Contract documents

February 28, 2023

There are a wide variety of claims and causes of action that may be asserted in a construction dispute. However, regardless of the type of claim or cause of action, there are generally three types of damages that can be recovered: direct, liquidated, and consequential damages. Understanding these categories can be beneficial when faced with a lawsuit.

Direct Damages

Direct damages, also known as actual damages, are those damages which are the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong. The aim of awarding direct damages is to compensate the plaintiff for the loss incurred that was foreseeable by the defendant from the wrongful act. In the context of construction claims, direct damages would include costs to repair or replace defective or damaged work and any additional costs incurred to complete a project in the event the Contractor failed to complete the work properly or in a timely manner.

Liquidated Damages

Liquidated damages are damages that are specified in the contract and agreed to by the parties. Liquidated damages are included in a contract to compensate for a potential breach of the contract. The amount determined in a liquidated damages clause is supposed to be a best estimate of the compensation that would be appropriate if the parties to the contract were to suffer a breach. Liquidated damages clauses typically specify certain types of breach, denoting the amount to be paid for each.

These provisions, however, are often difficult to enforce, and each jurisdiction has particular rules regarding enforceability of such provisions. One of the key factors in determining whether a liquidated damages provision can be enforced is whether the amount specified in the contract is reasonable. A liquidated damages provision that operates more as a punishment than just compensation for the loss will typically not be enforced. In making this determination, courts look to what would have been considered reasonable when the contract was formed, as opposed to when the claim actually arose.

Consequential Damages

Consequential damages, also known as special damages, relate to indirect losses or damages incurred by either party arising from a breach of contract by one of the parties. Some examples of consequential damages include lost profits or income, increased financing costs on the part of the owner, or loss of business opportunities by the contractor. The issue with consequential damages is that it is often difficult to quantify the amount of damages that a party is entitled to and the damages may be excessive compared to the overall value of the contract.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.