Industry Approach to Consequential Damages How to maintain a win-win environment For  Banner Health A review by  Arpita Gh...
What is a Consequential Damage <ul><li>Damages that arise from the intervention of “special circumstances” and are not ord...
<ul><li>Direct Damage </li></ul><ul><li>Easy to claim and prove damage </li></ul><ul><li>Judges presume contractor had </l...
Consequential Damages are hard to recover <ul><li>Plaintiff have to prove: </li></ul><ul><li>Proximate consequence  of the...
Problem faced by Banner Health <ul><li>Difficulty in negotiation </li></ul><ul><li>AIA mutual waiver-Is it practical for o...
1 .  Why negotiation is a problem?? <ul><li>Consequential damages are generally big money  </li></ul><ul><li>Never ending ...
“ Perini Corp. VS Great Bay Hotel” Is it fair to the contractor??? <ul><li>$24M  hotel casino expansion project </li></ul>...
2. Mutual Waiver Is it fair to the owner?? <ul><li>“ AIA added the mutual waiver to safeguard the contractor” </li></ul><u...
<ul><li>There is no clear definition of consequential damage </li></ul><ul><li>The plaintiff always attempt to prove conse...
Alternatives: <ul><li>One alternative is to consider all the foreseeable CDs and put a cap on consequential damages .  Ens...
<ul><li>It is a scope for both the parties to look into the CDs  and quantify risk </li></ul><ul><li>Once agreed upon the ...
Disadvantages of liquidated damages: <ul><li>Only work for a few contract or promises within a contract.  (e.g., late comp...
Industry approaches 1 <ul><li>CDs should be thought about and drafted while preparing the contract </li></ul><ul><li>CDs s...
Industry approaches 2 <ul><li>“ Boiler plate” terms like consequential damages should be avoided </li></ul><ul><li>Waivers...
Can this be replicated? Registered/post Speed post Analogy <ul><li>By buying registered post and speed post we actually av...
Questions and Answers
References <ul><li>www.constructionlawtoday.com -  </li></ul><ul><li>Blogs by Joshua Glazov </li></ul><ul><li>“ Recovering...
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Slide 2_Arpita

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  • No where in law it is said that the owner cannot recover consequential damages. But if the owner claims and the contractor disagrees there will be an inevitable dispute. If there is a dispute and the owner chooses to go to court it is extremely difficult to prove and recover consequential damages. So it is wise to avoid disputes.
  • 2 nd problem-if AIA mutual waiver is practical for owner
  • The plaintiff always attempt to prove consequential damage as direct damages to expedite recovery The contractor’s attempt is to describe the damages in consequential and waive it upfront while signing the contract
  • Mention the foreseeable consequential damages
  • Slide 2_Arpita

