Consequential Damages of Contractor's Lost Future Profits
by John S. Mrowiec

Contractors or subcontractors frequently claim damages as the result of delay or disruption for the costs of acceleration, extended site overhead expenses or labor productivity impacts. These damages arise directly from a breach of the underlying contract or subcontract.

Sometimes, the claimant raises claims for damages which are not as customarily claimed and do not arise in every situation. For instance, a contractor might be required to move substantial forces, supervision and even management from other projects to the delayed project.

This might result in lost or reduced profits on those other projects. Unabsorbed home office overhead, loss of bonding capacity and lost profits of a going concern are other claims that might occasionally arise. These nondirect damages are often called "consequential" damages. Owners, too, raise delay damages claims, some of which are considered "direct" and some "consequential."

A Key Distinction

Contract law makes an important distinction between "direct" damages and "consequential" damages. Sometimes, the difference between the two is said to be the degree to which the damages are a "foreseeable" or "highly probable" outcome of a breach of the contract in question. See Rexnord Corp. v. DeWolff Boberg & Associates, 286 F.3d 1001, 1004 (7th Cir. 2002).

It is generally understood in the law that "consequential" damages are more difficult to recover than are "direct" damages. Most modern courts follow the approach that consequential damages are recoverable only if they were foreseeable by the breaching party (even if not actually foreseen) at the time the contract was entered.

That principle originates in the English case of Hadley v. Baxendale, 156 Eng. Rep.
145, 151 (1854). In Hadley, the court held that a mill could not recover lost profits from its carrier resulting from the carrier's delay in delivering a mill part essential to operation of the mill. The Hadley court found it was not reasonably foreseeable at the time of entry of the carriage contract for the carrier to have anticipated that delayed delivery of a single machine part would cause the mill to shut down and lose profits.

The threat, if not the recovery, of consequential damages claims is apparently of concern to construction project participants. Indeed, the American Institute of Architects included a mutual waiver of the owner's and contractor's claims for consequential damages in its 1997 edition of the A201 General Conditions of the Contract for Construction 4.3.10. For contracts without such a mutual waiver, consequential damages still may be claimed and, if the correct proof is presented, might be awarded.

Case Illustrates Issue

The recent case of Trenhaile v. J.H. Findorff & Son, Inc., 2004 Wis. App. LEXIS 384 (May 4, 2004), involved a subcontractor's claim for consequential damages.

Trenhaile, doing business as Trenko Electric Inc., was an electrical subcontractor on the reconstruction and rehabilitation of two parts of the Jones Island Waste Water Treatment Plant owned by the Milwaukee Metropolitan Sewerage District. Findorff was the general contractor on both projects.

After completing approximately 90 percent of its work, the subcontractor sold its assets to another electrical contractor but continued to work on the projects under the direction of the new ownership. When creditors, unrelated to the projects, initiated an involuntary bankruptcy petition against the subcontractor, it stopped the subcontract work on the projects. The general contractor hired a replacement electrical subcontractor to complete the projects.

The original subcontractor sued the general contractor seeking payment of unpaid extras. In addition, the subcontractor contended the general contractor caused the bankruptcy by failing to pay the subcontractor's extras promptly. The subcontractor sought damages for the "lost going concern value" of the subcontractor.

The Trenhaile case has a long history in the trial and appellate courts. Ultimately, however, the trial court found, and the appellate court affirmed the finding, that the general contractor delayed or failed to pay amounts due to the subcontractor of $129,597 in receivables, causing the bankruptcy.

At one time the trial court also awarded the subcontractor $558,532 for consequential damages for the subcontractor's lost "going concern value." On the general contractor's appeal, the appellate court initially reversed that consequential damages award because the trial court had not made the necessary findings.

After reconsidering the case, the trial court held that the subcontractor was not entitled to recover lost future profits or the lost future value of the company. The trial court reasoned that the subcontractor had not proved that these damages were reasonably foreseeable.

Case Appealed

The subcontractor appealed. On appeal, the Trenhaile appellate court stated the rule of consequential damages in Wisconsin: consequential damages may be awarded for a breach of contract if such damages are reasonably foreseeable at the time the contract was made, Trenhaile, 2004 Wis. App. LEXIS 384 at *11 citing Reiman Associates, Inc. v. R/A Advertising, Inc., 306 N.W.2d 292, 300-01 (Ct. App. 1981).

The Trenhaile trial court's findings included that the general contractor was unaware that "a delay in paying for extra work and change orders would bankrupt" the subcontractor, Trenhaile, 2004 Wis. App. LEXIS 384 at *12. The appellate court reviewed the evidence and determined that the trial court's findings were not "clearly erroneous," the standard for reversal of a trial court's factual findings.

The Trenhaile decision can be contrasted with an earlier Wisconsin case, Downey, Inc. v. Bradley Center Corp., 188 Wis.2d 435, 524 N.W.2d 915 (1994).

In Downey, the mechanical subcontractor recovered a jury verdict for direct damages for acceleration of an arena project where the general contractor refused to grant time extensions for delays caused by "holds" and by other subcontractors. The subcontractor also recovered the additional consequential damages of lost profits from independent contracts because of the need to move forces, supervision and management to the arena project.

The general contractor appealed in the Downey matter, claiming the lost profits on other contracts were not reasonably foreseeable.

Applying Indiana law, the Downey appellate court held that the subcontractor had proved that the lost profits on independent contracts were reasonably foreseeable.
The evidence showed that the general contractor had reason to foresee that if it did not grant time extensions for the numerous "holds" on the subcontractor's work and instead told the subcontractor to "do whatever it had to do," that the subcontractor would pull resources from other projects and that those other projects could suffer, Downey, 524 N.W.2d at 921, citing Insul-Mark Midwest, Inc. v. Modern Materials, Inc., 594 N.E.2d 459, 467 (Ind. Ct. App. 1992).

The rule in Illinois is similar; consequential damages will be awarded for breach of contract, in addition to direct damages, if the claimant proves those consequential damages are "the consequence of special or unusual circumstances which were in the reasonable contemplation of the parties when making the contract," Cencula v. Keller, 180 Ill. App. 3d 645, 650, 536 N.E.2d 93 (2d Dist. 1989).

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.