The Florida construction industry is governed by contracts- between project owner and general contractor, general contractor and subcontractor, and between any of these parties and a third-party provider such as a materials supplier. If a breach of contract occurs, two types of damages are generally available if the plaintiff prevails: direct and consequential. This blog outlines the nature of each type, the differences between them, and what you need to know about their potential impact on your company.
Direct Damages
These damages are intended to compensate the plaintiff for losses directly related to the breach. Unpaid invoices, substandard workmanship or materials, and costs associated with completing unfinished work or repairing defective construction are examples of direct damages.
Consequential Damages
Florida’s Uniform Commercial Code defines consequential damages as a foreseeable and direct consequence of the construction contract being breached. Some examples include lost profits, property value reductions, and loss of bonding capacity. Under Florida law, these damages can be recovered unless they are waived in the contract.
A plaintiff can recover consequential damages in two different ways. They are:
- A claim for compensation based on actual and proven damages
- Acting upon a liquidated damages clause in the original contract
What are Liquidated Damages?
It can be difficult to assign a dollar value to actual consequential damages, so construction contracts often include liquidated damages clauses. Using these clauses can save time and money by assigning a specific dollar value to each day that passes between the contract’s substantial completion date and the date the job is actually completed.
Courts will only enforce liquidation clauses if the anticipated damages are reasonable, so as not to act as a penalty. Overly burdensome estimates are unlikely to be collected. If the breach was caused by the death of the contractor or subcontractor before the work was completed, liquidated damages are not recoverable, though actual consequential damages may be pursued.
Precluding Consequential Damages in a Construction Contract
Many Florida construction contracts are designed to exclude recovery of consequential damages. Other agreements contain clauses stipulating that the only recoverable damages are liquidated ones.
The contractor should demand a limit on its liability if the project owner does not remove clauses pertaining to actual or liquidated consequential damages. An acceptable cap is a percentage of the contract price or the profit that the contractor is expected to make from the job. Without one, bonding companies may not underwrite a performance or payment bond, as a contractor could tender a proposal valued at (for example) $5 million and end up facing consequential damage claims worth much more.
Understanding Consequential Damages is Critical
It is crucial that all parties to a construction contract understand the impact of consequential damages clauses. If the financial consequences are not capped, they can cripple or even end an otherwise thriving business. If you have questions or need a contract drafted or reviewed, contact the Florida Construction Law Group at (305) 227-4030.
