Key Business Court Decisions

Contract’s Exclusion Of Consequential Damages Prevents Recovery Of Expenses From Dealings With Third Parties

When businesses contractually agree that consequential damages caused by a breach of contract cannot be recovered, such provision prevents the recovery of breach-related expenses incurred from dealings with third parties.  Crescent University City Venture, LLC v. AP Atlantic, Inc. et. al., 2019 N.C.B.C. 46 (J. Bledsoe).[1]  As a result, the plaintiff was precluded from recovering any such third-party expenses, even though they were reasonably foreseeable at the formation of the contract. 

Plaintiff Crescent University City Venture, LLC (“Crescent”) contracted with AP Atlantic, Inc. (“APA”) for APA to act as the general contractor for a multi-building apartment complex to house students at UNC-Charlotte (the “Project”).  In their contract (“General Agreement”) the parties explicitly excluded the recovery of consequential damages resulting from any breach.

APA substantially completed the Project by January 2015. Within one month of students moving into the apartments, Crescent received complaints about apartment ceilings sagging.  An expert inspection estimated 30% of all trusses were defective. At the end of May 2015, Crescent demanded APA immediately commence work to repair the trusses and to complete the repairs by August 15, 2015.  APA refused, noting that it was still investigating the issues.  On June 4, Crescent invoked a “self-help” provision within the General Agreement and hired another construction company, Summit Builders, Inc. (“Summit”), to repair the trusses.  Shortly thereafter, Crescent moved all of the student-tenants out of the apartments to new accommodations and provided them with other benefits in an effort to keep them as tenants (e.g., free storage of their possessions, free shuttle service from the new location to the campus and monetary/gift card incentives (“Relocation Expenses”)).  At the Project itself, Crescent incurred significant expenses related to coordinating repairs to the apartment buildings themselves (“Operational Expenses”).  In total, Crescent incurred $1.9 million of Relocation Expenses and $650,000 of Operational Expenses.  After Summit timely completed the repairs,  Crescent filed a lawsuit against APA and its parent company, Adolfson and Peterson Construction (“A&P”), based upon a Performance Guaranty that A&P had given.  Crescent sought, among other things, recovery of the Relocation Expenses and the Operation Expenses.  APA sought summary judgment on Crescent’s claims for these expenses, contending that none of them were recoverable based upon the General Agreement’s exclusion of consequential damages.

The Business Court agreed, in part.  Recognizing that North Carolina distinguishes contract damages into three different categories (i.e., direct, incidental or consequential), the Business Court held the Relocation Expenses and Operational Expenses were not direct damages because neither represented the difference in the value of the property or the cost to repair the property, the hallmark for any claim of direct damages arising from property damage.  Notwithstanding the fact that North Carolina law does not draw a clear distinction between incidental and consequential damages, the Business Court nonetheless held that the Operational Expenses constituted incidental damages because they were costs that had been reasonably incurred by Crescent “for the purpose of minimizing the injury” resulting from APA’s breach.  (Opinion, ¶90).  In contrast, the Relocation Expenses were losses incurred by Crescent “in its dealings, often with third parties, which were a proximate result of the breach and which were reasonably foreseeable” by APA at the time of contracting. Those types of damages constitute consequential damages under North Carolina law and were barred from recovery by the General Agreement.  (Id., ¶93).  Moreover, because A&P’s Performance Guaranty obligated A&P to pay only those expenses owed by APA under the General Agreement, Crescent was precluded from recovering the Relocation Expenses from A&P as well.   

As a result of this decision, any business whose contract precludes the recovery of consequential damages should be careful in assuming that any payments it makes to third parties as a result of the opposing party’s breach will be recoverable.

Additional legal holdings in the case: 

·          Where the contract permits a breaching party the opportunity to cure, the non-breaching party’s failure to permit the cure is itself a breach of the contract and precludes recovery against the breaching party.  (Opinion, ¶58).

·          Use of the word “includes” in conjunction with a list in a contract is not a word of limitation but rather a word of enlargement; thus the list following the word “includes” provides merely examples of, but does not limit the antecedent to only those listed items.  (Opinion, ¶83).

[1] The Business Court’s extensive decision on the parties’ cross motions for summary judgment in this matter addressed numerous legal issues.  For the sake of brevity, and to address the numerous legal points rendered by the Court, discussion of this decision is broken down into multiple entries.

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