Chinese Hospital Association v. Jacobs Engineering Group, Inc.

Background

Chinese Hospital Association alleged that Jacobs Engineering Group, Inc. breached a written agreement for architectural services. Jacobs had taken over the rights and responsibilities of the original architecture firm under a novation agreement. After Chinese Hospital Association became aware of serious defects in the construction documents, it terminated the contract and hired another architectural firm to complete the project.

The case involved one breach-of-contract claim. The court had previously dismissed the portion based on Jacobs’s ordinary obligation to perform work consistent with an architect’s standard of care, while allowing the claim to proceed to the extent it was based on a different contractual breach. The court also previously denied Jacobs’s motion for summary judgment based on waiver.

Contract and damages rules

The court applied California law. It explained that general, or direct, damages flow directly and necessarily from a breach, while consequential damages are secondary or derivative losses arising from circumstances particular to the contract or the parties. The Design Contract contained a provision stating that neither party would be liable for damages in the nature of lost profits or lost opportunity and for consequential damages.

The court concluded that contractual limits on liability in construction contracts are generally enforceable under California law when the parties negotiated and expressly agreed to them.

Damages categories

Lost profits. Chinese Hospital Association sought lost profits associated with being unable to operate a skilled nursing facility. The court held that the contract’s express reference to damages “in the nature of lost profits” barred that claim. The court rejected the argument that the provision’s “Consequential Damages” heading limited the lost-profits exclusion to consequential lost profits. It also found unpersuasive the argument that these lost profits were direct damages.

Increased operational costs and lost revenue. The claimed costs included additional personnel costs for operating pharmacy facilities and washing and sterilizing carts, higher garbage-collection costs because of the absence of a trash compactor, and lost revenue from not operating a skilled nursing facility. The court held that these were consequential damages because they reflected the value of consequences that compliant and efficient hospital designs would have produced, rather than the value of Jacobs’s architectural performance itself. The contract’s consequential-damages limitation therefore barred recovery of these amounts.

Construction-delay damages. Chinese Hospital Association also sought damages resulting from later-than-anticipated project completion. The court held that delay damages are consequential damages under California law, including delay-related amounts paid to third parties. Because the contract waived consequential damages, the court held that the claimed delay damages were barred.

Other construction costs. Jacobs conceded that costs to demolish and replace construction resulting from the allegedly defective design would be direct, or rework, damages. Jacobs argued that other construction costs—such as costs associated with more stringent and code-compliant requirements in a revised design—were not damages because the construction would have occurred regardless of the alleged breach. The court did not decide that issue because it lacked a particular construction demand before it. It stated that the issue should be raised in a motion in limine.

Disposition

The court granted in part and denied in part Jacobs’s motion for partial summary judgment. It granted the motion as to Chinese Hospital Association’s claims for lost profits, increased operational costs, and delay damages. It otherwise denied the motion, including the challenge concerning additional construction costs; the opinion’s conclusion described that portion as denied without prejudice.