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Waivers of consequential damages can be unwise for owner-developers

Contract law, particularly when there is a breach of a North Carolina contract, will address the issue of compensable damages to the injured party to the contract. As explained by the American Bar Association, damages are typically divided into two categories: direct damages and consequential damages.

Direct damages, as you might guess, are the kind that result directly from the breach. An example might be having to hire a new contractor to repair shoddy work done by a prior contractor in breach of the contract. Consequential damages, on the other hand, are those damages that flow indirectly from the breach.

Consequential damages

Consequential damages are not always as clear as direct damages, but can be extremely substantial. They may include the following:

  • Loss of earned income to the non-breaching party, due to business stoppage because of the breach
  • Reduced value of the asset of the non-breaching party, due to faulty design or construction quality provided by the breaching party
  • Loss of sales contracts on real estate of the non-breaching party, due to closings not taking place timely or at all

Direct damages

Direct damages are far clearer and known as those damages that a reasonably prudent person who is a stranger to the contract would expect to flow from the breach. They do not require studied or personal knowledge of the non-breaching party or contract to ascertain that the damages would result, unlike consequential damages.

Waiving consequential damages causes construction litigation

As explained by the National Law Review, contracts in the world of residential construction, such as with multi-family dwelling and rented apartment projects, can be drafted in ways that can reduce the chance of construction defect litigation later. There are several key aspects between owner-developer and the general contractor that are addressable in the contract towards this goal. One such issue involves damages.

A common term found in contracts can include a mutual waiver of the parties' ability to collect consequential damages in the event of a breach. However, because the general contractor is more likely to suffer direct damages while the owner-developer tends to suffer more consequential damages, the mutual waiver may not truly be reciprocal.

The developer may be giving up far more rights, effectively, than the general contractor. As such, some recommend that the developer refrain from relinquishing its right to consequential damages.

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