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Three
years ago the "waiver of consequential damages" provision
became a part of the American Institute of Architects
revised standard form construction documents. Both the
1997 edition of the AIA standard contract between the
owner and the contractor (Form A201) and its standard
contract between the owner and the architect (Form B141)
added the waiver provision. These contracts probably are
more widely used and copied than any other construction
industry agreements. Because these contracts provide for
mediation and arbitration, the consequential damages waivers
are more likely to be interpreted by the participants
in the mediation, or by arbitrators, if the dispute is
not settled during mediation.
This
article offers practical advice about these waivers and
suggests how they can be tailored to the particular transaction.[1]
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2.
AIA's ADDITION OF WAIVER OF CONSEQUENTIAL DAMAGES PROVISION
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The
addition of the waiver of consequential damages provision
was a profound change in the AIA standard form contracts.
(Another profound change in these contracts was the addition
of mandatory mediation under the Construction Industry
Mediation Rules of the American Arbitration Association.)
When these revised form contracts were issued, the AIA
explained in a news release that "by setting the stakes
in a potential dispute more definitively, the contract
avoids a rapidly intensifying adversarial atmosphere."
Howard Goldberg, counsel to the AIA Document Committee,
said of the revised AIA forms, "The mutual waiver of consequential
damages provision is AIA's first attempt to interject
tort reform principles in the construction industry."
(See "New AIA Documents Adopt Mediation," in Punch List,
Fall 1997, p.5).
The
waiver can be read very broadly-covering "all consequential
damages." The provision goes on to itemize the types of
losses covered by the mutual waiver. Section 4.3.10 (Claims
for Consequential Damages) provides:
The
Contractor and Owner waive all claims against each other
for all consequential damages arising out of or relating
to this Contract. The 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 other than anticipated profits
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 (Termination or Suspension
of the Contract). Nothing contained in this Subparagraph
4.3.10 shall be deemed to preclude an award of liquidated
direct damages, when applicable, in accordance with
the requirements of the Contract Documents.
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3.
SHOULD YOU INCLUDE A WAIVER PROVISION?
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When
drafting construction agreements, the waiver provisions
should be evaluated by counsel and client in the context
of the particular project. They should consider whether
the benefits of having the waiver outweigh the disadvantages.
For example, an owner, facing substantial financing
costs and significant lost income in the event of
a delay, may conclude that having the waiver would
not be appropriate. (In this case, the owner might
opt instead to have an appropriate liquidated damages
clause.)
If counsel and client believe it would be beneficial
to include a waiver provision, they may wish to tailor
it to suit their transaction. However, construction
parties should be aware that the scope of the waiver
provision, whether or not they alter it, might be
questioned once a dispute arises. This could make
the role of the mediator or arbitrator more difficult,
at least until better norms are established for the
type of damages that may be recovered.
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4.
EXAMPLE OF PROVISIONS TAILORED TO THE PARTICULAR TRANSACTION
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If
a construction party wants to retain the
waiver and exclude all consequential damages, counsel
may wish to add to the arbitration clause a provision
that expressly curtails the arbitrator's ability
to award consequential losses. For example, this
provision might state:
The
arbitrators shall have no authority to award,
directly or indirectly, any form of consequential
damages, as such damages have been waived by the
parties to this contract.
A
project owner might wish to specify additional
forms of consequential damages that are excluded.
A sample clause might provide:
Such
prohibited damages include, but are not limited
to: lost profits; home office overhead or any
form of overhead not directly incurred at the
project site; wage or salary increases; ripple
or delay damages; loss of productivity; increase
cost of funds for the project; extended capital
costs; lost opportunity to work on other projects;
inflation costs of labor, material, or equipment;
non-availability of labor, material, or equipment
due to delays; increased cost of bonding due to
delay; or any other indirect loss arising from
the conduct of the parties to this contract.
A
contractor or design professional might wish
to add the following language to the waiver provision:
Such
prohibited damages include, but are not limited
to: lost rent or revenue; rental payments for temporary
offices; increased costs of administration or supervision;
costs or delays suffered by others (unable to commence
work or provide services as previously scheduled)
for which a party to this contract may be liable;
increased costs of borrowing funds devoted to the
project; delays in selling all or part of the project
upon completion; termination of agreements to lease
or buy all or part of the project (whether or not
suffered before completion of services or work);
forfeited bonds, deposits, other monetary costs,
or penalties due to delay of the project; increased
taxes (federal, state, local, or international)
due to delay or re-characterization of the project;
lost tax credits or deductions due to delay; impairment
of security; or any other indirect loss arising
from the conduct of the parties to this contract.
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Since
there is no universal definition of consequential damages,
it behooves the drafter of the construction agreement
to eliminate, to the extent possible, any potential ambiguity
in the scope of waived damages. Thus, the rationale for
itemizing consequential damages is to facilitate the arbitrator's
understanding of the negotiated limitations, and ensure
that they are respected.
Not
all parties will wish to waive their right to consequential
damages. A party who harbors doubts about the ability
of the other contracting party to perform the contact
may wish to strike the waiver provision from the agreement
and provide in the arbitration clause that "the arbitrators
are authorized to award any and all forms of indirect
or consequential damages."
To
carry out the intent of the waiver provision, the owner,
design professional and contractor must stop and consider
the potential savings and the possible losses for themselves
and the other parties on the project. Setting a limit
on the risks being taken is a worthwhile objective, but
it will only succeed if those negotiating the agreement
realistically consider what could happen if the schedule
is not met.
AAA
mediators and arbitrators, not judges or juries, will
have front-line responsibility for interpreting the terms
"liquidated damage" (permitted under the AIA documents)
and "consequential damage." The parties should give more
rather than less guidance to these neutrals so that they
can continue to meet the high expectations of the AIA
and the rest of the construction community.
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[1]
A more extensive analysis of this
and related damages limitations in arbitration agreements
appeared in the Construction Lawyer, Vol. 18, No.
2 (ABA Forum Committee on the Construction Industry).
An analysis of all the substantive changes made in the
1997 A201 Document appears in Sink & Peterson, The
A201 Deskbook: Understanding the Revised General Conditions
(ABA Forum on the Construction Industry 1998).
Reprinted
with permission from Punch List, August 2000
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