Third Circuit, Applying NJ Law, Revisits Distinction Between Direct and Consequential Damages and Holds Indemnification Obligation Only Applies When Seeking Damages for Third-Party Losses

Atlantic City Associates, LLC v. Carter & Burgess Consultants, Inc., et al
2011 U.S. App. LEXIS 9191 (3rd Cir. May 4, 2011)

* Please note that the Third Circuit issued this opinion as a non precedential opinion pursuant to Third Circuit Internal Operating Procedure Rule 5.7.

Atlantic City Associates (“ACA”) hired Carter & Burgess Consultants, Inc. (“C&B”) to oversee construction of a development in Atlantic City, New Jersey. Following numerous delays, ACA sued C&B and obtained a total recovery, including attorneys’ fees, costs and interest, of nearly $13 million. On appeal, C&B argued that the District Court failed to apply several clauses of the parties’ agreement waiving consequential damages, and failed to enforce an additional clause limiting C&B’s total liability to its compensation.

In the underlying project, C&B submitted a proposal to ACA to provide architectural and design services. The proposal contained a liability cap providing that C&B would not be liable to ACA for any amount in excess of its total compensation. The proposal also contained a clause providing that C&B would not be liable to ACA for consequential damages, including but not limited to loss of use, loss of profit, or claims for delay, impact or disruption damages, and a clause permitting the prevailing party to recover its attorneys’ fees.

The parties entered into two largely identical agreements pertaining to different aspects of the work, which incorporated the proposal absent a conflict. The agreements contained a mutual waiver of consequential damages, provisions requiring errors and omissions insurance, an indemnification provision in favor of ACA against all claims and losses, and a standard of care provision.

ACA commenced an action against C&B for breach of contract and professional negligence. C&B moved for, but was denied, partial summary judgment on the basis of the consequential damages waiver and limitation on damages to C&B’s total compensation. C&B also filed an unsuccessful motion in limine to bar ACA from introducing evidence of consequential damages related to loss of use, loss profit, and claims for delay, impact and disruption. Following trial, the jury awarded ACA damages which included approximately $1.3 million in additional construction costs to fix errors, $3.6 million in lost rental income, $1.7 million in additional payments to contractors due to delay, and $1 million in additional administrative costs. The trial court also granted ACA’s motion for attorneys’ fees ($2.5 million), costs ($949,000), and pre-judgment interest ($1.7 million), bringing ACA’s total recovery to $12.7 million.

On appeal, C&B primarily argued that the trial court erred by allowing ACA to recover consequential damages for lost rental income, additional payments to contractors for delay, and additional administrative costs. The appellate court agreed and found that the trial court erred in its analysis of what damages were consequential.

The appellate court held that “direct” damages are not simply foreseeable damages. Rather, the appellate court held that New Jersey permits the recovery of consequential damages for those delays that were fairly and reasonable contemplated by the parties to the contract at the time it was made. As a result, instead of forseeability, the difference between direct and consequential damages depends on whether the damages represent (1) a loss in value of the other party’s performance, in which case the damages are direct, or (2) collateral losses following the breach, in which case the damages are consequential.

The appellate court found that the parties contract (both the terms of the agreements and the proposal) barred recovery of consequential damages. The court held that the only damages awarded for a loss in value of ACA’s performance (direct damages) were for the additional construction costs necessary to repair the errors ($1.3 million), and that all the other damages awarded were consequential. The court also found that attorneys’ fees were properly awarded pursuant to the term of the proposal expressly permitting recovery of such fees, as attorneys’ fees are not consequential damages, or even damages at all.

The appellate court also reviewed the trial court’s determination that the indemnification clause in the agreements applied to a first-party dispute between ACA and C&B. Quoting Third Circuit precedent, the court stated that the terms to “indemnify”, “defend” and, “hold harmless” must be read together such that the only sensible reading of these terms required third-party liability to exist in order for the obligation to be triggered. The court held that indemnification provision did not apply to this dispute because there was no allegation that ACA was seeking indemnity for third-party losses.

Finally, the court held that the recovery of attorneys’ fees and costs permitted by the proposal were not subject to the liability cap of C&B’s total compensation, as the proposal provided that the prevailing party was entitled to all remedies at law, and, in addition, to its fees and costs. The appellate court could not determine from the face of the contract documents whether pre-judgment interest was subject to the liability cap and remanded for the trial court to determine the issue.

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