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Breach of Construction Contract Damages: What's Recoverable and What's Not?

Kentucky allows recovery of a variety of damages when there has been a breach of a construction contract or wrongful conduct within the context of a construction job. Which damages are recoverable – and which ones are not – when there is a breach of a construction contract?

Kentucky allows recovery of a variety of damages when there has been a breach of a construction contract or wrongful conduct within the context of a construction job. Which damages are recoverable – and which ones are not – when there is a breach of a construction contract?

Actual and incidental damages

Actual and incidental contract damages are generally recoverable unless they are otherwise excluded in the contract. Oftentimes, construction contracts have liquidated damages clauses which state the precise dollar amount of damages that may be recovered in the event of a breach of the contract. Kentucky courts generally enforce liquidated damages clauses as long as they have some reasonable relation to the transaction.

Consequential damages

Consequential damages are damages resulting from a party’s breach of contract that are not directly related to the breach of the contract itself. To be recoverable in Kentucky, such damages must have been a foreseeable consequence of the breach at the time the contract was entered. Such damages may include delay, lost profits, loss of bonding capacity, financial costs and unabsorbed overhead. Generally, the courts will enforce reasonable contract clauses that waive the recovery of consequential damages.

The Kentucky Fairness in Construction Act (KFCA), adopted in 2007, contains exculpatory clauses regarding damages. The Act states that certain types of clauses in contracts are unenforceable, including no damages for delay clauses, which attempt to waive the right of a contractor or subcontractor to recovery costs, time or damages for delay, which are in control of the real owner of the property or the public facility. The Act applies to commercial properties, not residential properties and certain utilities. Therefore, delay and disruption damages may be recovered as consequential damages, unless too remote or if they violate the provisions of the KFCA.

In addition, Kentucky has a statute that provides “any provision contained in any construction services contract purporting to indemnify or hold harmless the contractor from the contractor’s own negligence or from the negligence of his or her agents, or employees is void and wholly unenforceable.”

Damages under the Kentucky Building Code

Attorneys’ fees generally are not recoverable as damages unless provided for in statute (such as provided in Kentucky Building Code) or by the contract. The Kentucky Building Code is a unique and powerful statutory provision that requires payment of either the cost to repair or bring the property up to code compliance, payment of the diminution in fair market value of the property because of code infractions, plus a possible award of the cost of litigation, including attorneys’ fees.

Kentucky allows statutory interest on pre-judgment amounts if those amounts are liquidated and allows post-judgment interest at a statutory rate.

Stigma damages

Kentucky will allow stigma damages only where there has been a physical injury to the property.

Punitive damages

Kentucky allows for the recovery of punitive damages if there is tortious wrongful conduct, which is malicious or wanton in nature. Punitive damages are not available for breach of contract.

Damages in light of the economic loss doctrine

The Kentucky Supreme Court has clarified that Kentucky follows the economic loss doctrine, stating that where there is only economic damage, and no personal injury, then contract principles rather than tort principles apply.

Arbitration clauses

Kentucky courts strongly favor arbitration clauses, and will resolve any ambiguity in a contract provision regarding arbitration in favor of arbitration. Kentucky has a statute for arbitration procedure, providing for very limited appeal of arbitration damage awards absent manifest injustice or a clear accounting error. The actual procedure for arbitration is usually provided for in the contract, along with provisions as to recoverable damages.

If you have questions about how a breach of a construction contract may impact you or your business, please contact a member of our Real Estate Practice Group or Litigation Practice Group.

DISCLOSURE REQUIRED BY CIRCULAR 230. This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. If this article, including any attachments, contains any federal tax advice, such advice is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein (including any attachment hereto) may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author of this article. Thank you.

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