Contracts often contain clauses under which parties prospectively waive rights to consequential damages.
But what are consequential damages? As a recent case decided in Florida demonstrates, although the formal definition of such damages is clear and easily understood, applying the definition to particular damages is not intuitive and can lead to surprising results.
In Keystone Airpark Auth. V. Pipeline Contractors, Inc. et al., 266 So.3d 1219 (Fl. App. 2019), the owner of a local airpark filed against the contractor it hired to construct airplane hangars and taxiways and the consulting engineer it employed to inspect, observe, and monitor construction, including performance of all field and laboratory testing of materials and fill placement. The owner alleged that the contractor used substandard materials for stabilization beneath the structures and taxiways, which resulted in premature deterioration of hangar slabs and asphalt paving, and that the consulting engineer breached its contract by failing to properly inspect and test. The owner sought to recover the cost of removing, repairing, and replacing the hangars, taxiways, and underlying subgrade.
This opinion involved a motion for summary judgment filed by the consulting engineer, who argued that damages sought were not a direct result of an alleged breach, but rather constituted consequential damages, which the contract expressly excluded. The trial court agreed and entered final judgment in favor of the consultant. The owner appealed.
On appeal, the consultant relied on the famous English case, Hadley v. Baxendale, 9 Exch. 341, 156 Eng. Rep. 145 (1854), which articulated the longstanding rule that the general measure of damages for breach of contract are those which “arise naturally … from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of the both parties, at the time they made the contract.” Hadley also held that if there are “special circumstances” that are “communicated by the plaintiffs to the defendants, and thus known to both parties,” the plaintiff could recover for “injury which would ordinarily follow from a breach of contract under these special circumstances.”
The rule stated above is universally followed in the U.S. today, and the appellate court in this case had to decide whether, under the circumstances that existed, the damages the owner sought (removal and replacement of the defective work) flowed naturally from the alleged breach (failure to properly monitor, inspect, and test) and whether such damages were reasonably foreseeable by both parties when they entered into the contract. Common sense might say yes; however, the appellate court ruled they were consequential damages and thus disallowed by contract.
The court first noted that “foreseeability” is not an issue because when the parties entered into the contract, it was foreseeable that if the consulting engineer failed to perform its duties, repairs may be required.
General damages, the court noted, are “those damages which naturally and necessarily flow or result from the injuries alleged,” and “are commonly defined as those damages which are the direct, natural, logical, and necessary consequence of the injury.” In contrast, special damages are those not likely to occur in the usual course of events, but may be foreseen by the parties if special circumstances exist which are known to both.
The court concluded that the cost of repair here did not constitute general damages because the damages were not the direct or necessary consequence of the consultant’s alleged failure to properly inspect, observe, monitor, and report problems with the work. The court surmised that the contractor could have completed the job correctly without the consultant performing its duties under the contract. Thus, the need for repair did not arise within the scope of the immediate transaction between the consultant and the owner. Instead, the need for repair stemmed from loss incurred by the owner in its dealings with a third party—the contractor. While these damages were “reasonably foreseeable,” the court concluded they are consequential and not general.
While the rules the court cited here are fairly uniform across the country, courts and boards vary widely in their application of those rules, and, accordingly, the question of whether damages are consequential and fall within a consequential damage waiver clause is not always resolved consistently.