Owners Should Take Caution in Waiving Consequential Damages By

Volume 262—No. 94 WedNesday, NoVember 13. 2019

www. NYLJ.com

t is common in most con-

struction contracts for there

to be a mutual waiver of con-

sequential damages. Owners,

however, should take caution

before agreeing to provide a broad

unqualied waiver to contractors.

Generally speaking, consequen-

tial damages in construction con-

tracts relate to indirect losses or

damages incurred by either the

owner or contractor arising from

a breach by the other, such as

lost income or increased nanc-

ing costs on the part of the owner

or loss of business opportunities

by the contractor. In both situa-

tions, the consequential damages

incurred by the non-defaulting par-

ty may be difcult to ascertain and

may be excessive in the context of

the overall value of the contract at

issue. This can be contrasted with

direct damages, such as the cost

to correct or complete the work by

the owner or the loss of prots on

the work by the contractor.

From the owner’s perspective,

a blanket waiver of consequential

damages, such as that contained

in various American Institute of

Architects (AIA) documents is

problematic on two levels. First,

the waiver will deprive the own-

er of a remedy for the financial

losses it will suffer if, for exam-

ple, the project is delayed by the

contractor and the owner loses

sales or rental income.

However, because of the cata-

strophic losses an owner may incur

as a result of delayed completion,

contractors will, as a matter of

course, demand the waiver and,

perhaps, offer in its place liqui-

dated damages designed to limit

the amount of damages the owner

may recover. (Liquidated damages

must, however, bear some rela-

tionship to the actual damages

KeNNeth m. blocK and Joshua m. leVy are mem-

bers of Tannenbaum Helpern Syracuse & Hirschtritt.

CONSTRUCTION LAW

Owners Should Take Caution in

Waiving Consequential Damages

Kenneth M.

Block

And

Joshua M.

Levy

SHUTTERSTOCK

WedNesday, NoVember 13. 2019

the owner will suffer for delay,

otherwise they would be consid-

ered an unenforceable penalty.)

Second, a blanket waiver may

impede the ability of the owner

to be indemnified for claims of

third parties seeking consequen-

tial damages against the owner

resulting from the activities of

the contractor, such as neighbors

who may have suffered property

damage or interference with their

businesses. This implicates the

contractor’s indemnication of the

owner and brings a slight detour

in our discussion.

Traditional indemnities in favor

of the owner, including those

found in AIA documents, deal,

essentially, with personal injury,

bodily injury and property dam-

age. They do not include indem-

nication for claims of third par-

ties seeking monetary damages,

such as unpaid subcontractors,

neighbors, or civil authorities.

Because of this, we have includ-

ed in our construction contracts

indemnities of owners for third-

party claims against the owner for

economic loss. While, invariably,

there is objection to this expan-

sion of the traditional indemnity

by contractor counsel, once it is

explained that we are only look-

ing for protection against third-

party claims for damages arising

from the contractor’s negligence

or breach of contract, the expan-

sion is generally accepted.

This brings us back to our

discussion of consequential

damages and the breadth of the

waiver. If a blanket waiver is giv-

en, arguably, the indemnity for

claims of third parties may be

lost, inasmuch as a claim by a

third party may be considered

consequential damages. In order

to remedy this possibility, in our

construction contracts, we rst

carve out from the waiver any

claims of third parties. We also

address other circumstances for

which a waiver of consequential

damages would not be appropri-

ate, such as where the contractor

is guilty of gross negligence or

willful misconduct; insurance is

available to the contractor for the

owner’s claim for consequential

damages; or it arises from defec-

tive or nonconforming work. The

latter point covers situations

where, for example, the owner

suffers a loss of income due to

repairs necessitated by defective

work, such as the closing of a

retail establishment while reme-

dial work is being performed.

The language we have crafted

addressing these carve outs is as

follows:

Contractor and Owner waive

Claims against each other for

consequential damages arising

out of or relating to this Agree-

ment, other than with respect

to (a) claims of third parties

against Owner, (b) claims that

arise due to Contractor’s and/

or Subcontractors’ gross neg-

ligence and/or willful miscon-

duct, or (c) claims by Owner for

consequential damages against

Contractor that are covered by

insurance or arise from defec-

tive and nonconforming Work.

While on the topic of consequen-

tial damages, we should close by

noting that, as to design profes-

sionals, we do not believe there

should be any waiver of conse-

quential damages by an owner,

for the simple reason that profes-

sional liability policies generally

cover architects and engineers for

all damages arising from errors

and omissions, regardless of the

characterization of such damages

as direct or consequential. While,

as with contractor counsel, there

is initial push back from counsel

for design professionals on this

point, once it is explained that

insurance is available, the demand

for the waiver is usually dropped.

We have included in our con-

struction contracts indemnities

of owners for third-party claims

against the owner for economic

loss.

Reprinted with permission from the November 13, 2019 edition of the NEW YORK

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