Construction Law Today : Construction Lawyer & Attorney : Joshua Glazov : Design Build Contracts, Construction Bankruptcy

In the last consequential damages post we talked about how to tell the difference between consequential damages and direct damages.  In this post we'll talk about why that difference makes a difference.

Workflow

After reading what by now must be hundreds of cases about consequential damages, I developed a 5 step workflow that helps me remember why the difference between direct and consequential damages is important.   

Workflow Step 1 - Damages Categorized

Start this step assuming that you've already categorized damages as direct and consequential as we talked about in the last consequential damages post.

Workflow Step 2 - Contemplation

Assume that when seeking damages against the side who breached the contract (the "breacher"), the other side (the "victim") must prove that at the time they both entered into the contract, the breacher contemplated all of the damages that the victim would suffer. 
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Usually the focus here is on legal issues.  But sometimes new design and construction developments are so remarkable I've got to mention them.  This is one of those developments.

Last week Lynn Becker at Chicago Architecture Plus wrote about research underway on a new self-healing concrete at the University of Michigan called Engineered Cement Composite ("ECC"). 

ECC can heal itself when it cracks.  Just add water and carbon dioxide. Several wet days will mend a damaged member made of ECC.  ECC is designed to bend and crack in narrow hairlines instead of breaking and splitting open in wide gaps like traditional concrete.  The result is that ECC can repair itself.  

When ECC is strained, many micro-cracks form instead of one large crack that causes failure. Here, a specimen is bending as a force of five percent tensile strain is being applied. Regular concrete would fail at .01 percent tensile strain.  


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Why Talk About Consequential Damages?

Why talk about consequential damages? Because they're a big money and a chronic problem. They're an issue that affects the negotiation of every prime contract, subcontract, and architects agreement. And they're often a contentious issue in settlement negotiations, mediation, arbitration, and litigation. So this will be the first installment in a series on consequential damages.

Topics in this series will include:

• Identifying consequential damages - what makes then different from direct damages
• How consequential and direct damages are treated differently
• Why consequential and direct damages are treated differently
• Practical considerations to better your odds of getting consequential damages and lowering the odds you'll have to pay them

The toughest question: what are consequential damages? Put another way, what makes some damages consequential, and others not?

Two Types of Damages?

When it comes to breach of a contract, damages fall into one of two categories:

• Direct damages (a/k/a general damages)
• Consequential damages (a/k/a special damages)

How do you tell which category damages qualify for? It's tough. Many decisions written by many judges have tried to answer that question. The earliest, and most often cited, is the 1854 English case of Hadley v. Baxendale.

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While researching damages for breach of a construction contract yesterday morning, I saw the paragraph below in Construction Litigation, published by the Illinois Institute for Continuing Legal Education.  I showed it to a colleague.  He though it hit the mark. So did I.  So here it is to see if you agree with us......

[Regarding damages] it should be noted at the outset that nothing is of greater value or greater detriment in litigating such issues than a well-drafted construction contract. Too often the parties use a standard American Institute of Architects form, ignoring the fact that such forms are created by architects and are designed to shield the architect from responsibility and spread such liability elsewhere. The fact that the preprinted form looks authoritative and reduces the work necessary to create an agreement should never induce the owner or the contractor to use the form as it stands. Certainly, it provides a starting point, but for the owner or contractor, it should be nothing more than that. An attorney representing the owner or the contractor should amend, extend, curtail, eliminate, or add to such a form until the client's interests are properly protected.

                                                                                    - - Lorence H. Slutzky

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Most British readers already know that Lord Justice Jackson and his panel of assessors issued an interim report earlier this month in their Review of Civil Litigation Costs. 

The interim report raises a lot of issues that should interest readers outside Great Britain too, especially in other countries with common judicial systems (e.g., the United States, Australia, Canada).  Sometimes stepping outside our own system here in the United States fosters new ideas for solving chronic problems.  The US Navy's adopting the Royal Navy's angled flight decks on its aircraft carriers for safer and more efficient operations comes to mind as a good example. 