    1. 1. Industry Approach to Consequential Damages How to maintain a win-win environment For Banner Health A review by Arpita Ghosh
    2. 2. What is a Consequential Damage <ul><li>Damages that arise from the intervention of “special circumstances” and are not ordinarily predictable. </li></ul><ul><li>Ex: Loss of revenue </li></ul><ul><li>Employee salary </li></ul><ul><li>Third party law suits </li></ul>
    3. 3. <ul><li>Direct Damage </li></ul><ul><li>Easy to claim and prove damage </li></ul><ul><li>Judges presume contractor had </li></ul><ul><li>full knowledge </li></ul><ul><li>An approximate estimation is enough to recover </li></ul><ul><li>Can be mitigated with contingencies and insurances </li></ul><ul><li>Ex: cost necessary to repair, restore contractor’s defective work, finish unfinished work </li></ul>Direct Damage VS Consequential Damage
    4. 4. Consequential Damages are hard to recover <ul><li>Plaintiff have to prove: </li></ul><ul><li>Proximate consequence of the breach </li></ul><ul><li>Reasonably “foreseeable” </li></ul><ul><li>Contemplated by each of the parties </li></ul><ul><li>at the time of signing the contract </li></ul><ul><li>The $$$ estimated to be “ with reasonable certainty” </li></ul><ul><li>Each of the consequential damages needs specific pleading in the complaint. </li></ul>
    5. 5. Problem faced by Banner Health <ul><li>Difficulty in negotiation </li></ul><ul><li>AIA mutual waiver-Is it practical for owner </li></ul><ul><li>Can liquidated damages be an alternative </li></ul><ul><li>Estimating consequential damages </li></ul><ul><li>Other industry approaches </li></ul>
    6. 6. 1 . Why negotiation is a problem?? <ul><li>Consequential damages are generally big money </li></ul><ul><li>Never ending chronic problem </li></ul><ul><li>An issue that affects negotiation </li></ul><ul><li>Difficulty in distinguishing b/w consequential and direct </li></ul><ul><li>“ If contract is a leap, consequential damages make the fall longer with more dramatic stop. Contractors generally don’t get the opportunity of considering the option of a parachute” </li></ul><ul><li>“ A catch-all consequential damages waiver normally dismiss majority of owners claim even if it is completely the designer/contractor’s error” </li></ul>
    7. 7. “ Perini Corp. VS Great Bay Hotel” Is it fair to the contractor??? <ul><li>$24M hotel casino expansion project </li></ul><ul><li>Contractor compensation only $ 600K </li></ul><ul><li>Substantially completed except ornamental façade </li></ul><ul><li>Owner sued as the unfinished facade failed to attract the passerby </li></ul><ul><li>$14,500,000 loss of profit </li></ul><ul><li>NJ appellate court upheld consequential damage award on appeal </li></ul>
    8. 8. 2. Mutual Waiver Is it fair to the owner?? <ul><li>“ AIA added the mutual waiver to safeguard the contractor” </li></ul><ul><li>Loss of profit </li></ul><ul><li>Loss of revenue </li></ul><ul><li>Reduction in employee productivity </li></ul><ul><li>Law suits and other claims by third party occurring for the delay </li></ul><ul><li>“ Waivers don't end consequential damage controversy.  They just move it to a different place.”  </li></ul>
    9. 9. <ul><li>There is no clear definition of consequential damage </li></ul><ul><li>The plaintiff always attempt to prove consequential damage as direct damages to expedite recovery </li></ul><ul><li>The contractor’s attempt is to describe the damages in consequential and waive it upfront while signing the contract </li></ul>No bright line b/w Consequential & Direct damage
    10. 10. Alternatives: <ul><li>One alternative is to consider all the foreseeable CDs and put a cap on consequential damages .  Ensures that it is not disproportionate like the  Perini  case.  It's a partial waiver. </li></ul><ul><li>Best alternative available is  liquidated damages .  Liquidated damages give something to both sides. </li></ul>
    11. 11. <ul><li>It is a scope for both the parties to look into the CDs and quantify risk </li></ul><ul><li>Once agreed upon the owner need not prove each and every risk </li></ul><ul><li>The owner can still receive a big enough part of their CDs in the form of liquidated damages.  </li></ul><ul><li>The contractor gets a ceiling on their liability. </li></ul>4. Advantages of liquidated damages:
    12. 12. Disadvantages of liquidated damages: <ul><li>Only work for a few contract or promises within a contract.  (e.g., late completion) and very poorly to compensate others (e.g., non compliance with ADA) </li></ul><ul><li>Contractor can refuse the amount </li></ul><ul><li>Amount has to be fixed and reasonable at the time of </li></ul><ul><li>contract </li></ul><ul><li>Cannot be a penalty –cannot imply fraud, mistake, circumvention or oppression </li></ul><ul><li>Opting for liquidated delay damages waives the option of recovering actual delay damages </li></ul>
    13. 13. Industry approaches 1 <ul><li>CDs should be thought about and drafted while preparing the contract </li></ul><ul><li>CDs should be identified and classified as consequential and direct before signing the contract  </li></ul><ul><li>Contract should reflect that the other side got a chance to contemplate CDs </li></ul><ul><li>Each risk should be identified and expressly allocated prevention/mitigation responsibility between the parties </li></ul>
    14. 14. Industry approaches 2 <ul><li>“ Boiler plate” terms like consequential damages should be avoided </li></ul><ul><li>Waivers only leads to further disputes </li></ul><ul><li>Alternatives should be considered like LDs before negotiating </li></ul><ul><li>Consider the insurance option (environmental, builder’s risk, loss of use” for the anticipated risks) </li></ul>
    15. 15. Can this be replicated? Registered/post Speed post Analogy <ul><li>By buying registered post and speed post we actually avoid the consequential damages of lost mail or delayed mail </li></ul><ul><li>In return postal company takes some extra care and liability </li></ul><ul><li>We pay some premium for mitigating those risks </li></ul><ul><li>Can the owner/contractor have a mutual agreement </li></ul><ul><li>Contractor agree to take some capped amount of consequential damages </li></ul><ul><li>owner agree to pay some premiums like shared profit or additional percentage </li></ul>
    16. 16. Questions and Answers
    17. 17. References <ul><li>www.constructionlawtoday.com - </li></ul><ul><li>Blogs by Joshua Glazov </li></ul><ul><li>“ Recovering and avoiding consequential damages in current economic climate”- </li></ul><ul><li>By John H. Dannecker, Jason W. Hill, John E. Kofron, and Dale B. Rycraft </li></ul><ul><li>“ Consequential Damages in today’s construction industry- Effectively avoiding them requires up front clarity”- </li></ul><ul><li>By Jason L. Richey and William D. Wickard </li></ul>

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