Limitations of Liability – The Elephant in the Room

Robinson+Cole Construction Law Zone

This is the first post in the four-part series “Limitations of liability—The Elephant in the Room.”

One or more of the following scenarios takes place in my office virtually every day:

  • Scenario One:  Owner client sends me an industry form construction contract and asks me to take a look, after the project has been bid but prior to execution (or worse, after a problem has arisen on the project).  The contract contains a “standard” waiver of consequential damages.
  • Scenario Two:  Contractor client has bid on a project and has asked me to “bless” its contract with the Owner (or worse the project is already behind schedule), and the contract contains a “no damages for delay” clause.
  • Scenario Three:  Subcontractor client sends me a template subcontract form that it received after pricing a private project for a contractor.  The subcontract includes a “pay if paid” clause, and prohibits recovery of costs except to the extent that the contractor recovers from the owner (regardless of who is at fault).

Inevitably, when I flag these clauses for my clients, they tell me that they either didn’t contemplate such risks when they first got involved, or they don’t anticipate that these clauses will present an issue for them.  It’s understandable.

Who thinks about claims or problems when they’re just getting started on a new project or a new relationship? And if they are thinking worst case scenarios, who wants to call attention to the elephant in the room – that they want their exposure limited in the event the project does go bad.

However, over the last few years, parties to construction contracts have become much more bold in raising these issues. Rightfully so, as they are critical, but I have witnessed some significant misunderstandings as to what these clauses actually mean.

It’s time to talk about the elephants in the room, and to clear up misunderstandings about their meanings.  Hopefully doing so will spur a dialog about basic business expectations at the beginning of the project – well before the contract is finalized.

We’ll tackle all three scenarios.  Our first installment, to be published contemporaneously with this post, will address scenario one, the waiver of consequential damages clause, and what it could mean to project owners.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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