rents, lost profits, tion of the parties when the contract are not merely speculative, possi- was made.5 For example, where plain- ble or imaginary.13 In addition, there tiff was a business engaged in the con- must be a showing that the particu- struction and sale of new homes, a lar damages were fairly within the Kenneth M. Block is a member of Tannenbaum Helpern Syracuse & Hirschtritt. Boris Brownstein, an associate fact finder was permitted to conclude contemplation of the parties to the of the firm, contributed to the preparation of this article. that the additional carrying, mainte- contract at the time it was made.14 wednesday, september 10, 2014

Claims for lost profits arising out of to profit from development of the such risk, and instead find that the delay may be found to be too specu- land and that breach would deny parties had not contemplated such lative where the claim for delay itself the plaintiffs those anticipated prof- additional cost.25 is unsubstantiated.15 its.19 Nevertheless, the court denied Waivers For example, in Kenford v. County recovery, reasoning that plaintiffs of Erie,16 the county failed to satisfy could only recover these damages Sophisticated owners and con- its commitment to negotiate a lease if they were within the contempla- tractors can easily anticipate most with the developers for the opera- tion of the parties as the probable consequences likely to result from tion of a stadium and the project was result of a breach at the time of construction contract breaches. abandoned. The intended operator contracting. And what was in the For this reason, contractors and of the stadium sued the county for parties’ contemplation depended on design professionals routinely seek the loss of prospective profits during “the nature, purpose and particu- to obtain a waiver of consequential the 20-year period of the anticipated lar circumstances of the contract damages for fear that an imposition management contract. At trial, the known by the parties…as well as of such damages might have disas- plaintiffs won a multimillion-dollar ‘what liability the defendant fairly trous financial effects, particularly judgment. The intermediate appel- may be supposed to have assumed where there is no insurance cover- late court modified the judgment on consciously, or to have warranted age for claims of an owner. Deter- the ground that expert opinion did the plaintiff reasonably to suppose mining the waiver’s scope can be not provide a rational basis for the that it assumed, when the contract as challenging as determining what calculation of lost profits. The Court was made.’”20 Such a fact-specific damages are “consequential”—and of Appeals, however, denied conse- and subjective inquiry is bound to thus within the scope of waiver— quential damages. A plaintiff seek- produce inconsistent results unless which can vary depending upon the ing lost profits, the Court of Appeals parties marshal evidence bearing factual circumstances. concluded, must demonstrate that on what they had contemplated.21 This distinction became more the “particular damages were fairly important with the adoption of within the contemplation of the par- the 1997 version of the American ties to the contract at the time it was Lost profits are typically the Institute of Architects (AIA) docu- made.”17 Finding that the lost profits foremost among consequential ment A-201, General Conditions award was based on a speculative of the Contract for Construction.’ assessment of how much income damages sought by owners. Section 4.3.10 of the 1997 version would be generated by the never- contains a waiver by the owner and constructed stadium, the Court of A party to a contract also may the contractor of all consequential Appeals held that plaintiff’s proof recover financing costs as . The provision states that failed on the second prong. The damages, apart from prejudgment this waiver includes: court also found, based on the record interest allowable under New York • damages incurred by the owner before it, that lost profits damages State law.22 Generally, courts award for rental expenses, for losses had not been within the contempla- such relief where the injured party of use, income, profit, financing, tion of the parties. can point to costs associated with business and reputation, and for In a sequel to Kenford,18 the court a particular loan that was “commer- loss of management or employee rejected a claim for damages by the cially reasonable and foreseeable” productivity or of the services of stadium developers for the loss of under the circumstances.23 In New such persons, and anticipated appreciation in the val- York, however, claims seeking inter- • damages incurred by the ue of land that they had purchased est as part of damages rarely suc- contractor for principal office on the periphery of the proposed