DIRECT AND INDIRECT DAMAGES: WHAT IS THE DIFFERENCE?

By: Andrew Richards, Co-Managing Partner(LI), Kaufman Dolowich Voluck,
Attorneys at Law Legal Counsel, Subcontractors Trade Association

Andrew Richards
Co-Managing Partner(LI),
Kaufman Dolowich Voluck,
Attorneys at Law Legal Counsel,
Subcontractors Trade Association

There are really two types of damages for a breach of a construction contract, direct damages and indirect damages.  Direct damages are those that flow naturally and necessarily from the breach and compensate for loss that is presumed to have been foreseen or contemplated by the parties because of the breach.  Examples of direct damages include unpaid contract amounts due a contractor, and costs incurred to repair defective work or complete the work of the contractor.

Consequential damages are those damages that do not necessarily, but do directly, naturally, and proximately result from the injury for which compensation is sought.  In other words, they are the result of special circumstances not usually predictable. Not only must the damages be directly traceable to the breach of contract and result from it, but the damages must also be “foreseeable.”  Common examples of consequential damages are lost profits, lost bonding capacity, financing costs, reduced value or lost sales of real estate, and extended general conditions/overhead costs.  A party may recover provable, actual consequential damages, or through a liquidated damages clause in the contract.  Thus, liquidated damages are a type of consequential damage.  Consequential damages are recoverable in New York State unless the contract precludes the award of consequential damages.

Liquidated damages clauses are used because it may be very hard to quantify actual consequential damages.  These clauses set a specific dollar value typically per day for each day for each day after the contractual substantial completion date until the contractor substantially completes its work.  Utilizing a liquidated damages clauses saves much time and money proving the damages.  Liquidated damages may not be used as a “penalty.”  Liquidated damages are enforceable if they reflect a reasonable measure of anticipated damages, and the calculation of damages are difficult to otherwise calculate.  If the damages provided in the liquidated damages provision are not a reasonable estimate or the calculation of damages would not be particularly burdensome, courts may not enforce such provision.

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