Judge Andrea Masley of the Supreme Court of New York County rendered a decision in Bldg 44 Developers LLC. v. The Pace Companies of New York LLC, which is highly significant in the area of construction law for two reasons: The first is that it clarifies, in the context of the construction contracts, when consequential damages can be recovered. The second, less obvious and possibly more important, is that it provides a bulwark against an owner or developer seeking to use theories such as third-party beneficiary status to circumvent the limitations on liability provided by traditional privity of contract.
Background on Bldg 44 Developers v. The Pace Companies of New York LLC
In Bldg 44, the developer of a Manhattan mixed-use building (“Owner”) claiming status as a third-party beneficiary from a general contractor (GC), brought suit directly against the GC's subcontractor. The Owner had a clause in its contract with the GC limiting Owner’s consequential damages to a certain amount. There was no mention of consequential damages in the GC-sub agreement. There was a clause in the GC - subcontract providing that the subcontractor would indemnify the Architect, CM and Owner for damages, including liquidated damages if applicable. It was this clause that Owner relied upon to seek unlimited consequential damages from the subcontractor.
The Owner sued the subcontractor for in excess of ten million dollars in consequential damages, including lost profits, lost rent, and refinancing fees under a third-party beneficiary theory. The Court held that no consequential damages could be recovered by the Owner against the subcontractor because the subcontractor did not reasonably foresee or contemplate being held liable for the Owner's consequential damages. The Court further found that the omission of a clause in the subcontractor agreement permitting recovery of consequential damages was purposeful, noting that the Agreement between the Owner and the GC limited the GC's liability to the Owner for consequential damages. Viewed slightly differently and as argued by the subcontractor, the Owner, as a third-party beneficiary standing in the GC's shoes, cannot recover damages from the subcontractor that the Owner would be unable to recover from the GC with whom it was in privity.
Key Takeaways for Construction Contracts
This case is important. As a practical matter, the decision restrains an Owner or Developer from circumventing its own contractual limitations with a GC by directly suing a sub- either on a third- party beneficiary theory, an assignment theory, or any other creative way to avoid long-standing and well-respected privity principles. In our view, such theories are properly used when a contractor goes bankrupt or defaults, and there is a need for an Owner to step into a GC's shoes to complete a contract or meet obligations. However, the theories should not be available as a weapon to ignore clear limitations of liability provisions in an Owner's own contract with a GC or any other parties with whom it is in privity.
The Court came at this problem more broadly by holding that where the facts warrant, an Owner's consequential damages for lost profits and loss of use etc., are not foreseeable to a subcontractor unless specifically contemplated or provided for in the subcontractor agreement. Relying on this logic, the Court held that all consequential damages were not foreseeable to the subcontractor and did not allow consequential damages up to the limit permitted by the Owner-GC agreement.
Either way, this very significant decision on foreseeability prevents parties from being exposed to potentially cripplingly consequential damages that were not bargained for or contemplated. This should be especially true where the party seeking the damages has an explicit agreement governing consequential damages with the party with whom it is in privity and seeks to rely on a broad indemnity provision to circumvent it. This decision does not in any way limit an Owner/Developer’s ability to provide for and recover consequential damages. It just makes clear that consequential damages may be forfeited if not explicitly provided for.
Attorneys and clients representing all stakeholders in the construction process should take note.
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