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Contractor Issues / Mini-Series, Part 4


Damages


This is a 10,000 foot overview on the issue of contract damages when focusing on service contracts concerning general contractors and subcontractors. While we include some scenarios below, please keep in mind that the facts could be reversed, and these scenarios are not written to cover every single angle of what may occur.


These types of remedies are all under the umbrella of civil law, thus it is all about money damages, or compensatory damages.


If there is a finding of a breach of contract, and nobody has been excused from performance, then the issue of damages comes up. Generally, a claimant or plaintiff may be entitled to pursue:


1. Incidental damages;

2. Expectation damages;

3. Consequential damages; or

4. Reliance damages.


(This does not discuss other types of damages such as liquidation damages or punitive damages, etc.).


Incidental Damages


First, incidental damages are about out of pocket expenses. These types of losses arise after the breach of contract occurs and concern the additional costs to the party to avoid additional loss. In the current scope of discussing contractor and subcontractor disputes, take the following example: A general contractor hired a subcontractor to perform plumbing work. The subcontractor goes to the local store to purchase pipes, gaskets, and other supplies to perform her end of the bargain. She spends $3,000 in supplies, and knows that she’ll need to spend another $2,000 in another few weeks. Without warning, the general contractor changes his or her mind and terminates the deal. The subcontractor just spent a few thousand dollars preparing to perform. These are incidental costs that the subcontractor incurred and is thus entitled to recover.


Note that the subcontractor in this case will also have a duty to mitigate her damages. She can’t just go back to the store, spend the extra $2,000 that she knew she’d have to ultimately spend. Here, she knows there is a problem, so she would have a duty to stop spending and focus on the recovery of what she incurred. If she spends the extra money, she may be prevented from recovery because she did not mitigate her damages.


Now, of course, if the subcontractor went to Home Depot and made these purchases she could probably walk right back into the store with her receipt and return all of the products. But what if she couldn’t? Maybe some of these parts (pipes, gaskets, nuts, and bolts) were already used and are fixed into place. Thus, the subcontractor could argue she’s entitled to the value of her labor and materials expended prior to the repudiation, plus the profit that would have been realized, but nothing further.


Expectation Damages


Second, expectation damages are about receiving the benefit of the bargain. It puts the non-breaching party into the same position had the contract been performed. Take this example: A married couple hired a contractor (Contractor #1) to build a home for $250,000, and then the contractor abandoned the work halfway through the job. The married couple had spent $125,000 already, and couldn’t get the contractor to resume, so they had to hire a second contractor (Contractor #2) to complete the performance. Contractor #2 is hired for $150,000, which is the amount it will cost to finish building the home. Note that the homeowners are spending an extra $25,000 in substitute performance to get the home finished.


After the home is built, and assuming that Contractor #2 did not have to fix any errors left by Contractor #1, then the homeowners are entitled to pursue expectation damages. They aren’t entitled to recover the $150,000 spent on Contractor #2 as that would result in a “windfall” to the homeowners. However, the original contract was for $250,000 (the cost to build a home). They spent $125,000 before Contractor #1 abandoned the contract, which means there was another $125,000 left to go. The substitute performance is completed by Contractor #2 for $150,000 ($25,000 above and beyond the original $250,000 bargained for). Thus, $25,000 is arguably the homeowners’ expectation damages and puts them in the place had the contract been performed how it was originally promised to be.


Consequential Damages


Third, consequential damages are about damages that would naturally flow from the breach and are reasonably foreseeable to the breaching party. Example: A homeowners hires a general contractor in the late winter to build an addition to her home to rent out. She tells the contractor that she’s building the addition because she’ll have some tenants living there starting in the fall and is creating this space to generate some supplemental income. The contractor gets behind schedule during the summer months, and starting in September only has 80% of the addition completed (there is no livable space). If the contractor is in breach when fall comes and there is not a livable space, then the homeowner may have lost the ability to earn that rental income. This is a reasonably foreseeable consequence of the breach, and the general contractor would have been aware of the special circumstances (the homeowner told the contractor why this addition was being built).


To win on a consequential damages argument there are a number of criteria that would have to be proven in court. Was the contractor on notice that the completion of this contract was for the homeowner to earn extra income by renting it out? Did the owner/landlord have tenants already signed into a contract? Was the amount of money lost known or can it be ascertained? Did the breach completely cut off the homeowner’s ability to earn such extra income, or did it just delay it (thus mitigating or reducing the amount of consequential damages that could be obtained)? The list goes on. These types of damages come up in all forms of contract disputes, and an experienced attorney can ascertain whether or not you could be entitled to them.


Reliance Damages and Restitution


Fourth, reliance damages are another example of compensatory damages. If expectation damages are too speculative, then this is a remedy to pursue. If a general contractor has been hired to build a new store before the holiday season, fails to perform and all of the holiday sales are missed, then it is extremely hard to determine what amount of profits the store could have made in a Black Friday sale. But the breaching contractor could reimburse the store owner for the advertising fees, the employee salaries, and other expenses (all of these commitments made in reliance of the contract that the contractor was expected to perform on). These reimbursements place the store owner into the same position he was at the start.


Generally, expectation damages are where the remedy is going to be found (putting the non-breaching party into the same place they would have been in had the contract been performed). But if this is too hard, then attorneys may look into reliance damages.


On occasion, there is a basis to argue for restitution damages. This puts the non-breaching party into the same position as if the contract had never been performed. It is about getting your money back and it is as if there was never a contract to begin with. If a party is unjustly enriched by their breach, or failure to perform, then they should “restore” the non-breaching party. The breaching party must give up what they gained from the other party and return the person to the status they were in before the execution of the contract.


In the alternative, what was the benefit conferred to the other party? Use the first plumbing example above. If a substantial amount of the plumbing work was completed then the subcontractor’s performance helped (1) the general contractor’s own contractual duties, and also (2) improved the value of the property she was working on. However the argument is framed, the subcontractor is entitled to the benefit, or work, she provided and should be compensated the fair market value of her services. If she isn’t, then the general contractor is unjustly enriched by getting the benefit of the deal without having to pay for it.


Tie In to Consumer Protection Act


An overall general note, if there are certain violations under the Regulation Of Home Improvement Contractors Act (M.G.L. c. 142A), there could be a violation of the Massachusetts Consumer Protection Act (M.G.L. c. 93A), which could result in double or triple damages.


Various Defenses


Finally, there are many defenses and ways to reduce the amount of damages claimed as well. Did the other side mitigate their damages? Is the contractor entitled to the fair market value of his or her services already performed? What amount of costs did the contractor incur in starting the contract? Did they provide and install materials that are already fixed into place? The contractor may be entitled to be paid for those costs and for the labor in installing these, or else you would be unjustly enriched by their performance? Even if the work is partially performed, on occasion the work may actually increase the fair market value of your home—thus this is factored into the math in assessing damages when there is a breach of contract claim. Equity is found on both sides of the dispute.


Concluding Remarks


As a final word, please note that this is not an all-encompassing article. There is a lot of literature and case law on the issue of damages and each case is different. For example, these contractor articles concern issues with service contracts. However, if we’re discussing an issue with the sale of goods, then a different analysis applies (using the state’s version of the Uniform Commercial Code as opposed to common law).


Please consult an attorney.


-Niles and Kyle

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