Owners Should Take Caution in Waiving Consequential Damages

Kenneth M. Block and Joshua M. Levy

It is common in most construction contracts for there to be a mutual waiver of consequential damages. Owners, however, should take caution before agreeing to provide a broad unqualified waiver to contractors.

Generally speaking, consequential damages in construction contracts 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 financing costs on the part of the owner or loss of business opportunities by the contractor. In both situations, the consequential damages incurred by the non-defaulting party may be difficult 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 profits 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 owner of a remedy for the financial losses it will suffer if, for example, the project is delayed by the contractor and the owner loses sales or rental income.