Construction Law

Waiver of Consequential Damages: What You Need to Know

As you may be aware, the waiver of consequential damages provision can be fairly common in construction contracts. However, before you determine if it is right for your project, it is critical to understand the details and drawbacks.

What the Provision States

When a waiver of consequential damages provision is in place, both the owner and contractor agree to waive and not file claims for consequential damages, which are also called special damages. These are defined as indirect losses, damages, and injuries that result from breach of contract by either of the parties. (In contrast, direct damages would include the cost of additional work or the repair of substandard work.)

For example, if a contractor fails to meet contractual obligations, the owner could experience losses related to income, reputation, profit, use, employee productivity, and other issues. Similarly, if the owner breaches the contract, the contractor might incur losses related to office expenses, worker compensation, reputation, and financing.

Consequential damages are often difficult to define specifically and, therefore, difficult to quantify generally. In some instances, consequential damages could be excessive when compared to the contract budget. For example, if a contractor fails to build a structure on time, the owner could sue the contractor for income that theoretically would have been earned if the structure had been completed without delay. That dollar amount could be hard to prove; however, in reality, it could be a significant sum that could cripple the contractor’s business.

When both parties waive consequential damages, they alleviate some of the uncertainty about related claims.

Issues to Consider

Although a mutual waiver might seem simple enough, courts have been known to interpret these provisions in a variety of manners. First, they consider how the provision is phrased to determine both parties’ intents. Next, they focus on any ambiguities that leave the provision open for interpretation.

For example, phrases such as “similar items or damages” leave too much to the imagination. It is essential to avoid such language and instead define exactly what consequential damages are and indicate which ones—such as the loss of rental income or principal office overhead—are covered by the provision.

In addition, courts may consider other clauses in the contract that could impact such a provision. These include the following:

• Indemnity Provisions: In these clauses, one party agrees to protect the other from losses resulting from an event. They often involve third parties and are related to obligations, personal injury, and property damage. However, suppose an indemnity clause goes so far as to indemnify beyond a third party and includes a contractor’s breach of contract. In that case, it can suddenly provide an opportunity for consequential damages to be included.
• Liquidated Damages: Sometimes, owners may hesitate to waive all consequential damages if they are concerned about the risk of losses due to a delay. In that case, they may insert an exception to the waiver to cover liquidated damages. With that phrasing, an owner might recover some damages, depending on the circumstances. Such a situation increases the risk for the contractor.

Also, keep in mind that if the prime contract includes a waiver of consequential damages, it will likely flow down to any subcontractors. Therefore, all parties must be aware of these provisions and how they are phrased.

Final Thoughts

Depending on the size of a project, having to pay for consequential damages could be devastating for some contractors. Therefore, it is critical to use thoughtful and specific language in waivers and avoid ambiguity. Here is a sample waiver of consequential (and other types of damages):

In no event, whether based on contract, warranty (express or implied), tort, federal or state statute or otherwise arising from or relating to the work and services performed under the Agreement, shall Contractor be liable for special, consequential, punitive, or indirect damages, including loss of use or loss of profits. 

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.