Lost Profit Claims in Construction Litigation: Speak Now, Or Forever Hold Your Peace?

In an unpublished February 18, 2014 decision, the North Carolina Court of Appeals (“COA”) refused to let a project owner pursue drastically higher lost profit damages after its counterclaim had been tried, appealed and remanded for further findings on the issue of damages.

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In J.T. Russell & Sons, Inc. v. Silver Birch Bond, LLC, the owner, Silver Birch Pond (“SBP”), was the developer of a subdivision that had hired a paving company to perform the project’s asphalt paving work for about $150,000.  SBP refused to pay for the work, citing deficiencies in the contractor’s performance.  At trial, SBP successfully defeated the contractor’s claim for payment and prevailed on its own counterclaim for construction defects, but on appeal, the contractor successfully argued that the jury’s award of damages wasn’t fully supported by the evidence.  The COA agreed, sending the case back to the trial level for further findings of fact on various damages issues.

That’s when SBP tried to up the ante on its alleged lost profit damages.

During round 1 of the litigation, it had prevailed in seeking compensation for certain interest payments it had made on its development loan, as well as lost profits on two missed lot sales, for a combined total of around $75,000.  After the COA sent the case back to the trial court for round 2 and the trial court reopened discovery on the issue of damages, however, SBP tried to seek an addition +$1.1MM in lost profits as follows:

First, instead of only claiming lost profits based on the lost sales on two of the lots, SBP claimed lost profits for all 39 lots because … the bank foreclosed on the subdivision.  Thus, SBP lost any and all potential revenues from selling lots in the subdivision. Second, SBP now claimed damages for lost “homebuilder premiums.”  Mr. Johnson [SBP’s principal] alleged that he was also the principal of Willow Brook Homes, Inc., a company that constructs modular homes. Since the subdivision was a “closed development,” each time someone purchased a lot from SBP, he would be required to purchase a modular home for that lot from Willow Brook.  To pay off SBP’s loan quicker, Willow Brook would pay SBP a “homebuilder premium” each time a sale was made — $20,000 for the first 10 lots, $15,000 for the next 10, $10,000 for the next 10, and $5,000 for the last dwellings sold. The total new amount of requested damages for lost profits was $1,137,906.

The trial court wasn’t having it.  On SBP’s motion for leave to amend its counterclaim to include this new theory of lost profit damages, the trial court ruled that because the motion was filed four (4) years after the initial counterclaim and sought “speculative and unforeseeable” new damages, the motion should be denied.

Back up on appeal, the COA agreed, focusing on the owner’s delay in asserting its new damages theory:

Given the substantial amount of time that had elapsed between the filing of SBP’s counterclaims and the motion to amend, the trial court’s denial of the motion to amend was manifestly supported by reason.  SBP filed its initial counterclaim in December 2008. The first trial occurred in 2010.  After this Court reversed and remanded the judgment awarding damages to SBP back to the trial court in December 2011, SBP still did not move to amend its counterclaim until October 2012, almost four years after the initial counterclaims were filed and almost one year after remand.  Moreover, we find that SBP’s reasoning behind the delay is not compelling.  Therefore, the trial court did not abuse its discretion in denying the motion to amend.

The takeaway?  Two points spring immediately to mind:

• Whether you’re an owner, prime contractor, subcontractor, supplier or surety, don’t overlook damages, particularly lost profit damages, during the early stages of construction claim assessment and pleading.  Lost profits are considered “special damages” in North Carolina, and therefore must be specifically averred.  See Stanford v. Owens, 46 N.C. App. 388, 398, 265 S.E.2d 617, 624 (1980); N.C. R. Civ. P. 9(g).  Since there’s no guarantee a trial court judge will allow amendment of a complaint, counterclaim, crossclaim or third-party claim once the parties are waist-deep into litigation, it’s best to consider, develop and assert all viable theories of damages sooner as opposed to later.

• If you’re a prime contractor, mutual waiver of consequential damages clauses, such as those set forth in § 15.1.6 of the AIA-A201™ 2007 General Conditions and § 6.6 of the ConsensusDOCS 200 General Conditions, are your friend.  Such clauses bar owners from recovering the very type of lost profit damages SBP actually recovered in round 1 and sought to recover during round 2 of its case.  True, because these waiver clauses are “mutual,” they bar your own recovery for lost profits not related to the project, damages to your business reputation, etc.  In my experience, however, that’s a trade-off prime contractors should be happy to make; in the usual case, your exposure for the owner’s consequential damages will exceed the owner’s exposure for yours.  I recommend negotiating your next contract accordingly.

What do you think about the recovery of lost profit damages in connection with construction disputes?  Do you have any experiences you’d like to share?  Please comment below!