Dealing with Consequential Losses

By: Dr. Chandana Jayalath

Losses can be recovered under two limbs namely the losses arise naturally, according to the usual course of things, as the result of the breach (first limb); or the losses that were contemplated by the parties, at the time the parties made the contract, as being the probable result of the breach (second limb). Consequential loss in construction contracts is equated with the second limb, as they are often be specified clearly in writing, such as payments to consultants during penalty period.

The extent to which the Owner is exposed to financial losses arising as a result of delayed completion of the Contract Works in consequence of loss or damage occurring during the construction period is not always clear. The relevant clauses of the FIDIC Conditions of Contract can be open to differing interpretations and indeed the law according to which the Contract is to be interpreted will also have a bearing on the position.

The issue of consequential loss revolves around the Clause 44 and 47. In particular it is not clear from Clause 44 of the FIDIC Conditions of Contract whether the Contractor is entitled to an extension of time for completion if delayed completion of the Contract Works occurs in consequence of loss or damage to the Contract Works during the construction period. If the Contractor is entitled to an extension of time, the Owner will not be entitled to recover financial loss suffered in consequence of the delay. If the Contractor is not entitled to an extension of time, then the Owner will be entitled to recover liquidated damages for delay under the provisions of Clause 47 but if the liquidated damages have not been agreed, he could be entitled to recover his actual financial loss. The insurances normally effected by Contractors do not provide the Owner with an indemnity against financial loss resulting from loss or damage to the Contract Works. The FIDIC Conditions of Contract do not stipulate that the Contractor should arrange to cover this exposure.

It is consequential losses which may be the most unpredictable and, on certain projects, the most significant. What constitutes consequential loss will depend upon the circumstances. Often, those who refer to consequential loss are particularly keen to exclude loss of profit, but the courts have held that loss of profit may be a direct loss, at least in some cases. Limitation clauses govern the limit of consequential losses in many standard forms.

An example of a limitation clause is the following, giving the parties the ability to cap certain types of losses at an  agreed maximum: ‘… the Contractor’s liability for loss of use, loss of profit or other consequential loss arising in respect of the liability of the Contractor in clause 2.5.1 [Contractor’s design liability] shall be limited to the amount, if any, named in Appendix 1…’ (JCT Standard Form of Building Contract with Contractor’s Design, 1998 edition – extract from clause 2.5.3.) This clause addresses loss of profit separately but does not limit the client’s right to claim damages for direct losses for remedying defects in the building’s design and/or construction.

Likewise, if construction works were not completed in accordance with the contract, the losses of the client in completing those works could be recoverable, whatever their nature and value, subject to the usual common law rules and the remainder of the contract. However, where a penalty period prevails, meaning that the employer cannot use the facility, or that a lucrative opportunity to make a profit has been lost, ‘loss of use’ and/or ‘loss of profit’ claims would succeed only up to the amount of any agreed cap, one of which is the payments to consultants, as specified in the contract. This compensation to the Employer shall be the amount payable to the Consultants whose deployment has been made mandatory because of the extension of services during the prolonged period.

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