Chapter 9 Damages

• Library: Arkansas Construction Law Manual (2016 Ed.)

Damages

Dennis M. Zolper^* and Jeffrey W. Puryear^**© 2016

9.1 Scope of Chapter.......................................... 9-2

9.2 Basic Theory – Compensatory Damages........ 9-2

9.3 Owner’s Damages – Cost to Complete or

Repair ....................................................... 9-5

9.4 Owner’s Damages – Diminution in Value...... 9-7

9.5 Owner’s Consequential Damages.................. 9-7

9.6 Liquidated Damages.................................... 9-9

9.7 Contractor’s Damages – Contract Balance

Less Cost to Complete................................. 9-12

9.8 Contractor’s Other Damages....................... 9-14

A. Direct v. Indirect Costs............................... 9-15

B. Direct Labor, Materials, and Equipment...... 9-16

1. Labor............................................ 9-16

2. Direct Materials............................. 9-17

3. Direct Equipment........................... 9-17

4. Cost Escalations............................. 9-20

C. Site Overhead............................................ 9-21

D. Home Office General and Administrative

Expense.................................................... 9-23

E. Additional Bond Costs, Insurance Premiums,

and Taxes.................................................. 9-25

9.9 Contractor’s Consequential Damages........... 9-26

9.10 Restrictions on and Waiver of Consequential

Damages................................................... 9-26

9.11 Interest, Attorney’s Fees, and Litigation

Costs......................................................... 9-29

A. Pre-Judgment Interest............................... 9-29

B. Post-Judgment Interest.............................. 9-31

C. Attorney’s Fees........................................... 9-31

D. Court Costs................................................ 9-33

9.12 Mitigation of Damages............................... 9-34

9.13 Limitations on Damages............................. 9-35

9.14 Contractually Barred Damages.................... 9-37

9.15 Disclaimers............................................... 9-38

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9.1 Scope of Chapter

This chapter first discusses the basic theory of compensatory damages. It then explores the various damage elements designed to achieve that compensatory goal for both an owner and a contractor. The chapter reviews the principles underlying any recovery for consequential damages, as well as the circumstances in which a party may recover interest, attorney’s fees, and costs. Finally, the chapter considers the principles, circumstances, and contract provisions which may operate to bar or limit damages.

9.2 Basic Theory – Compensatory Damages

The basis of the law of compensatory damages is to place a party who has been wronged in the position it would have been in if the alleged wrong had not occurred.¹ In contracts law, the specific focus of compensatory damages is to place the plaintiff in the same position as if the contract had been fully performed.² In so doing, the damages should give the plaintiff the benefit of its bargain or expectancy.³ Contract damages are ordinarily based on the injured party’s expectation interest.⁴

The general rule for the recovery of damages in any contract case is to award the plaintiff the money that will reasonably and fairly compensate the plaintiff for the elements of damage resulting from the defendant’s breach of contract.⁵ Thus, damages in any construction contract case must arise from the actions of the breaching party.⁶ To be recoverable, breach of contract damages must have been reasonably foreseeable to the contracting parties when they entered into their contract.⁷ Stated otherwise, compensatory damages are recoverable only if they are within the scope of what the breaching party “knew or should have known when the contract was made.”⁸

Arkansas recognizes two categories of compensatory damages in breach of contract actions: general damages and special damages.⁹ General damages are those that flow from the alleged breach of contract and are treated as the natural and normally occurring damages based upon a breach of contract or some other wrongful occurrence.¹⁰ General damages would include those expenses caused by the contractor’s failure to complete the project, the owner’s failure to pay the contract sum, or a delay in completion of the construction contract that can cause damages to either party.

Special damages do not automatically and necessarily flow from the alleged wrong or breach of contract, but nevertheless arise from the circumstances of each case.¹¹ Special damages would include collateral damage to the owner’s property during construction. In Arkansas, the recovery of special damages in contract actions is based on the defendant’s tacit agreement to be liable for more than ordinary damages.¹² Special damages are also known as consequential damages, which are discussed in Sections 9.5 and 9.9, infra.