In January 2009 British Lord Justice Jackson was appointed to lead a fundamental review of the rules and principles governing the costs of civil litigation. His goal is to identify recommendations for the United Kingdom's Ministry of Justice to promote access to justice at proportionate cost.  The final report is due at the end of 2009.

Lord Justice Jackson emphasizes that the preliminary report is to promote discussion during the consultation period before he and his assessors prepare their final report, So, the interim report focuses on areas where they seek comments from the lawyers and the public at large.  They urge people to submit comments by July 31, 2009.

The following are some of the principal areas of focus in the report:

• Court fees. The report expresses disagreement with the Ministry's policy of full-cost pricing - where litigants pay for the court service they receive. It suggests shifting more costs of the civil justice system from litigants to taxpayers.
• Cost shifting. The report requests comment on whether fee and cost shifting should be abolished in select areas, although it tentatively concludes that cost shifting must remain in some form for most litigation.
  

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In a post last week I mentioned that the the Minnesota legislature passed bill HF420 amending amendments to Minnesota's Notice and Opportunity to Repair Law and sent them for Governor Pawlenty to sign.  Kevin Duchschere of the Star Tribune reported in an article this afternoon that the governor vetoed HF420.  It's now back to the legislature to see if they can muster up enough votes to override the governor's veto.

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In the last post we talked about the recent trial of the the the Indianapolis-Marion County Public Library's (the "owner") fraud claims against against New York based Thornton Tomasetti Engineering, Inc. (the "structural engineer").  Those claims stemmed from $50 Million in cost overruns to build the underground garage foundation of an addition to the Indianapolis Central Library.

The owner also sued the structural engineer on a litany of other claims, including negligence in providing structural design services.  But the trial didn't include the owner's negligence claims because they were dismissed before the trial started.  The owner appealed.  In this post we'll talk about the Court of Appeals's decision because it has important effects on the liability of architects, engineers, and other design professionals. 

Background

Recall from the last post that when hiring designers for the project, the owner contracted with architects Woolen Molzan and Partners, Inc. (the "architect") to be the project's prime designer.  The architect then sub-contracted with the structural engineer to serve as the project's structural engineering sub-designer.  The Owner never had a contract with the structural engineer. 

Recall also that the only damages the owner claimed were for repair, retrofitting, and delay costs.  The owner never claimed any damages for:

• Death or personal injury to anyone.
  
• Damage to the owner's property other than problems with the foundation and garage the structural engineer designed.  They did not claim damages for things like broken computers in the existing parts of the library or broken light poles in the library parking lot.
• Damage to the property of anyone else (e.g., damage to neighboring buildings or cars of library customers).

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In an article last week, Jon Murray of the Indianapolis Star reported that the Indianapolis-Marion County Public Library (the "owner") will not appeal a jury verdict of no liability on the owner's $50 Million fraud claim against against New York based Thornton Tomasetti Engineering, Inc. (the "structural engineer").  The case stems from cracks and gaps in the concrete members of the Indianapolis Central Library's new underground garage that also serves as the building's foundation. 

Though the owner will not appeal from the lost trial of their fraud claims, they are already appealing Judge Matthew Kincaid's pre-trial dismissal of their negligence and breach of contract claims.

The Backstory

In 1998, the owner hired architects Woolen Molzan and Partners, Inc. (the "architect") to design renovation of, and additions to, the main Indianapolis public library.  The architect contracted with the structural engineer to work as the structural engineering sub-designer on the project. The architect also hired Charlier Clark & Linard, PC (the "observer") to observe report on the construction work once it started.

Construction started in 2002 with Shook, LLC as the "prime contractor".  As construction progressed, significant problems developed with the rebar and concrete in the garage. In fact, after the completion of each concrete pour, numerous defects were discovered, including exposed steel reinforcement and voids in the beams and columns.