ceed because of the limitations on expenses including the compen- stadium site. The contract stipulat- consequential damages discussed sation of personnel stationed ed that part of the compensation above.24 Thus, for example, in the there, for losses of financing, paid to the county would consist of context of mortgage rates, unless business and reputation, and for increased real property taxes result- the parties had allocated the risk loss of profit other than antici- ing from the enhanced value that of interest rate fluctuating and lead- pated profits arising directly the peripheral land would enjoy as ing to additional costs as a result from the work. a result of the stadium. That clause of a culpable delay in performance, A waiver of consequential damages suggested that plaintiffs expected courts may be reluctant to allocate is also found in the AIA forms for wednesday, september 10, 2014

525 (2012) (for the purchasers’ , the jury owner/architect agreements. first-party claims), architects also properly awarded the vendor consequential damages). Waivers of this nature routinely carry professional liability insur- 7. Lake Steel Erection v. Egan, 403 N.Y.S.2d 387, 389 (1978) (lost profits for delay in grouting the concrete flooring slabs). have been broadly enforced. In 400 ance, which will cover claims for 8. Cf. e.g., Cooperstein v. Patrician Estates, 499 N.Y.S.2d 423, 424 (1986) (for breach of contract for construction and sale of 15th Street v. Promo-Pro, owner’s consequential damages by an owner house, home purchasers were entitled to award of damages to compensate them for contractors’ breach of promise to timely claim for delay damages was dis- against an architect. A reasonable construct house on premises). 9. Cf. e.g., Bulk Oil (U.S.A.) v. Sun Oil Trading, 697 F.2d 481, missed “because they constitute balance may be to limit the archi- 482 (2d Cir. 1983) (citing Neri v. Retail Marine Corp., 30 N.Y.2d 393, 397 (1972)); Long Island Lighting v. IMO Indus., 85 CIV. consequential damages” and were tect’s liability for consequential 6892 RO, 1990 WL 64588 (S.D.N.Y. May 3, 1990) (“a party to a thus barred by the contract’s waiver damages to the amount of insurance contract may recover financing costs as incidental damages, apart from prejudgment interest allowable under New York of consequential damages, where being carried. Owners, however, State law.”). 10. Cf., e.g., Losei Realty v. City of New York, 254 N.Y. 41, 47 “a plain reading of the [contract] should proceed cautiously, for the (1930) (landowner could recover, as damages resulting from city’s delay in filling in property, loss in rental value resulting reveal[ed] that it applied to all ‘con- architect’s insurance coverage may from the period of delay reasonably attributable to city). 11. Cf., e.g., Manshul Const. v. Dormitory sequential damages arising out of be eroded by multiples claims. Auth. of New York, 436 N.Y.S.2d 724, 729 (1981). 26 12. See Ansonia Brass & Copper v. Gerlach, 8 Misc. 256, 259- or relating to this contract.’” 60, 28 N.Y.S. 546, 549 (Com. Pl. 1894). In the contractor context, a waiver 13. Kenford v. Erie County, 67 N.Y.2d 257, 261 (1986). 14. Id. may leave the owner bereft of a rem- While waivers are common 15. Teramo & Co. v. O’Brien-Sheipe Funeral Home, 725 N.Y.S.2d 87, 90 (2d Dept. 2001) (trial court erred in awarding edy for delayed construction in the place and broadly enforced, profits lost due to construction delay; owner’s unsubstanti- ated claim that it lost business due to the delay in complet- form of lost revenue and increased ing construction of the extension to its funeral home was too the full ramification of the speculative to allow recovery). carrying costs. While liquidated 16. 67 N.Y.2d 257, 261 (1986). waiver should be understood 17. Id. damages may substitute for con- 18. Kenford v. Erie County, 73 N.Y.2d 312, 315 (1989). sequential damages (to the extent as possibly leaving an ag- 19. Id. at 317-18. 20. Id. at 319 (quoting Globe Ref. v. Landa Cotton Oil, 190 they approximate delay damages U.S. 540, 544 (1902)). grieved owner without a com- 21. Route 7 Mobil v. Machnick Builders, 296 A.D.2d 809, 810 suffered), contractors are equally (3d Dept. 2002) (rejecting a gas station owner’s claim for four plete remedy for damages years of lost profits attributable to water contamination of an loath to agree to assume that obliga- underground diesel fuel tank allegedly improperly installed by flowing from the breach. the contractor based on finding that owner failed to offer ad- tion. An alternative approach may equate proof to meet any of the required elements of direct or consequential damages). be simply to limit the amount of con- 22. See cases cited, supra, note 9. sequential or 23. Id. Conclusion 24. See, e.g., Ernst Steel v. Horn Const, 104 A.D.2d 55, 63 recoverable to a tolerable