Alan Winkler and Susan Elliott | Peckar & Abramson, PC | November 2016
Contractors are often focused on correctly estimating the cost to construct a project and obtaining the contract award. Reviewing the terms of the contract sometimes takes a back seat. Laxity may set in when the contract is based on a recognized industry form, particularly with provisions that were not modified. One example could be the mutual waiver of consequential damages.
Many contracts have clauses described as a mutual waiver of consequential damages. Contractors may believe this is fair, puts them on an equal footing with the owner and protects them from having to be responsible for the owner’s consequential damages. However, this may be a fallacy because owners will claim a broad exception. Many of those same contracts have liquidated damages clauses where the liquidated damages rate is based on a projection of costs considered to be consequential damages. Owners will take the position that liquidated damages are recoverable despite the mutual waiver clause.
Both the AIA (A201-1997 General Conditions) and the ConsensusDocs (200 Standard Agreement and General Conditions Between Owner and Contractor, 2011, revised 2014) forms of agreement include mutual waiver of consequential damages provisions:
AIA:
§ 15.1.6 CLAIMS FOR CONSEQUENTIAL DAMAGES
The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
1. damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
2. damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14. Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.
CONSENSUSDOCS:
6.6 LIMITED MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES. Except for damages mutually agreed upon by the Parties as liquidated damages in section 6.5 and excluding losses covered by insurance required by the Contract Documents, the Owner and the Contractor agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below. The Owner agrees to waive damages, including but not limited to the Owner’s loss of use of the Project, any rental expenses incurred, loss of income, profit or financing related to the Project, as well as the loss of business, loss of financing, loss of profits not related to the Project, loss of reputation or insolvency. The Constructor agrees to waive damages, including but not limited to loss of business, loss of financing, loss of profits not related to this project, loss of bonding capacity, loss of reputation or insolvency. The provisions of this section shall also apply to the termination of this Agreement and shall survive such termination. The following are excluded from this mutual waiver: ______________________________.
The concept is that both the owner and the contractor agree to give up the right to recovery of consequential damages. Further, although consequential damages are not defined, both of these standard clauses list specific types of damages that are included in the waiver. The conundrum is this: if the very types of consequential damages waived were used in the calculation of the liquidated damages rate and that liquidated damages rate is recoverable by the owner, is there truly a mutual waiver of consequential damages? Put another way, is the concept of a mutual waiver of consequential damages provision fundamentally at odds with a liquidated damages clause?
Surprisingly, there are no court decisions on this issue. In examining the AIA mutual waiver of consequential damages provision, there is room for both the owner to argue that liquidated damages may be recovered and for the contractor to take the opposite position. The key wording in the AIA provision is: “Nothing contained in this Section 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.” An owner will seize on this as an exception to the waiver by claiming the phrase “when applicable” means that liquidated damages are fully recoverable whenever the rate is applicable to the claim asserted (typically a delay).
A contractor could argue that this language is for clarification purposes, but does not vitiate the mutual waiver. To that end, a contractor may point to at least three factors. First, the section does not contain clear and definite language that a carve-out to the waiver was effectuated, such as by employing wording ‘notwithstanding anything in this section to the contrary’ or ‘specifically exempted from the foregoing’. Second, a contractor could argue that the words “when applicable” are a limitation on the liquidated damages rate itself so that only applicable (i.e., non-consequential) damages included in the rate are recoverable. Third, the definition of liquidated damages under the law could be cited by a contractor as a reason to bar enforcement of the rate to the extent it includes consequential damages. While the precise definition may vary from state to state, liquidated damages are generally considered to be an estimate made at the time the contract is entered into of the actual damages that may result from a breach of the contract where the exact amount of damages to be incurred cannot be calculated. From a contractor’s perspective, if consequential damages are excluded under the contract, then they cannot form a part of the estimated actual damages to be incurred and, therefore, a liquidated damages rate premised on consequential damages is not a proper rate.
The ConsensusDocs mutual waiver is different from the AIA’s. For one thing, the ConsensusDocs provision is entitled a “Limited Mutual Waiver of Consequential Damages”. For another, the ConsensusDocs provision has language carving out liquidated damages as an exception: “except for … liquidated damages … except for those specific items of damages excluded from this waiver. . . .”).
While the purpose of this article is to examine the interplay between a mutual waiver of consequential damages clause and a liquidated damages clause, another issue that may arise is what types of damages are waived. Both the AIA and the ConsensusDocs provisions list specific types of damages included in the waiver, but neither gives a complete list nor defines consequential damages. Again, the definition of consequential damages is a matter of state law. But while each state may have a general definition, the exact types of damages categorized as consequential is not completely settled.
Even if a mutual waiver of consequential damages provision is considered to have an exception for liquidated damages based on any type of projected damages, the mutual waiver may still have value to the contractor. With a mutual waiver in place, consequential damages in the form of liquidated damages may be recoverable by an owner only for delays but not for construction defects found after completion, for example.
As with other contract provisions, a mutual waiver of consequential damages clause should be carefully considered. The provisions in a standard contract form may be negotiated and modified, if both the contractor and owner think it necessary to do so.