From the Litigation Practice.
Originally published in The Legal Intelligencer on May 03, 2022.
The American Institute of Architects (AIA) Standard Form Conditions for contracts entered into between owners and general contractors contain the following damages waiver:
- 15.1.6 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:
- 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
- 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 15.1.6 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the contract documents.
In the event of a construction defect claim by the owner against the general contractor, and subcontractors, the question has arisen whether and to what extent the waiver applies to such claims as loss of rents or profits.
A general contractor is likely to take the view that the waiver constitutes a wholesale waiver of all such claims by the contracting parties. Owners are likely to take the view that the waiver provision is oddly placed within the AIA-201 document, the claims and disputes section, for the waiver to be read so broadly. Moreover, the provision itself states that “this mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 14.” Article 14 has to do with termination or suspension of the contract during the course of the work, with each party vested with the right to invoke its provisions for cause. Such an argument suggests that the waiver only applies to those consequential damages occasioned by the termination or suspension of the contract, not to post-construction consequential damages that are caused by construction defects.
A 1992 New Jersey opinion is believed to be the motivation behind the initial inclusion of the AIA consequential damages waiver in the 1997 update to the A201 AIA Standard Form Conditions. See Perini v. Greate Bay Hotel & Casino,129 N.J. 479, 510 (1992) (arbitrators awarded an Atlantic City hotel and casino owner over $14,500,000 in damages for lost profits due to the construction contractor’s delayed completion of renovations to the hotel and casino, which was objectively disproportionate to the $600,000 fee that the contractor was to be paid for its renovation work).
Some courts have considered the scope of the consequential damages waiver provision, and have embraced an expansive reading of the waiver, specifically rejecting the argument that the consequential damages waiver applies only in the context of abandonment or termination of the contract. See, e.g., Bartram v. C.B. Contractors, 1:09-CV-00254-SPM, 2011 U.S. Dist. LEXIS 34972 (N.D. Fla. Mar. 31, 2011) (construing a near identical version of the consequential damages waiver in A201-1997 as barring an owner’s post-construction claim to recover consequential damages).
In Bartram, an owner alleged that the contractor was liable for construction defects that caused water damage that was noticed after construction was completed. The owner argued that “the waiver applies only during the construction phase of the contract and applies only if one of the parties terminates the contract,” and further argued that “the waiver of consequential damages applies only during the construction phase because liquidated damages were provided in their place.”
The Bartram court found that the waiver was a total bar to the owner’s post-construction claims for lost revenue, increased finance costs, and diminution in value damages. The court ruled that: “Here, the waiver of consequential damages … is clear and unambiguous. An ordinary person reading the provision would understand that he was contracting away the right to recover consequential damages from the other party. The waiver is clearly written and unequivocal. It contains no limitation for when it applies.”
Similarly, a 2013 Delaware Superior Court opinion interpreted a standard form consequential damages provision in the context of a hotel construction project in which window water infiltration issues were discovered after construction. See Smyrna Hospital v. Petrucon Construction, 2013 Del. Super. LEXIS 509, at *1–2 (2013). The court held that the owner was not entitled to consequential damages due to the waiver included in the construction contract, (“here, the language of the agreement is susceptible to but one meaning: the contractor is responsible for the costs of repair under the agreement, but not consequential damages, as defined by the agreement”).
The Legal Guide to AIA Documents (Aspen Publishers, 6th Edition, 2020-1 Cumulative Supplement), Section 4.85, provides the following summary and discussion of Crescent University City Venture v. AP Atlantic, 2019 NCBC LEXIS 46 (N.C. Super. Aug. 8, 2019), a North Carolina state court opinion that expanded the scope of the waiver to also include types of consequential damages that are not specifically enumerated within the provision.
The project involved the construction of a multi-building student apartment complex near a university. It was alleged that there were defects in the floor trusses that developed shortly after construction was completed, requiring significant repairs and relocation of the student tenants. The owner argued that various damages that were asserted were not included in the definition of consequential damages (and thus waived) found here. The court rejected the argument that the word “includes” in this section means that the owner waived only those categories of damages specifically referenced in the first subsection. Among the damages were significant costs for “student relocation and operation costs.” The contractor argued that those were waived consequential damages. The owner claimed that they were direct damages and not consequential because they flowed naturally and necessarily from the contractor’s breach of the general contract. The court disagreed, finding that direct damages are such damages as might accrue to any person similarly situated. These particular damages were unique to this plaintiff and were therefore not direct.
It is worth noting that at least some of the rationale behind the AIA standard form mutual waiver of consequential damages provision is to “eliminate some of the incentive to escalate claims and to encourage settlement.” See commentary on AIA document A201-2007 (The American Institute of Architects, 2007), page 56, §Section 15.1.6 (“by waiving claims for consequential damages, the owner and contractor limit themselves to direct damages”). Furthermore, the commentary notes that “the items identified as consequential damages in .1 and .2 are not intended to be a complete listing of all such items.”
The expansive reading of the consequential damages waiver can be problematic to owners who incur lost profits or lost rents from workmanship defects after the completion of a construction project. While courts have yet to expressly limit the scope of the AIA consequential damages waiver, the basis for doing so lies in the placement and content of the waiver provision, itself—as noted above, the provision is placed in the claims and disputes section, and cross references termination provisions contained in Article 14.
Moreover, at least in relation to waiver provisions perhaps less explicit that the AIA waiver language quoted above, arguments that lost profits and lost rents do not constitute consequential damages, and are actually direct damages that a contractor would reasonably foresee to result from certain construction defects at a commercial or residential property, have found a receptive audience.
Some courts seem to have treated lost profits as a direct loss, instead of a consequential one. For example, a court characterized loss of profits as well as loss of use damages as recoverable when “the loss is a direct and proximate result of the injury complained of and the damages are within the contemplation of the parties at the time of making the contract.” See Northern Petrochemical v. Thorsen & Thorshov, 297 Minn. 118, 123–24 (1973). See also Oliver B. Cannon & Son v. Door-Oliver, 394 A.2d 1160, 1163 (Del. 1978) (lost profits were treated as a direct loss, although the court ultimately reversed and remanded the lost profits award because the lost profits calculation was speculative). For a good review and commentary on this issue, see Lynn R. Axelroth, Mutual Waiver of Consequential Damages—The Owner’s Perspective, Jan. 1998, at p. 3–4.
So far, a few courts have read the AIA consequential damages waiver provision to unambiguously preclude claims for lost profits or rents that arise from construction defects after completion of a construction project. While courts have yet to expressly limit the scope of the waiver provision to consequential damages incurred due to termination of the contract during construction, the placement and content of the provision would seem to give an opportunity to argue for such. Some courts have been open to limiting the reach of at least some waiver provisions by holding that lost profits and rents are not “consequential” in the first place.
Stephen S. McCloskey is the chairperson of the litigation department at Semmes, Bowen & Semmes, and a member of the firm’s management committee. His practice focuses on civil litigation including concentrations that include construction litigation. McCloskey is barred in the Federal and State Courts of Maryland and Washington, D.C. Contact him at firstname.lastname@example.org.
Thomas V. McCarron is the managing principal of the firm. He has extensive experience in various aspects of civil litigation, including in construction litigation. He is barred in Maryland, Washington, D.C. and Virginia. Contact him at email@example.com.