Owners are optimists and contractors are negotiators. Maybe this explains the increasing (and for owners, disturbing) presence of liability waivers in construction and design contracts. Savvy owners – especially those with experience in litigation – know the importance of avoiding the growing variety of clauses that limit liability for construction industry vendors. Likewise, general contractors and architects need to be on guard against sub-tier liability waivers often lurking in the fine print or at the end of lengthy proposals.
1. The Consequential Damages (CD) Waiver
Consequential damages consist primarily of lost revenue from the inability to use a completed project. Whether composed of lost rents in apartment projects or lost sales of manufactured products, consequential damages are the very dollars the project was built to generate. Like all liability waivers, the CD waiver is often sold as “standard in industry,” even though many upstream parties successfully avoid the clause in negotiations. Consequential damages can be as great or greater than the cost to repair a defective facility. They can also be covered under commercial general liability policies and professional liability policies carried by contractors, designers, suppliers and manufacturers. The cost of these policies is (directly or indirectly) a cost of the project that upstream parties bear, so waiving the benefit of a policy you paid for is uniquely unsavvy.
2. The Limitation of Liability (LOL)
Why waive only one type of liability (like consequential damages) when you can waive them all? LOL clauses usually limit all types of liability and damages, and are the most dangerous of all waiver clauses. For some contracts, LOL clauses can appeal to the upstream parties’ sense of fairness or at least their practical business sense. Examples include (1) geotechnical investigations that sample minute portions of a site to determine the overall soil profile for the project and (2) manufacturing projects where the facility will generate more revenue in one month than the cost to build the project. In these cases, exposing the vendor to unlimited liability grossly disproportionate to the fee earned would limit or extinguish the number of vendors available to provide the service. But most LOL clauses cannot be justified. Why should the upstream party bear the liability of a failure by the downstream party? Almost all LOL clauses start with a dollar limit that is disproportionately low compared with the owners’ risk and the vendors’ insurance limits or other assets. Like CD waivers, leaving a proposed LOL clause in the contract, without at least negotiating conditions and reasonable dollar limits, reveals an unhealthy level of optimism.
3. The Warranty Illusion
Some warranties are great. Many are not. Our eyes focus on the number of years of “protection” while failing to see the many limitations imposed by the fine print. To the sophisticated purchaser, fancy colored ribbon printed on the border of the warranty page is a red flag. The liability limitations found within a warranty may justify relabeling the document a “Disclaimer,” not a “Warranty,” and you may be better off with no warranty at all. The limitations are not just limitations on the warranty itself, but on all damages that the product or service may cause to the purchaser. Windows, roofing products, HVAC equipment and heavy machinery all carry warranties that deserve a careful read. Warranties or guaranties offered by service providers can also disguise unfavorable terms that should be avoided. Especially if the volume of the product or service purchased is large, the consumer has leverage and should not assume the warranty is nonnegotiable.
There are several other types of liability limits and disclaimers, but they are easy to spot if you look for them. Many can be avoided completely once spotted, and almost all can be negotiated to more reasonable conditions and limits. Here are some common negotiating points: waivers should not limit recovery of insurance proceeds, waivers should not waive completely uninsured claims or damages, liability limits that exceed the insurance policy limits and/or proceeds encourage the liable party to push for full payout from the policy, waivers should be void if the vendor fails to maintain the insurance coverages and limits required by the contract, and waivers should cover only the direct vendor and not sub-tier providers. Finally, limitations of liability should be for dollar amounts large enough to encourage careful vendor performance, and large enough to provide a meaningful upstream remedy, but not so large that they create risk unreasonably disproportionate to the vendor’s fee and its ability to control the project outcome.
"The Trend Towards Liability Waivers in Design and Construction" was originally published by the Daily Journal of Commerce on September 19, 2015.