In the recent case of TSP Services v National-Standard, LLC (Court of Appeals, Sept. 2019), the Michigan appellate court affirmed an arbitrator’s award of consequential damages to a contractor for lost profits, but rejected the arbitrator’s ruling that such damages could be included in a construction lien. 

In this case, the contractor, TSP, entered into a contract for $414,950 for asbestos abatement, demolition and disposal of refuse, and site restoration work at owner’s facility. The contract did not mention the sale of scrap steel or TSP’s potential profits from such sale. Nevertheless, TSP and the owner recognized that the sale of scrap steel was a major part of the project, even though their contract was silent on that point.

The project encountered delays and, after several disputes, the owner suspended TSP’s work. At that point, TSP had extracted only 9% of the available steel. TSP liened the project for the unpaid contract balance plus the net value of unextracted steel. In the ensuing arbitration, the arbitrator ruled that owner breached the contract and awarded TSP damages of $782,469. This award included nearly $400,000 in lost profits for the sale of scrap steel, $33,793 in interest on lost profits, and $169,226 in attorney fees. Importantly, the arbitrator ruled that TSP’s construction lien could be enforced on the entire award, not just the unpaid contract balance. Owner appealed claiming the arbitrator committed clear legal error. The Michigan Court of Appeals agreed in part with the arbitrator’s ruling, but nonetheless vacated the award. The appellate court’s holding underscored several key points.

First, courts have a limited role in reviewing arbitration awards. Not every error of law merits court intervention; rather, the error must have a material effect on the outcome or generate a legally unsustainable result. In this case, there was clear error that required substantial correction.

Second, there was no basis to disturb the award of consequential damages. Because both parties knew that TSP intended to sell steel recovered from the site for a profit, those lost profits could reasonably be considered the result of Owner’s breach.

Third, the arbitrator’s approval of a construction lien in excess of the unpaid balance of the contract amount was a clear error that required substantial correction. Michigan’s Construction Lien Act (CLA) limits the amount of a construction lien to the contract amount, less payments received. While the parties understood that TSP would try to profit on the disposal of scrap steel, this was an understanding outside of the contract terms. How TSP disposed of the steel and under what financial conditions were solely up to TSP and not part of the contract. Thus, under the plain language of the CLA, TSP’s lien should have been limited to the $141,083, the contract balance. Correcting the arbitrator’s clear error would reduce the lien by over $500,000 and this substantial correction justified court intervention.

The takeaways? Absent clear language in a contract excluding consequential damages, such damages are fair game for the parties to argue. And, these damages can be significant. The Michigan Construction Lien Act, however, will not permit a construction lien to include such damages unless the damages are expressly addressed in the parties’ contract.

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