Another "New" Building Bites the Dust / Consequential Damages

According to an article published by the Wall Street Journal on August 15, 2011, the “Harmon Tower,” a new, unfinished building located on the Las Vegas strip must be demolished before it is used because of structural defects.

Seattleites are quite familiar with new buildings being demolished well before their time. Currently, the McGuire building, a 25-story apartment building in Bell Town, built in 2001, is being taken a part piece-by-piece because of corroding post-tension rods throughout the concrete structure. Lease Crutcher Lewis, McGuire Building Demolition. All residents inhabiting the McGuire building were required to move out in 2010 because of fears that the rods would crack or even fail. And while the contractor of the McGuire building, McCarthy Building Co. based in St. Louis, Missouri, has apparently settled the disputes arising from the defects, there remains a stigma for all new buildings having been erected in Seattle over the last decade.

The Harmon is a part of the $8.5 billion CityCenter Project in the heart of Las Vegas and is co-owned by the MGM and Dubai World. The MGM contends that it has consulted with numerous experts who agree that the Harmon’s “pervasive and varied” defects would cause it to collapse in a major earthwork, therefore, the new building must be razed. Perini Building Co. (“Perini”), the general contractor on the project, insists that the defects can be repaired and that the MGM desires to demolish the building “to hide the fact that the Harmon is not a threat to public safety” and to get out of having to pay the outstanding $200 million for a condo building that is no longer financially viable in our waning economy. As of now, Perini and MGM are battling out the future of the Harmon in the Nevada courts. Stay tuned for more about the fate of the Harmon.

You may recognize the name “Perini” because it became synonymous with “consequential damages” when the New Jersey Supreme Court upheld a $14.5 million arbitration award for the Sands Casino due to lost profits not contemplated during the formation of the contract.

Insertion of a consequential damages waiver was arguably the most important change made in 1997 to the AIA A201 General Conditions document. This change brought construction contracting more in line with the practice followed in the sale of goods. In the sale of goods contracts, it is common for sellers to limit the remedies available to buyers of goods in the event the goods prove defective (see UCC 2-719)—protecting the supplier/seller from liability for consequential damages.

In AIA 201 (2007) § 15.1.6, both Owner and Contractor “waive Claims against each other for consequential damages arising out of or relating to” the construction contract. The Owner specifically waives rental expenses, loss of use, income, profit, financing, business and reputation, and loss of management or employee productivity or services of such persons. The Contractor, on the other hand, waives principal office expenses, including the compensation of personnel stationed there, loss of financing, business and reputation, and loss of profit other than anticipated profits arising directly from the Work itself.

In 1997, the AGC suggested the inclusion of the mutual waiver of consequences damages clause in the AIA 201 general for conditions. The AGC, in urging support of the mutual waiver, argued that recovery of Contractors’ pure delay damages has been rendered exceedingly difficult by many recent State and Federal Court decisions. Several restrictions have been imposed on the Contractor’s ability to recover for extended overhead using the Eichleay formula – to the point that the risk of a disastrous award against the Contractor outweighs the rights the Contractor might have waived, e.g., delay damages such as extended overhead costs.

The addition of the mutual waiver provision in the AIA Documents was in large part prompted by the case of Perini Corp. v. Greate Bay Hotel and Casino, 129 N.J. 479, 610 A.2d 364 (1992). Perini was hired to manage the renovation of the New Jersey Sands Hotel and Casino (Owner). Perini was not the General Contractor on the project and did not perform any construction work. Perini was the construction manager. The Owner terminated Perini’s contract after substantial completion of the project. Perini sued the Owner for wrongful termination. The trial court sent the matter to arbitration.

In the arbitration, the Owner asserted a counterclaim for damages incurred because the facility did not open in time for the summer gambling season. The arbitration was a disaster for Perini. Although the total amount of the contract was $16,800,000, Perini’s fee was only $600,000. The arbitrator awarded the Owner over $14,500,000 in lost profits damages, $4,000,000 of which comprised delay damages that accrued after the date of substantial completion, against Perini, the construction manager! On appeal, the Court upheld the arbitrator’s award. The AGC’s urging of the mutual waiver of consequential damages clause was based on the disproportionate award of consequential damages to the Owner.

The AGC did not endorse the 2007 AIA family of documents opting instead to endorse the ConsensusDocs.

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