Extent of meaning of ‘consequential loss’
JAY JALA v DDG CONSTRUCTION [2016] (US District Court of Pennsylvania)
The meaning of ‘consequential loss’ has different meanings to different lawyers, particularly in varying jurisdictions and it has sometimes been given a much broader interpretation in the US, resulting in the exclusion having a much greater impact, as this case illustrates. It demonstrates why a supplier would certainly want to contract under US law and a customer would want to contract under English law.
Facts:
- In 2013 Jay Jala (“J”) contracted with DDG Construction (“D”) in relation to a motel to be built in Pennsylvania, using standard contractual forms from the American Institute of Architects.
- The contract set a guaranteed maximum price and a commitment to a completion date which was later extended by agreement to October 2014. Delays continued beyond the agreed extension, and eventually D left the project at the end of December 2014 with the work still incomplete.
- J terminated the contract for cause in January 2015 and finished the project on its own. The motel finally opened in May 2015 and J identified several categories of damages that it sought to claim from D.
- D argued that the contract precluded the recovery of certain categories of damage entirely. The contract contained the following exclusion: “Each party waives claims against each other for consequential damages. This includes damages incurred by [J] for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons”.
- The US District Court of Pennsylvania was asked to determine which types of loss were caught by the ‘consequential damage’ exclusion.
Decision:
- The Court commented, “foreseeability is the limit of all contract damages, not the distinction between direct and consequential damages”. It then went on to say that, “rather than turning on foreseeability, the difference between direct and consequential damages depends on whether the damages represent (1) a loss in value of the other party's performance, in which case the damages are direct, or (2) collateral losses following the breach, in which case the damages are consequential ”.
- The following statement from an earlier case was also quoted: “Direct damages refer to those which the party lost from the contract itself - in other words, the benefit of the bargain - while consequential damages refer to economic harm beyond the immediate scope of the contract ”. The Court also said that, “Direct damages are the costs of getting what the contracting party was supposed to give - the costs of replacing [D’s] performance. Other costs that may not have been incurred [but for the breach], but that are not part of what [J] was supposed to get from [D], are consequential’ or a ‘secondary consequence’ ”. Before looking at the specific heads of loss being claimed, the Court noted that the contract required completion of the construction work within a certain defined timeframe.
- Looking at the different elements of J’s claim, the Court concluded as follows:
- Loss of income – this claim was abandoned prior to the hearing because of the explicit reference to it in the exclusion. However, based on the above analysis it would seem clear that loss of income (and loss of profit) would be ‘consequential loss’. This is in direct contrast with what would almost certainly be the position under English law;
- ‘Project completion fee’ – it seems all concerned (both parties and the judge) were confused about what this referred to! However, the Court ultimately came to the conclusion that if this claim referred to a charge in respect of ‘overheads’ that D would otherwise have charged for but which J itself incurred during the period of time that it completed the project, then the claim was not excluded;
- Insurance – ie the costs of insurance taken out to cover the running of a motel between the date agreed for completion and when the motel actually opened. The Court said, “Payment for that type of insurance coverage was not a part of [D’s] expected performance under the contract. It was a separate business arrangement that [J] made, not something [J] had to pay in an effort to replace the performance [D] failed to provide. The insurance costs that appear to be involved here are at best consequential and not recoverable”;
- Advertising expenses – the claim here was for expenses for adverts that were taken out to coincide with the anticipated opening date for the motel. Because of the delay the costs were effectively wasted. The Court commented that these costs were not part of the value of D’s performance – they may have been caused by D’s breach, but the expenses were not designed to deal with or make up for that breach or recover the lost value of D’s performance. This category of damages was consequential, covered by the waiver, and therefore not recoverable;
- Furniture lease costs – when the delay to completion occurred, J had to incur additional leasing costs for furniture as a result of the delay (presumably they were being acquired subject to some form of lease rather than being purchased outright). The Court said, “While [J] had to pay the lease fees for a longer period of time, this was an indirect consequence of the delay [D] caused. This was not a cost [D] was supposed to pay and did not. It was not something [J] expected to get from [D] and had to get elsewhere or provide itself ”;
- Bank interest on a loan – the Court analysed this claim in the following terms:
“[J] did not have to pay for motel operations insurance to construct the building, it did not have to pay for [advertising] to construct the building, and it did not have to rent furniture to construct the building. But [J] did have to take out and incur interest on a loan to construct the building, and pay additional interest during the delay: clearly, it is an integral cost of completing [D’s] performance, which was construction of the building. The loan interest costs are not much different in this respect than any other necessary construction input.
If [D] agreed to build the motel using no more than a certain amount of concrete, used up the full amount, and left the job incomplete, [J] could certainly recover as direct damages the cost of additional necessary concrete. Here, [D] agreed to build the motel using no more than a certain amount of time and therefore, necessarily, a certain amount of loan interest. [D] used up all the time and left the building unfinished, so [J] can recover as direct damages the cost of additional time necessary to finish construction. In this way, [D’s] obligation to complete the project on time, and the contract’s allowance of delay damages, are naturally integrated into interest charges, and thus direct rather than consequential damages”;
- Utility bills - it was D’s responsibility under the contract to pay for the monthly utility bills until the building was complete. Therefore, payment of utility costs during construction was expressly part of its performance, and the several months of additional utility bills were a direct part of J carrying out D’s performance on its own. These costs were therefore held to be recoverable.
Points to note:
- Some aspects of the US Court’s thinking are perhaps open to question, most notably in relation to the loan interest. However, in many ways its interpretation of the term ‘consequential’ is much closer to the ordinary meaning of the word and in that sense it is perhaps to be welcomed.
- Nevertheless, the analysis provided by the Court shows the very considerable divergence between the apparent US position on the meaning of ‘consequential damage’ and the stance under English law. In particular, the apparent dismissal of the relevance of the ‘foreseeability test’ is telling. Why is this important? It demonstrates very starkly that whilst we might seem to share a common language, that language can have very different meanings depending upon the law governing the contract. A contract governed by US law which excludes liability for ‘consequential losses’ would seem to exclude considerably more than the same provision governed by an English law contract, where a ‘consequential loss’ exclusion by itself arguably excludes relatively little.
- Quite how non-lawyer clients are supposed to be able to know what risks and liabilities they are taking on in such circumstances is open to question. No doubt it explains why US companies are so keen to preserve their consequential loss exclusions. Query whether European based customers will be quite so eager to accept such exclusions in the future? We suggest that many customers based in Europe would be surprised to find that a simple ‘consequential loss’ exclusion would preclude them from claiming damages for many categories of loss which are eminently foreseeable as likely to arise in the ordinary course of things as a natural result of any particular breach.