When a contractor or subcontractor is terminated for default, the terminating party may seek its damages for completing the defaulted contractor or subcontractor’s scope of work. The cost to complete the work will almost always exceed whatever money was left in the contract to complete the work.

Construction contracts will often expressly allow the terminating party to obtain the above excess completion costs. And under Florida law, “controlling weight should be given to the actual expenditures, made in good faith, that are necessary to complete the job covered by the original contract.” R.K. Cooper Builders, Inc. v. Free-Lock Ceilings, Inc.

But what happens when the excess completion costs include the cost to construct a second building when only one building was contemplated under the parties’ contract?

Will those excess completion costs be considered a form of consequential damages that may be barred under the parties’ contract? A federal court recently considered that question in United States ex rel. Sustainable Modular Management, Inc. v. JE Dunn Construction Company.

In Sustainable Modular Management, a contractor entered into a contract with the federal government to design and construct renovations to a hospital. The contract required the contractor to build a temporary facility (TF) to house hospital departments during the renovation of the project.

The original plan—two phases and one temporary facility.
The contractor planned to complete the renovations in two phases. First, the emergency department and other personnel would move into the TF while the contractor completed the first phase. And second, after the first phase was complete, the emergency department and other personnel would move out of the TF to the completed first phase renovation. The remaining personnel would then move into the TF while the contractor completed the second phase.

The contractor subcontracted with a subcontractor that would design, construct, deliver, and install the TF. The subcontractor was also required to reconstruct the TF between the two phases of work and remove the TF after the renovations were done.

The subcontractor stops working and the contractor incurs $10 million in completion costs. 
After the subcontractor’s work started, there was a delay to completion of phase one of the project. The contractor contended it was the subcontractor’s fault, and the subcontractor disagreed. The parties’ dispute ended with the subcontractor stopping work, and the contractor completed the subcontractor’s work.

In an effort to complete the project as quickly as possible, the contractor used two TFs to complete phases one and two concurrently, instead of completing the work in two phases as considered under the subcontract. Ultimately, the contractor spent $12 million to complete the subcontractor’s work, even though the original subcontract amount was around $2 million.

The contractor sought roughly $10 million from the subcontract for the excess completion costs. Of that $10 million, about $7.6 million was associated with the cost of installing the second TF.

The subcontractor sues the contractor, and the contractor asserts a counterclaim against the subcontractor.
Initially, the subcontractor sued the contractor and the contractor’s payment bond surety for amounts the subcontractor believed it was owed. (For more information on payment bond claims, click here.) The contractor filed a counterclaim against the subcontractor for the subcontractor’s alleged breach of contract and sought the above excess completion costs.

The subcontractor filed a motion for partial summary judgment in which it argued that the contractor was not entitled to recover the $7.6 million for the cost of installing the second TF under the subcontract. The subcontractor argued that those damages were barred because the parties waived consequential damages under the subcontract.

Were the contractor’s damages associated with completing a second TF barred as consequential damages?
The subcontractor contended that the contractor could not obtain the $7.6 million to build a second TF because they were consequential damages that were barred under the subcontract. There was a mutual waiver of consequential damages in the subcontract that provided the contractor and subcontractor waived “claims against each other for their consequential damages arising out of or relating to this Contract, including without limitation any consequential damages due to either party’s termination.” 

The court noted that “[c]onsequential damages are those that occur as a result of special circumstances, beyond the ordinary course of events, which the party in breach will be aware of at the time of contract formation only if notified of such circumstances.”

The court finds the consequential damages waiver ambiguous and looks to the parties’ intent.
Since the contract did not define what the parties contemplated would be “consequential damages,” the court concluded the consequential damages waiver was ambiguous. As such, the court looked to the intent of the parties.

The court found that the parties never intended a second TF to be used when they entered into the subcontract. The court noted that the scope of work only included the construction and renovation of a single TF for both phases of the project. Also, the contractor’s corporate representative acknowledged that at the time the parties entered into the subcontract, the parties did not consider that a second TF would be used to complete the project.

The court concludes the contractor’s $7.6 million in damages associated with the second TF were consequential damages.
Based on the above evidence, the court wrote that the contractor’s “use of a second [TF] constitutes consequential damages because [the contractor] only contracted to receive one [TF] under the terms of the Subcontract, and the parties did not consider utilizing a second [TF] to complete performance at the time of contracting.”

The contractor argued that the parties intended the use of a second TF, and it was contemplated under the subcontract because the subcontract contained “damage-for-delay provisions.” Those provisions provided that damages would be assessed against the subcontractor “for delay in performance, and [the subcontractor] would be liable to [the contractor] for additional expenses incurred by [the contractor] in completing [the subcontractor’s] work.”

The court took issue with the contractor’s argument because the damage-for-delay provisions “generally consider [the contractor’s] remedies if [the subcontractor] delayed or abandoned in its performance as set forth in its Scope of Work. And [the subcontractor’s] Scope of work was to provide one [TF].”

The court further noted that under the contractor’s interpretation:

any action it took to complete the project was reasonably contemplated by the parties at the time of contracting so long as it resulted from [the subcontractor’s] delay or abandonment. That position is untenable. Some actions, even if remedial, were not considered by the parties and do not rise directly from [the subcontractor’s] breach. This is especially true when those actions cost three times the amount of the entire value of the Subcontract.

Based on that reasoning, the court concluded that the contractor’s “request for damages related to the second [TF] are consequential because they were not contemplated by the parties, and although they were used to remediate [the subcontractor’s] alleged delay or abandonment, were not contracted for under the Subcontract.”

Thus, the court granted the motion for partial summary judgment. That means that $7.6 million of the contractor’s roughly $10 million claim was effectively wiped out on summary judgment—a ruling that may affect the resolution of the case.

Bottom Line: There may be odd situations where the cost to complete a defaulted contractor’s or subcontractor’s work is considered a form of consequential damages not contemplated by the parties. The above case is unusual because the contractor essentially built two buildings where the subcontract only contemplated the completion of one building.

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