Limiting Contractors' Exposure to Delay Damages – Part II

This is the second installment of a two-part blog informing contractors how they can limit their exposure to owner’s project delay damages.  Part I of this blog series discussed how utilizing well-drafted liquidated damages clauses can protect a contractor from potentially limitless actual damages. Part II discusses the use of consequential damages waivers and limitation of liability clauses as measures to reduce a contractor’s risk and exposure to delay damages.

B.        Consequential Damages

Contractors are advised to limit their exposure to owner-project delay damages.  In many instances, an owner’s delay damages can exceed any profit the contractor may make on the project and even the contract price.  A well-drafted waiver of consequential damages provision, however, can limit the contractor’s risk.

  1. 1.         Defining Consequential Damages

Consequential damages are losses that are reasonably foreseeable, but are linked to the owner’s particular needs and circumstances, rather than to the contract itself.  Consequential damages are dependent upon specific circumstances and can include lost profits, third-party claims, loss of use, loss of reputation, lost opportunities, and interest.  Consequential damages are a wild card when disputes arise because they depend upon circumstances outside the subject matter of the contract.  In the construction context, loss of anticipated profits is considered consequential because they are generally reasonably foreseeable by the contractor, but do not flow from the contract itself (i.e. completing the work), but from the specific circumstances of the owner.

2.         Waiver of Consequential Damages

Broad protection against consequential damages can be provided by an express waiver of consequential damages provision that either eliminates or limits the amount of recoverable damages to direct and incidental damages (in most cases, the costs to complete the project) and requires any other risks to be shifted by express agreement:

Notwithstanding anything to the contrary in this Contract, in no event shall Contractor, or its consultants, subcontractors, or suppliers of any tier, or the employees, officers, or any of the foregoing, be liable for any consequential, indirect, special, punitive, or exemplary damages of any kind, whether due to or based upon delay, contract, tort, negligence, strict liability, warranty, indemnity, error or omission, or any other cause whatsoever.

An explicit consequential damages waiver in favor of the contractor has become standard in the commercial building industry since the American Institute of Architects (“AIA”) first included one in 1997 at Section 4.3.10 of the AIA 201 General Conditions (now found in Section 15.1.6).  In the absence of a consequential damages waiver or the existence of a waiver only by the contractor in favor of the owner, the contractor may be held liable for such damages.  Therefore, it is good practice to include a consequential damages waiver along the lines of the above-suggested example.  For more tips on drafting, read our blog articles Top 10 Construction Industry Contract Provisions – Consequential Damages Part I and Part II.

C.        Limitation of Liability Clause

Including a limitation of liability clause is a third way for a contractor to limit its exposure to not only delay damages, but all liability:

Contractor’s maximum aggregate liability for breach of any and all terms, conditions, representations, warranties, covenants, obligations, or other provisions of the Contract whether arising in tort (including negligence), in contract (including breach of any provision hereof), or by reason of any law, statute, strict liability, or otherwise will not individually or in the aggregate exceed in any event or circumstance the amount of $____________.

Generally, rather than drafting a provision in which all liability is waived, it is better practice to limit the contractor’s liability to certain risk or certain dollar amounts.  Limitation of liability clauses are more likely to be enforced by courts than a provision completely waiving liability.  Courts may be incensed by an absolute immunization of liability whereas limiting liability to a fixed amount generally is less offensive and, thus, enforceable.  These types of clauses are most often found in negotiated contracts such as Guaranteed Maximum Price contracts where the contractor’s mark-up is limited, cost information is shared, and the contractor does not enjoy a large contractor-controlled contingency.

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