In February 2004, approximately a month after the prime contractor completed the two final major concrete pours, owner personnel discovered major voids in concrete beams and columns in the garage. Concerned about the structural integrity of the garage, the owner hired Construction Technologies Laboratories, Inc. (the "forensic engineer") to investigate the garage. The forensic engineer reported several design and construction defects in the garage. Representatives of the forensic representatives even believed that the garage was "at serious risk for structural failure if construction were allowed to continue."  The owner suspended work on the project on May 6, 2004. Continue Reading...

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The Texas House passed a bill (HB1657) in a 73-71 vote and sent it to the Senate.  If enacted, HB1657 will expand the types of claims injured construction workers can recover from property owners under Texas law.   

Earlier this year the Texas Supreme Court decided Entergy v. Summers.  Under that case, property owners who buy workers compensation insurance covering injuries to the employees of construction contractors they hire, in addition to their own employees, are immune from claims outside of those allowed under the Texas Workers Compensation Act.

In 2001, plant owner Entergy Gulf States, Inc. hired a contractor to work on one of their facilities.  One of the contractor's workers was injured while repairing a leak on a hydrogen generator.  The plant owner's workers compensation insurance policy covered the worker's injuries. 

The worker sued the plant owner.  The plant owner countered, saying they were immune from the worker's lawsuit under the Workers Compensation Act.  The Texas Supreme Court agreed. Because the plant owner's workers compensation insurance covered the worker's injuries, the plant owner enjoyed immunity under the Workers Compensation Act against the worker's lawsuit.

For several years Texas legislators have taken initiatives to amend the Workers Compensation Act.  The recent vote is the latest installment in their initiative.

The Entergy decision provides a lot of protection to those property owners whose workers compensation insurance insures injuries to their contractors' workers in addition to injuries to their own employees.  That protection will soon be gone if HB1675 passes the Senate and Governor Perry signs it.  

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In the last post I mentioned that amendments to Nevada's Notice and Opportunity to Repair law (SB349) might not pass this year.  According to the Mercury News's Home Defect, Malpractice Bills Die article today, they won't.

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Since the building boom that started in the mid-1990's, Minnesota, Nevada, and Colorado each enacted Notice and Opportunity to Repair statutes ("NOR Statutes") intended to reduce the volume and expense of residential construction defect litigation.  This past legislative season, legislatures in each of these states considered bills to amend their NOR Statutes.  One passed, one may pass, and the other died in committee.     

Minnesota

The Minnesota Legislature passed a bill (HB420) amending Minnesota's NOR Statute. This bill makes the following changes to Minnesota's NOR Statute:

• Construction contracts must re-state the statutory warranties already imposed under Minnesota's NOR Statute.
• The statutory warranties are non-waiveable.  Regardless of what language there is a construction contract, or other agreement between a contractor and an owner, attempted waivers of these warranties is void.   

The Minnesota Legislature sent this bill to Governor Pawlenty.  If he signs this bill, it will become law on August 1, 2009.
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On the United States Department of Veterans Affairs' website, the Office of Construction & Facilities Management publishes a Construction Contract Forecast Summary. This summary updates the public on upcoming Department of Veterans Affairs construction projects. Contractors can also use it to identify new projects in their areas they can bid on. 

The site also includes the following information about upcoming projects:
 

• Project number
  
• Project summary
• Location
  
• Dollar value
• Contracting officer contract information
  

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As promised in the last post, this post is about ensuring you can enforce a liquidated damages clause in your contract. It's also about other practical issues affecting liquidated damages and getting them to fulfill more of your expectations.

First, there's nothing that will ensure that liquidated damages will be enforced, or they'll do what you hope. Enforcement is at the mercy of judges.  And if you don't know already, they're unpredictable.  But there's things you can do to better the odds.  Or, if you're opposing liquidated damages, lower the odds.

Principal Elements Of Enforceable Liquidated Damages

In most cases, liquidated damages must have 5 principal elements (this varies from state to state and country to country, so you and your lawyer must check applicable law very closely):

• Actual damages must be difficult to quantify.


• The amount must be liquidated (i.e., agreed on and set in advance)


• The amount must be reasonable.


• They must be compensation, not a penalty.


• They must be exclusive (i.e., the only remedy available).



More on each of these below.

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