American Bar Association Forum on the Construction Industry 2005 Annual Fall Meeting Pitfalls Associated with the Mutual Waiver of Consequential Damages: Look Before You Leap Construction Litigation Committee Division 12 Breakfast Meeting Friday, September 30, 2005

AIA Document A201 – 1997 provides: § 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 shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.

AIA Documents B141 – 1997 Part 1 provides: § CLAIMS FOR CONSEQUENTIAL DAMAGES The Architect and the Owner waive consequential damages for claims, disputes or other matters in question arising out of or relating to this Agreement. This mutual waiver is applicable, without limitation, to all consequential damages due to either party's termination in accordance with Section

AGC Document 20 provides: 10.2MUTUAL WAIVER OF CONSEQUENTIAL DAMAGES. The Owner and the Contractor agree to waive all clams against each other for any consequential damages that may arise out of or relate to this Agreement. 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 principal office overhead expenses, loss of profits not related to this Project, or loss of reputation. The Contractor agrees to waive damages including but not limited to loss of business, loss of financing, principal office overhead and expenses, loss of profits not related to this Project, loss of bonding capacity or loss of reputation. This Paragraph 10.2 shall not be construed to preclude contractual provisions for liquidated damages when such provisions relate to direct damages only. The provisions of this Paragraph shall also apply to the termination of this Agreement and shall survive such termination.

What are Direct Damages? 1)“damages the law presumes follow from the type of wrong complained of” [Black’s Law Dictionary 416 (8th ed. 2004)]; 2) “General or direct damages are those which naturally arise from the breach.” Steven G.M. Stein, Construction law ¶ 11.02[1] (1990); and 3)“those which arise 'naturally' or 'ordinarily' from a breach of contract; they are damages which, in the ordinary course of human experience, can be expected to result from a breach.” Roanoke Hospital Association v. Doyle & Russell, Inc., 215 Va. 796, 801 (1975).

What are Consequential Damages? 1)“losses that do not flow directly and immediately from an injurious act but that result indirectly from the act,” Black’s Law Dictionary 416 (8th ed. 2004); 2)“damages [that] may not naturally flow from the breach, but may be awarded by the court upon proof of certain additional elements,” which elements are (1) the damages were caused by the breach, (2) the damages were reasonably contemplated at the time of contracting, (3) the damages were reasonably foreseeable at the time of contracting and (4) the amount of damages must be reasonably certain. Steven G.M. Stein, Construction law ¶ 11.02[1] (1990);

What are Consequential Damages? 3)“Indirect or special damages which do not naturally flow from a breach of contract, but instead, arise from intervening circumstances not ordinarily foreseeable at the time the parties entered into the contract.” Appendix B: Glossary, in Fundamentals of Construction Law 338 (Carina Y. Enhada et al. eds., 2001); 4)“damages which naturally flow from the breach of a contract, or may reasonably be contemplated by the parties as a probable result of a breach of the contract” Imdieke v. Blenda-Life, Inc., 363 N.W. 2d 121, 125 (Minn. Ct. App. 1985);

What are Consequential Damages? 5)“damages which do not arise from the wrongful act itself, but depend on the circumstances peculiar to the infliction of each respective injury” DP Service, Inc. v. AM International, 508 F. Supp. 162, 167 (N.D. Ill. 1981) (citations omitted); 6)“those which arise from the intervention of 'special circumstances' not ordinarily predictable. … If damages are determined to be consequential, they are compensable only if it is determined that the special circumstances were within the 'contemplation' of both contracting parties. Whether damages are direct or consequential is a question of law. Whether special circumstances were within the contemplation of the parties is a question of fact.” Roanoke Hospital Association v. Doyle & Russell, Inc., 215 Va. 796, 801 (1975) (citations omitted);

What are Consequential Damages? 7)“The damages recoverable for loss that results other than in the ordinary course of events are sometimes called ‘special’ or ‘consequential’ damages. These terms are often misleading, however, and it is not necessary to distinguish between ‘general’ and ‘special’ or ‘consequential’ damages for the purpose” of determining whether damages are recoverable. Restatement (Second) of Contracts § 351 cmt. b (1979);

What are Consequential Damages? 8)“The term ‘consequential damages’ has often been used with respect to harm suffered as a ‘consequence’ of the breach of duty, but not as a direct and immediate and foreseeable consequence. The use of this expression should be abandoned. It may be that ‘consequential damages’ is a term that is used loosely as a synonym of ‘special’ as opposed to ‘general’ damages. If such damages are not recoverable, it is for reasons that are stated herein in discussing foreseeability and remoteness. Sometimes a contract contains a provision against liability for ‘consequential damages.’ The interpretation given to the term seems to be that suggested herein.” Arthur Linton Corbin, Corbin on Contracts § 1011 (1979); and therefore, 9)WHO KNOWS?

