Damages in construction contracts: pitfalls and how to avoid them

Morag McGreevey (00:05): Welcome back to Navigating Project Disputes. Our video series on project litigation. In this session, Shalom and I discuss three common damages issues, and how to control for them to develop a winning litigation strategy.

Shalom Cumbo-Steinmetz (00:19): It takes a village to build a village. And that's particularly true on big projects. The big infrastructure projects that are being built today: energy projects, transit projects, remote projects, these are all massive undertakings.

In addition to the construction and design related aspects. Contractors often need to work around existing infrastructure and not interrupted unduly. A minor logistical hiccup at the front end can have major ripple effects, and these come at a serious price tag.

Morag McGreevey (00:50): One of the main ways that parties try to define the scope of damages is through exclusion clauses. Frequent contract readers will be familiar with clauses that exclude indirect, consequential, and special losses. These clauses can be successful in limiting a party's damages. However, they don't necessarily reduce litigation. Legal terms like “consequential” and “special damages” have been given different meanings by different courts, which can prompt confusion and disagreement amongst parties.

Therefore, at the contract drafting stage, it's worth considering an inclusion rather than an exclusion clause. For example, the contract would state, “the only type of damage you can claim is the following”, and then list the specific types of losses the parties want to be able to make claims for.

Shalom Cumbo-Steinmetz (01:38): Even after the ink has dried in your contract. It's important to keep thinking about exclusion clauses. As a project progresses, if a party believes they have a developing claim, it's important very early on to determine are the costs that are being incurred actually eligible for compensation under the contract? Determining this point in real time can make a winning strategy for the eventual dispute. If lost profits are excluded damages, all efforts should be devoted to overcoming the cause of lost profit. And shifting costs to endeavors that qualify for compensation under the contract.

Morag McGreevey (02:12): Another way that parties seek to discipline claims is through strong contractual notice requirements. Because contractors are on the ground, they'll likely know long before an owner whether an event is likely to cause a claim for extra costs or extra work. Requiring a contractor to provide notice within a short period of time after discovering an issue helps to protect owners from runaway damages claims. This timely communication allows owners to determine whether intervention is necessary.

Shalom Cumbo-Steinmetz (02:43): These clauses can be a powerful defense if a case goes all the way to trial. However, our experience is in settlement negotiations they may be of limited value. If a notice clause is very strict, and the potential impact of the clause on the dispute may be so significant, the parties can't actually give it a meaningful discount factor in settlement negotiations.

A more effective notice clause is one that enforces a contractor to give timely notice but does not impose draconian consequences for minor delays. Clauses like these, which are more balanced, are more likely to be enforceable and create a more meaningful risk for the contractor, both in settlement and at a trial.

Morag McGreevey (03:22): Another common issue is project agreements with no damages cap. It may not be possible to negotiate a damages cap during the construction phase. The variability of potential impacts is too uncertain that contractors may simply refuse to accept caps when a project is being built.

Shalom Cumbo-Steinmetz (03:41): The same is not true during the operation and maintenance phase of a project, where the risks are more easily identified. We have seen caps on lost revenues effectively used to control owner’s damages exposure during an operation and maintenance phase.

Morag McGreevey (03:56): Often revenue is provided on a productivity-driven calculation where the contract allows claims for lost revenue. One way to control these claims is to establish a baseline calculated on average anticipated productivity, and to cap damages at that amount up to a set period of time. Again, real time assessment of the claim is key.

Prior to formal litigation being commenced. Litigators can help determine if the loss is covered and where to deploy efforts so that the costs qualify for compensation under the contract.

Shalom Cumbo-Steinmetz (04:31): To learn more about these and other issues, we invite you to get in touch with our projects litigation team. Thanks for joining us for this installment of Navigating Project Disputes.