Inevitably, claims and litigation will follow whenever a contractor is terminated from a project, particularly if a surety has been called in to complete the contractor’s work. The possibility of recovering outstanding change orders and lost profits on the project have always been attractive reasons to pursue a wrongful termination claim. Now, lost profits from future jobs may also be on the table.
A new decision from the Colorado Supreme Court in Denny Construction, Inc. v. City and County of Denver, Colorado, 199 P.3d 742 (2009), decided that a terminated contractor may recover future profits on future projects as a result of the loss of bonding capacity arising from a wrongful termination. This decision is likely to greatly increase the cost for owners who improperly terminate general contractors and general contractors who wrongly terminate subcontractors as defaulted parties include lost future profit claims as standard parts of wrongful termination lawsuits.
In Denny, the City of Denver terminated Denny Construction from a project to build a new headquarters for the Denver Board of Water Commissioners. Denny’s surety reduced and subsequently withdrew Denny’s bonding. Denny was unable to secure substitute bonding, which prevented it from securing any future public construction work which required the posting of a bond. As a result of its termination, Denny brought a claim for wrongful termination against the City of Denver and sought to recover the future profits that it lost through the wrongful impairment of its bonding capacity. The jury awarded Denny $845,000 in lost profits.
In Massachusetts, New Hampshire and Rhode Island, the courts have yet to issue a decision on the recoverability of lost profits arising from a loss of bonding capacity, but the standard that is generally applied to recovery of lost profits is that the requested damages must have been reasonably foreseeable by the parties at the time of contracting and that the amount of damages must be ascertainably within a reasonable degree of certainty and without speculation. Brewster Wallcovering Co. v. Blue Mt. Wallcoverings, Inc., 68 Mass App.Ct. 582, 614 (2007); Independent Mechanical Contractors, Inc. v. Gordon T. Burke & Sons, Inc., 138 N.H. 110 (1993); National Chain Co. v. Campbell, 487 A.2d 132 (R.I. 1935).
These cases are in accord with Federal case law declaring that claims for lost profits from future projects are too “uncertain and remote to be taken into consideration as part of the damage occasioned by the breach of contract.” Ramsey v. United States, 121 Ct.Cl. 426 (1951) cert. den. 343 U.S. 977 (1952). This rule has been directly applied in lost bonding capacity cases where the Federal Court of Claims held that a claim for “general loss of business…is too remote, consequential and speculative…as a matter of law [and therefore] not recoverable.” Rhen v. United States, 17 Cl.Ct. 140 (1989).
Colorado has a similar legal standard to Massachusetts, New Hampshire, Rhode Island and the Federal case law, however, despite this fact, the Colorado Supreme Court has now held that this legal standard does not preclude claims for lost profits as a matter of law. Instead, according to the Denny court, lost profits arising from the loss of bonding capacity are reasonably foreseeable by the parties because it is commonly known that a termination will impact bonding capacity and therefore impact the terminated party’s ability to bid on future public construction contracts. Moreover, a party can, under the Denny decision, prove its losses with “reasonable certainty” by submitting evidence of its profits on past projects, its profitability on those projects and by submitting expert testimony projecting its operational history into the future. The Denny Court’s acceptance of this straightforward evidence should make it easier for contractors to assert lost profit claims in other jurisdictions that employ a similar legal standard to Colorado’s for the recovery of lost profits after termination from either a public project or a private project with bonding requirements.
Notably, a Connecticut court entertained an award of lost future profits arising from the loss of bonding capacity in M.J. Daly & Sons, Inc. v. City of West Haven, 1999 Conn. Super. LEXIS 25736. The Court ultimately denied the terminated subcontractor’s claim, solely on the grounds that the subcontractor failed to substantiate its claim that it had lost work as a result of its diminished bonding capacity. This ruling does, however, suggest that Connecticut courts would grant an award of lost future profits for loss of bonding capacity if proper evidence supporting the claim were to be submitted.
By arguing that the loss of bonding capacity, and therefore the loss of future bonded work, was reasonably foreseeable by the parties, a contractor may be able to support what would once have been an untenable claim for lost future profits by merely piecing together historical profitability data to support its claim. Depending on the annual profitability of the terminated contractor, this could easily generate claims for millions of dollars from terminations of contracts with tens of thousands of dollars in remaining work to be performed. Obviously, in light of these potentially out-sized claims, the cost of being found to have wrongfully terminated a contract or subcontract must be weighed against the cost and aggravation of allowing a defaulting contractor to complete performance without being terminated.
In circumstances in which termination is the preferable option, heightened attention should be paid to the contractually required termination process to ensure that the termination process does not create a breach of contract and expose the terminating party to potential lost profits liability. Typically, the termination process includes: (1) notice of breach of contract; (2) allowance of a period for the breaching party to cure the alleged defect; (3) notice of intent to terminate pursuant to the contractual termination provision; (4) notice of actual termination. These steps however can be, and often are, modified by the contracts between the parties. It cannot be overemphasized how crucial it is to verify the procedure set out in the contract prior to initiating any termination proceedings as contract compliance is likely to be the key issue in any litigation arising out of the termination.
As always, compliance with the contract’s terms and the recognition of the risks of termination are the key elements to identifying the best course of action, reducing the costs of a termination decision and now, avoiding potential liability for future lost profits.