Potential Consequential Damages of Owner 1)Loss in Professional Reputation 2)Loss of Business Opportunities 3)Loss of Profits 4)Escalation in Material and Labor Cost * 5)Rental and Storage Expenses * 6)Increased Insurance Costs * 7)Delay Damages Owed to Other Project Participants * 8)Cost of Forfeited Bonds or Deposits, Penalties or Tax Implications * These damages usually only arise in delays claims.

Potential Consequential Damages of Owner 9)Increase in Professional Design Services Fees ** 10)Increase in Management and Personnel Expenses ** 11)Loss of Use (other than loss of profits) ** 12)Diminution in Value ** [according to one author writing about consequential damages from a contractor’s perspective] ** Many owners consider these direct damages.

Potential Consequential Damages of Contractor 1)Loss in Professional Reputation 2)Loss of Business Opportunities 3)Lost Profits on Other Work * 4)Loss in Bonding Capacity * 5)Loss in Funding Capacity * 6)Escalation in Material and Labor Cost * 7)Loss of Use of Equipment * 8)Loss of Productivity * 9)Extended General Condition Costs * 10)Home Office Overhead Expenses – Eichleay Damages * * These damages usually only arise in delays claims.

Apparent Intent of the Waiver of Consequential Damages 1)Solution to Perini Problem 2)Reallocation of Risk 3)Forces Parties to Identify and Acknowledge Risks 4)Increases Dispute Resolution Predictability 5)Decreases Dispute Resolution Costs

Problems/Issues with the Standard Waiver of Consequential Damages 1)The waiver is consistent with other provisions of the contract (e.g. insurance requirements of §§ 11.1 and 11.3 of AIA A , cost of work calculations pursuant to Art. 7 of the AIA A , damages owed to separate contractors and subcontractors pursuant to §§ and of the AIA A , etc.).* 2)The term “consequential damages” is ambiguous. 3)The term “direct” as it relates to liquidated damages is ambiguous. 4)A liquidated damages provision may not be enforceable (e.g. it may be determined a penalty).What about consequential 5)damages that are not caused by delay? 6)It reallocates risk to parties that are least able to manage and/or mitigate that risk. 7)IS THE WAIVER REALLY MUTUAL? * See Axelroth, infra slide Sources and Additional Materials

Some Alternatives to the Standard Waiver of Consequential Damages 1)Leave the waiver as is 2)Define consequential damages by defining the types of: a)damages waived and/or not waived (e.g. lost profits) or b)claims waived and/or not waived (e.g. delay claims) 3)Use a monetary amount to limit: a)total recovery for any breach/negligence, b)recovery for specific types of damages (e.g. lost profits) or c)recovery for specific types of claims (e.g. delay claims)

Some Alternatives to the Standard Waiver of Consequential Damages 4)Use monetary limits based on: a)Percentage or multiple of fee b)Negotiated not-to-exceed cap c)Insurance coverage 5)Use a liquidated damages provision for specific types of: a)damages (e.g. lost profits) b)claims (e.g. delay claims) 6)Delete the waiver

Waive Only Specific Types of Damages and Broaden the Liquidated Damages Provision § Claims for Consequential Damages. The Contractor and Owner waive Claims against each other only for the following 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 opportunities and reputation, and for loss of management or employee productivity or of the services of such persons [and any other negotiated damages]; and.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of profitfinancing, business opportunities and reputation, and for loss of profit except anticipated profit arising directly from the Work [and any other negotiated damages]. This mutual waiver is applicable, without limitation, only to all the limited consequential damages identified above that result from due to either party's delay of performance or from a termination in accordance with Article 14. Nothing contained in this Section shall be deemed to preclude an award of liquidated direct damages, when applicable, in accordance with the requirements of the Contract Documents.* * See Kofron & Reams, infra slide Sources and Additional Materials

