Texas construction law has been less than crystal clear on the definition of consequential versus direct damages in contract disputes. Will Allensworth’s presentation to the State Bar of Texas Construction Law Conference considers the historical treatment of these legal terms of art, their effect on outcomes in lawsuits and arbitrations, and how to draft contracts to precisely define and allocate the risks associated with consequential damages.
A Question of Consequence
“It’s complicated” is the only appropriate response to a client asking about consequential damages and how to recover them (or prevent the other side from recovering them). Whether a particular damage element is consequential or direct simply depends on too much information for any lawyer to confidently opine on without carefully examining, among other things, the entire contractual relationship between the parties and reams of case law. Whether consequential damages are recoverable is also factually complicated and hinges on a bevy of factors, including perhaps some person’s subjective beliefs about what the parties anticipated, industry standards or customs, or some e-mail that your client received years ago but has long since forgotten.
Legal arguments over whether damages are direct or consequential damages are, to put it mildly, consequential. Consequential damages waivers were originally incorporated into industry form contracts in response to a $14.5M judgment against a general contractor whose total fee was around $600K. Last September, a federal court held that a general contractor could not pass-down roughly $1.3M in owner-assessed liquidated damages to its subcontractor, because the liquidated damages were not foreseeable and were in any event waived through a relatively boilerplate consequential damages waiver.
The purpose of this paper is to try and shed a flicker of light on an opaque legal subject. The paper begins with a brief history of consequential damages, and their now ubiquitous waiver in construction industry form contracts. Next, the paper sets forth Texas’s black letter law on direct vs. consequential damages, along with an analysis of several recent construction case opinions on the subject. Finally, the paper concludes with comments on drafting consequential damages waivers, or alternative clauses more suited to accomplishing your client’s goals.