Standard Mutual Waiver of Consequential Damages
When one party breaches a construction contract, the primary form of relief available is monetary damages. There are two general types of damages – ‘direct or general’ damages and ‘indirect or consequential’ damages. A commonly utilized component of many owner-contractor contracts is the American Institute of Architects (AIA) A201 General Conditions form, which includes a mutual waiver of consequential damages.
What does the AIA standard mutual waiver of consequential damages provide?
The waiver, included in the latest edition of the AIA’s Form A201 General Conditions for construction contracts, is meant to limit the parties’ liability to one another to direct damages. Limiting or eliminating the availability of consequential damages reduces the monetary incentives to escalate a claim and eliminates some of the uncertainty as to what risks the parties are reasonably undertaking when they enter into a construction project together. The waiver can be extremely important because the direct damages flowing from a breach can be dwarfed by those associated with the consequential damages a creative attorney can come up with. For instance, the defects in the construction of a project may result in direct damages in the form of added costs to the owner for repairs. However consequential damages can spiral to include loss of expected profits profit and damage to the owner’s business reputation.
Can you give some examples of consequential damage?
Consequential damages vary from situation to situation. A common example is when a business is unable to open a retail location on time, and claims damages for the profits it would have realized during the time between when it should have opened and when it actually did, and could even include a claim of long-term damage to its brand. Or in the case of the delayed completion an apartment building, potential tenants might be forced to find another place to live. The owner might not only suffer from the lost rental incomes but may also incur additional marketing costs to attract new tenants. A problem is that there isn’t a clear-cut definition of consequential damages and the situations leading to this type of damage claim can be very broad.
Are there any risks associated with including the AIA A201 waiver in contracts?
Yes, the waiver includes lists of types of consequential damages which are eliminated by the waiver, but the wording is unclear as to whether these lists are intended to be merely illustrative examples of the types of damages the waiver is intended to include, or exclusive lists leaving any other potential category of consequential damages up for grabs. Of course, not every potential situation can be included in the wording, but the vague way the waiver is currently written leaves the parties with having to convince a court that the situations illustrated in the waiver are either mere examples of what is waived or limitations of what is waived to only what is specifically listed. This reintroduces a good deal of uncertainty where the purpose for including the waiver in the first place was to reduce uncertainty.
How can the AIA waiver be made stronger?
Using AIA’s contractual provisions is a good start. They are generally designed to work together. However, every party, from the owner to the general contractor and architects, should consult with their attorneys during the negotiating phase to consider whether it makes sense to eliminate the waiver altogether, to clarify that the categories of consequential damages listed are not exclusive, or conversely to utilize exclusive lists and agree in advance upon what types of damages will and will not be waived. A little consideration up front can save a good deal of uncertainty and expense later!