As I have often stated, any settlement you can live with is far better than the result an attorney will achieve for you at trial. Trials are time consuming and expensive, and, no matter how good your case is, there is no guarantee what the result will be when you let an arbitrator, judge or jury decide your fate. In addition, it is not productive for you and your employees to spend weeks away from your current projects to prepare for and attend a trial intended to resolve a dispute from a job that has long been completed. Thus, even a “win” at trial may not be considered a true success once you add in all the ancillary costs.
In light of the foregoing, for a case to go to trial, at least one of the parties must have an unreasonable valuation of the case. For example, I once defended a contractor from a subcontractor’s lost productivity claim that greatly exceeded the subcontractor’s actual costs. The subcontractor’s lost productivity claim was based upon a Measured Mile Analysis that purportedly determined that the subcontractor suffered $27 million in damages. However, the subcontractor’s financial statements indicated that its total loss was only $12 million. Although I repeatedly raised this issue with opposing counsel, he proceeded full speed ahead completely undeterred, only for the court to reject his expert’s opinions.
There are several types of claims that arise out of a construction project where the parties may have extreme differences of opinion as to the claim’s value. With regard to the example above, the reason an expert’s opinion of lost productivity damages may exceed a contractor’s actual costs is because most methods for determining lost productivity are approximations and, if not done properly, can lead to absurd results. Thus, one benefit of the often maligned “Total Cost Approach” is that you cannot come up with a number that exceeds the actual loss because the calculation is based upon subtracting the amount paid from the actual costs incurred. As was seen in my case, however, an improper Measured Mile Analysis can result in a claim amount that has no basis in reality.
In addition to poor expert analysis, another reason the parties may have disparate opinions of a claim’s value is due to a misunderstanding of damages that are recoverable, versus those which are not. Generally, after one party breaches a construction contract, the other party is entitled to those damages that are reasonably foreseeable at the time the contract was entered. Damages that are reasonably foreseeable include “direct damages” and “consequential damages.” Direct damages, as the name implies, are those damages that directly flow from a breach, e.g. an owner not paying its contractor the full contract price after the work is properly completed on schedule is obviously liable for the unpaid contract balance. Consequential damages are those that indirectly flow from the breach provided they are not too far remote or unreasonable. For example, lost profits do not directly flow from a breach, but it is generally accepted that, if a project is not completed on time, an owner can recover its lost profits. Conversely, a contractor may be prevented from bidding on additional work if it has to keep its labor and equipment available for a project that has been delayed, but such claims do not often prove successful.
The classic case that examined the limits of recoverable damages is Hadley v. Baxendale. In that case, a manufacturer hired a shipping company to ship a part that needed repair. The shipping company delayed the shipment for several days during which time the plant was not able to operate. The issue was whether the shipping company should be held liable for the plant’s downtime. In that case, the fact that the plant could not operate without the part being shipped was considered reasonably foreseeable and the shipping company was held liable for the manufacturer’s damages. Of course, in this brief synopsis, I am leaving out a lot of details that could lead to a different result. When it comes to the question of foreseeability and consequential damages for the breach of a construction contract, careful consideration of the facts by an experienced practitioner is crucial.
In light of the foregoing, if your negotiations are stalled because you and the other party have dramatically different valuations of the claim, please give me a call.