Real Estate Law
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I agree with your interpretation of the consequential damages. The contractor and subcontractor could be held liable. Consequential damages, otherwise known as special damages, are damages you can prove occurred because of the failure of one party to meet a contractual obligation. They go beyond the contract itself and into the actions garnished from the failure to fulfill. The contractor acknowledged the breach; and, but for the breach, there would not have been anything wrong with the sprinkler system.
I also agree that the preferred low spot should be used. Although easements may restrict the rights of landowners to erect structures, etc., you should be able to negotiate something that is in the best interest of the land itself (in other words, if your proposal would actually help the situation; which it does).
I agree that the city would be liable if the city incorrectly provided the permits. In other words, if the permits were improperly issued; the city could be held responsible if the work done incorrectly followed what an incorrectly issued permits said.
In Minnesota, the Conciliation Court is also known as "small claims" court. General claims of $10,000 or less can be filed in Conciliation Court. Note that once you file a claim, you cannot later file another claim for more money related to the same event(s).
I hope this response answers your questions. If you need clarification or follow up, let me know. Best regards, Damien
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