Limit Contractor’s Recovery for Delay to Job Site Expenses If the Contractor is delayed at any time in the commencement, prosecution or completion of the Work, or is obstructed or hindered in the orderly progress of the Work by any act, neglect, interference, or default of the Owner, the Design Professional, or anyone working for the Owner, or the Design Professional, or by any cause beyond the control of the Contractor, then the Contract completion dates shall be equitably extended by a Change Order for the impact of such delay, obstruction or hindrance on the critical path activities of the Work. In the event of delay, disruption, inefficiency or hindrance that is the fault of Owner, Design Professional or anyone working for the Owner or Design Professional, the Contractor's sole remedy for additional compensation shall be a Change Order increasing the Contract Sum or Guaranteed Maximum Price to account for any additional field overhead costs actually incurred by the Contractor as a result of such delay, disruption, inefficiency or hindrance. In no event shall the Contractor be entitled to home office overhead, lost profits or other consequential damages in connection with delays to the Work, irrespective of the cause of such delays. The Contractor shall not be entitled to additional compensation for delays caused by events beyond the reasonable control of the Owner, such as weather, permitting delays caused by a governmental agency or other force majeure events beyond the reasonable control of the Owner.* * See Kofron & Reams, infra slide Sources and Additional Materials

Limit Owner’s Recovery for Delay to Liquidated Damages Owner shall be entitled to recover from Contractor as liquidated damages the sum of $[agreed sum] per day for each day Substantial Completion is delayed after [specified date]. Damages may only be awarded under this provision if such delays are solely and proximately caused by the actions or inactions of Contractor, its subcontractors, agents or employees which action or inaction results in a delay upon the Project or a failure of the Project to progress in a reasonable and orderly manner resulting in such delay. Payment of liquidated damages, if any, shall be in lieu of and replacement of any other damages, of any type or nature, that Owner might claim, either directly, indirectly or consequentially from the failure of Contractor to deliver the Project on or before the agreed contractual completion date.* * See Kofron & Reams, infra slide Sources and Additional Materials

Limit Owner’s Total Recovery to a Negotiated Not-to-Exceed Cap Contractor's maximum liability to Owner for all damages (whether direct, special, compensatory, consequential, or otherwise) for breach by Contractor of this Agreement shall not exceed [$_______; the Contract Price, the Contractor's Profit; etc.], [less/not including] the amounts paid by Contractor to Owner for Liquidated Damages under the Contract Documents. This provision shall not apply with respect to liability for personal injury, death, illness, or property damage to third parties caused by the negligence or misconduct of Contractor or any person or entity for whom Contractor is responsible.* * See Kofron & Reams, infra slide Sources and Additional Materials

Limit Recovery of Consequential Damages to Insurance Coverage The parties agree to limit their right to recover consequential damages against the other party to consequential damages that are [recoverable, available or covered] under any insurance policy procured by owner or Contractor [or Architect] applicable to the work or applicable to the parties' obligations under the Contract Documents.* OR The Owner agrees to limit its right to recover consequential damages from the Contractor [or Architect] that arise from its Work [or its professional services provided] under this Agreement to any consequential damages that are [recoverable, available or covered] under any insurance policy the Contractor [or Architect] has procured for (or applied to) the Project ("Insured Consequential Damages"). Insured Consequential Damages shall include, but are not limited to, [identify specific types of consequential damage here] and other consequential damages that may be recoverable under the Contractor's [or Architect’s] insurance.** * See Kofron & Reams, infra slide Sources and Additional Materials. ** See Weier, Lamden & Glover, infra slide Sources and Additional Materials.

Sources and Additional Materials 1)Lynn R. Axelroth, Mutual Waiver of Consequential Damages: The Owner’s Perspective, 18 Constr. Law. 11 (Jan. 1998). 2)J. William Ernstrom & Michael F. Dehmler, Mutual Waiver of Consequential Damages: The Contractor’s Perspective, 18 Constr. Law. 4 (Jan. 1998). 3)James D. Weier, Seth D. Lamden & Ric D. Glover, Preserving Consequential Damages Through Limited Waivers and Insurance Coverage, 22 Constr. Law. 22 (Summer 2002). 4)R. Harper Heckman & Benjamin R. Edwards, Time is Money: Recovery of Liquidated Damages by the Owner, 24 Constr. Law. 28 (Fall 2004). 5)John Kofron & Steven Reams, Limitations on Damages and Waivers of Consequential Damages, in The Construction Contract Book 49 (Daniel S. Brennan et al. eds., 2004).