By Edward E. Nicholas III and Maggie D. Finnegan
If liability is clear (that is, the breach of contract cannot be disputed), then it comes down to damages. How much may the plaintiff recover? All damages caused by the defendant’s breach? Not necessarily, because, to answer the question posed above, not all damages are created equal. All “direct” damages are recoverable as long as they can be calculated with a reasonable degree of certainty. Direct damages are those which in the ordinary course of experience can be expected to result from a breach. So if an owner fails to pay a contractor for work performed, the amount due but unpaid is direct damage to the contractor. And if a contractor fails to complete construction on a building, the cost of completing the construction is direct damage to the owner. But not all damages are ordinary. Damages that flow from special circumstances fall into another category: consequential damages. What may be considered “special circumstances” is not always easy to determine. One example is an owner’s additional interest costs due to increases in the interest rate that occurred after the contractor should have completed construction. The Supreme Court of Virginia ruled decades ago that such costs are consequential damages, because they result from market factors and do not flow naturally from the contractor’s breach. Consequential damages may be recovered only if the special circumstances were within the contemplation of the contracting parties at the time the contract was signed. For example, can a contractor that lost its bonding capacity because of an owner’s failure to pay for work performed recover the profits lost because of the lost work? In Virginia the answer is no, unless the owner knew when it signed the construction contract that non-payment would result in the loss of the bonding capacity. Even if special circumstances are known to both parties, consequential damages arising from those circumstances will not be recoverable if the parties agreed to waive claims for such damages. Such waivers are fairly common (the standard AIA General Conditions include a waiver provision) and offer the parties a way of managing risk by putting the burden on the party with the special circumstance. These articles are meant to bring awareness to these topics and are not intended to be used as legal advice.
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