By Wolf Saar, FAIA
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Sands Casino and Hotel 1967 © Mark Goebel
Imagine you’re an architect hired to design a building for a manufacturer of cutting-edge virtual reality technology. During construction, a heavy snowfall causes significant ice buildup, and part of the roof collapses onto the manufacturing floor, delaying the project’s completion. Although the contractor installed the roof as planned, your design may have contributed to the issue by failing to account for proper drainage, leading to the ice buildup.
Your client submits a claim for rebuilding the damaged structure, but the delay in completing the project also meant they couldn’t fulfill customer orders, losing income and profits. Meanwhile, a competitor took over the market share. The cost to rebuild the facility is considered “direct damage,” as it directly correlates to the breach of contract (failure to design a roof that could handle heavy snow). However, the lost profits your client claims due to the delay are “consequential damages”—costs not directly tied to the physical damage but arising from the resulting business disruption.
Consequential damages are “indirect expenses” connected to a breach of contract, such as lost profits, business opportunities, or other financial losses. These damages can be disproportionate to the cost of repairing the actual damage, and they can be significant for architects and contractors.
These damages are typically recoverable if they were reasonably foreseeable at the time of the contract agreement. However, whether consequential damages are awarded is ultimately a decision for a judge or jury.
A notable case involving consequential damages is Perini Corporation v. Greate Bay Hotel and Casino. In the early 1980s, the Sands Casino and Hotel in Atlantic City was struggling to attract high-rolling customers. After purchasing the property, the Sands owners decided to renovate, including creating a new entrance and a striking glass façade to improve visibility and attract customers from the nearby boardwalk.
The project, initially budgeted at $16.8 million, was later increased to $24 million. Perini Corporation was hired as the construction manager, with a crucial completion date set for May 31, 1984, to capitalize on the high summer season. However, due to delays, the renovation was not completed until late August, four months behind schedule.
As a result, the Sands filed a claim for lost profits, which amounted to $14.5 million. Perini argued that the contract didn’t address lost profits. However, the New Jersey Supreme Court ruled that the lost profits were consequential damages because they were reasonably foreseeable. The court cited four key reasons for this decision:
Architects should be proactive in addressing potential consequential damages in their contracts. One effective way to do this is by including a waiver of consequential damages clause in the agreement. This clause limits the liability for lost profits and other indirect costs resulting from construction delays, design defects, or other issues that may arise during the project.
The AIA (American Institute of Architects) introduced a similar clause in its A201-2017 General Conditions of the Contract for Construction. This clause ensures that both the owner and contractor waive claims for consequential damages, including rental expenses, income losses, and damage to business reputation, among others. For architects, it’s essential to incorporate this provision into contracts with owners to minimize the risk of costly claims.
Architects and owners alike can benefit from mutual waiver clauses, which prevent claims for consequential damages in the event of project delays or design failures. Although such clauses are often part of the AIA’s standard contracts, their inclusion is still subject to negotiation between the parties. By incorporating a waiver of consequential damages clause, architects can significantly reduce their exposure to significant legal claims related to lost business opportunities, profits, and reputational damage.
Architects must carefully consider the potential for consequential damages in their contracts and take steps to mitigate these risks. The Perini Corp. v. Greate Bay Hotel and Casino case serves as an important reminder of the financial implications of construction delays and design flaws. By adopting clear contract provisions, including waiver clauses and limitation of liability clauses, architects can better manage these risks and protect their interests in the event of unforeseen damages.
On October 18, 2007, the Sands Hotel and Casino in Atlantic City was demolished in a spectacular implosion, marking the end of its storied history. The demolition, accompanied by fireworks and celebrations, was a symbolic closing chapter for the casino, which had struggled to meet its revenue targets even after extensive renovations.
Wolf Saar, FAIA is the current Vice Chair of the AIA Contract Documents Committee and Managing Director of VIA Architecture’s Seattle office, an influential west coast regional practice in architecture and urban planning noted for its leadership in transit, infrastructure and housing design in Canada and the US. Wolf has been a frequent presenter at AIA National Conferences and AIA-sponsored webinars regarding Contract Documents.