range. (1984) amended, 109 A.D.2d 1104 (1985) (manufacturer failed to substantiate its claim that the entire amount of increased should also be giv- Under appropriate circumstances, costs due to the delay was paid for with borrowed funds). consequential damages for breach 25. See Hurley v. Watanabe, 2014 N.Y. Slip Op. 32160(U), en to restricting the waiver to first 2014 WL 3870614, at *10 (N.Y. Sup. Aug. 5, 2014) (finding that of construction contracts are recov- parties agreement indicated that risk for an interest rate was party claims between the owner and not allocated, and in light of the time allotted for performance, erable if foreseeable in nature and placing such risk on defendant is not warranted). contractor, which are not covered 26. 400 15th Street v. Promo-Pro, 28 Misc. 3d 1233(A), 2010 not waived. While waivers are com- WL 3529466, at *10 (N.Y. Sup. 2010) (dismissing claims for con- by general liability insurance. sequential damages for losses due to the change in the Zoning However, there should be no waiv- mon place and broadly enforced, the Resolution, consisting of delay damages, attorney fees to ap- peal the zoning change, and its payment of additional interest, er of consequential damages arising full ramification of the waiver should insurance, and other carrying charges.”); see also New York be understood as possibly leaving Trans Harbor v. Derecktor Shipyards Conn., 15 Misc. 3d 1140(A), from a third-party action against an 2007 WL 1532293, at * 6 (Sup. Ct. 2007) (enforcing waiver of an aggrieved owner without a com- consequential damages with respect to delay damages). owner arising from negligence or 27. 5th Ave. Chocolatiere v. 540 Acquisition, 712 N.Y.S.2d 8 plete remedy for damages flowing (1st Dept. 2000), rev’d, 96 N.Y.2d 280, 294 (2001) (reversing breach of contract by the contractor lower court’s allowance of recovery for economic loss, hold- from the breach. Thus, care should ing that negligence claims seeking recovery of purely econom- because such claims are generally ic loss fell beyond the scope of duty owed by reason of city’s covered by the contractor’s gener- be taken in agreeing to the waiver closure of streets for safety reasons to businesses impacted and area residents evacuated from their homes); Amin Realty al liability insurance. Additionally, and negotiating its full terms. v. K & R Const., 306 A.D.2d 230, 231 (2d Dept. 2003) (denying a building owner’s negligence claim against a concrete sup- where a non-party to a construction ••••••••••••••••••••••••••••• plier under the economic loss doctrine, and ruling that the owner did not fall within the third-party beneficiary exception contract brings allegations sound- 1. See, e.g., Glens Falls Ins. v. Quality Furniture, 301 A.D.2d because “the record is devoid of any evidence that the par- 626, 754 N.Y.S.2d 346, 347 (2003). ties intended that the [building owner] be a beneficiary of the ing only in tort, absent contractual 2. See, e.g., Compania Embotelladora Del Pacifico, S.A. v. contract. The [owner], at most, was an incidental beneficiary Pepsi, 650 F. Supp. 2d 314, 322 (S.D.N.Y. 2009) (addressing of such contract.”); Bri-Den Const. v. Kapell & Kostow Archi- rights and privity, recovery is per- whether the breach of contract damages sought by the plain- tects, 56 A.D.3d 355, 355 (1st Dept. 2008) (stating the rule that mitted only for losses from tortious tiff “are general, thus merely requiring a “reasonable estimate’ economic losses could be recovered in a relationship that was of damages before an award can be made, or instead conse- the “functional equivalent of contractual privity,” but rejecting invasion that cause personal injury quential, thus requiring CEPSA to prove such damages ‘with the claim of a contractor against an architect after finding no reasonable certainty”‘). such privity). or property damage to plaintiff. 27 3. Compare Am. List Corp. v. U.S. News & World Report, 75 N.Y.2d 38, 42 (1989) (lost profits are direct damages), with The calculus with respect to design Kenford v. County. of Erie, 73 N.Y.2d 312, 321 (1989) (loss of an- ticipated profits and loss of anticipated appreciation in value professionals is a bit different. Unlike of land owned in periphery of proposed stadium site are con- sequential damages). contractors carrying only general 4. Latham Land I, v. TGI Friday’s, 96 A.D.3d 1327, 1330-31 Reprinted with permission from the September 10, 2014 edition of the NEW YORK (2012). LAW JOURNAL © 2014 ALM Media Properties, LLC. All rights reserved. Further liability insurance (which, as not- 5. Am. Standard v. Schectman, 80 A.D.2d 318, 321 (1981). duplication without permission is prohibited. For information, contact 877-257-3382 ed, does not provide coverage for 6. See, e.g., David Home Builders v. Misiak, 937 N.Y.S.2d 524, or [email protected]. # 070-09-14-09