This article analyzes what is known as a “Mutual Waiver of Consequential Damages” – a contractual provision that acts as a powerful tool in limiting both the contractor’s and owner’s potential contractual liability on a construction project. While this provision is commonly seen in most standard form agreements prevalent in the construction industry today (e.g., the AIA and ConsensusDocs), some contractors and owners fail to include it for one reason or another, running the risk of severe financial harm should the project go awry.

However, before analyzing the significance of this provision, it is critical to understand the difference between “direct” or “general” damages, and “indirect” or “consequential” damages. Direct or general damages are those damages that the law presumes follow from the type of wrong complained of. Examples include an owner’s cost to correct or complete a contractor’s work after a breach. Indirect or consequential damages are losses that do not flow directly and immediately from an injurious act, but that resulted indirectly from the act. Examples include lost profits suffered by the owner caused by the delayed completion of a store or lost rents from the owner of an apartment complex building.

Absent language to the contrary in the contract, consequential damages are recoverable in Florida. As Florida courts have held, a homeowner is entitled to “loss of use” damages (in other words, consequential damages) under Florida law. See Gonzalez v. Barrenechea, 40 Fla. L. Weekly D 258 (Fla. 3d DCA 2015). Whether a construction contract addresses the risk of consequential damages is a serious consideration for property owners and contractors alike because consequential damages often greatly exceed direct damages.

Understanding this risk and wanting to “level the playing field” between owners and contractors, the American Institute of Architects, for example, includes a mutual waiver of consequential damages into the commonly used “General Conditions of the Contract for Construction” (the “AIA A201), a document that compliments and incorporates itself into the contract (the “AIA A101”). For example, the AIA A201 (2017 version) provides as follows per Section 15.1.7:

§ 15.1.7 Waiver of 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 15.1.7 shall be deemed to preclude assessment of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.

It is important to note that the AIA’s waiver of consequential damages per Section 15.1.7 is not “bulletproof”. As you can see, Section 15.1.7 only includes two (2) specific subparts that cover certain damages incurred by the owner and certain damages incurred by the contractor. A common criticism of Section 15.1.7 in the construction industry is whether these lists of damages is meant to be “exclusive” or all encompassing, or merely illustrative. Moreover, Section 15.1.7 fails to account for certain insurance considerations. For example, it may be wise to include language to the effect of modifying the waiver to operate as a cap on consequential damages, limiting those damaged to the insurance policy limits when the damages are a covered loss.

Lastly, keep in mind that a common defense and challenge to the enforceability of these waivers is that they are ambiguous and unclear, as drafted, and thus, unenforceable. Thankfully, AIA documents are modifiable to not only fit each parties’ specific goals and requirements, but to strengthen and add clarification to critical provisions such as Section 15.1.7. That is why it is imperative to consult with an experienced construction attorney.

The attorneys at Soto Law Group, P.A. are equipped with the experience, knowledge, and expertise to handle all facets of contract drafting and negotiation. Should you require assistance, please do not hesitate to contact us. For more information please contact Douglas Clarke, Esq. at 954-567-1776 or via email doug@sotolawgroup.com.

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