Where the practitioner is concerned with whether damages are general or special, the issue can be alleviated by alleging all damages in the complaint and specifically supporting the damages claims based on the facts of the case.¹³

The party asserting the claim—whether plaintiff, counterclaimant, or cross-claimant—has the burden of proving by a preponderance of the evidence the amount of damages with reasonable certainty. Damages claimed cannot be based on speculation.¹⁴ Our model instructions are clear and provide that a reasonably certain term of the contract is one that provides a basis for giving an appropriate remedy.¹⁵ Precisely what constitutes “reasonable certainty” in a particular case will vary with the facts. As a rule, mathematical precision is not required, as such precision cannot reasonably be obtained in every case. Often, the nature of the breach itself, such as a series of overlapping delays or hindrances to work, is responsible for the inability to be more precise.¹⁶

In any claim, the party seeking damages should first consult the construction contract to identify the extent to which the parties have established the recovery of damages. Those terms will govern, provided Arkansas law does not invalidate them.

9.3 Owner’s Damages – Cost to Complete or Repair

The common scenario in an owner’s breach of construction contract claim results from the failure of the contractor to complete the project according to the contract terms. The failure of the contractor to complete the project typically causes the owner to incur costs for either completion of the contract or repairs to the project. In either situation, the law provides compensatory damages to the owner so that it recovers the costs that exceed the contract price for the construction and thus places it in the position it would have been in had the contractor performed under the contract. This cost rule is a preferred damages computation, if it is economically feasible in the circumstances, because it gives the owner a money equivalent of what it bargained for by permitting it to recover the cost of completing the work properly.¹⁷

When the contractor breaches by partially performing the construction contract, the owner can undertake to complete the project. In so doing, the owner can recover the expenses associated with finishing the project that exceed the original contract price.¹⁸ If, however, the owner elects not to complete the project, the damages would be limited to a return of any funds paid to the contractor for work that was not performed or materials that were not provided on the project.

Additionally, where the contractor has seemingly completed the project but its performance is not in compliance with all terms of the contract, the owner will incur expenses to remedy the contractor’s defects on the project. For example, in Jocon, Inc. v. Hoover an owner was awarded the costs of reasonable repairs due to the contractor’s failure to complete the construction for a parking lot.¹⁹

When proving damages of any type, actual cost records carry significantly greater weight than estimates.²⁰ Typical sources of actual cost data include quotations, purchase orders, payroll records, invoices, and accounting ledgers. Actual cost records can generally be introduced into evidence as business records by someone familiar with how the costs were recorded and maintained in the normal course of the contractor’s business.²¹ Actual costs may simply not be available, in which case estimates must be used to prove damages. Estimates are generally considered secondary evidence of damages but will be sufficient to sustain the claim if properly supported and justified.²²

9.4 Owner’s Damages – Diminution in Value

The owner may alternatively seek to recover damages for diminution in value of the property caused by the contractor’s breach. The owner may seek these damages when the contractor has failed to complete the project according to the contract terms. The owner’s recovery is based upon the “value” rule, which is the difference in the value of the property in its current state and the value as promised by the contractor.²³

9.5 Owner’s Consequential Damages

Indirect or consequential damages, also known as special damages, flow from the breach of the contract but are not so obvious and foreseeable as to qualify as direct damages.²⁴

Arkansas allows consequential damages according to the Tacit Agreement Rule: the breaching party must have tacitly agreed to be bound to more than ordinary damages upon breach of the contract.²⁵ In order to recover consequential damages in any contract action, the plaintiff must prove: (1) the defendant knew that its breach of the contract would result in consequential damages to the plaintiff; and (2) the circumstances under which the defendant made the contract were such that it should have understood that it had agreed to assume responsibility for the claimed consequential damages.²⁶ The party claiming consequential damages must demonstrate that the damages were a reasonably foreseeable or contemplated result of a breach of their...