www. NYLJ.com Volume 262—NO. 94 Wednesday, November 13. 2019

Construction Law Owners Should Take Caution in

By And Waiving Consequential Kenneth M. Joshua M. Block Levy

t is common in most con- struction for there to be a mutual waiver of con- sequential damages. Owners, however, should take caution beforeI agreeing to provide a broad unqualified waiver to contractors. Generally speaking, consequen- tial damages in construction con- tracts relate to indirect losses or damages incurred by either the owner or contractor arising from

a breach by the other, such as S h u tt er sto ck lost income or increased financ- ing costs on the part of the owner to correct or complete the work by contractor and the owner loses or loss of business opportunities the owner or the loss of profits on sales or rental income. by the contractor. In both situa- the work by the contractor. However, because of the cata- tions, the consequential damages From the owner’s perspective, strophic losses an owner may incur incurred by the non-defaulting par- a blanket waiver of consequential as a result of delayed completion, ty may be difficult to ascertain and damages, such as that contained contractors will, as a matter of may be excessive in the context of in various American Institute of course, demand the waiver and, the overall value of the at Architects (AIA) documents is perhaps, offer in its place liqui- issue. This can be contrasted with problematic on two levels. First, dated damages designed to limit direct damages, such as the cost the waiver will deprive the own- the amount of damages the owner er of a remedy for the financial may recover. ( losses it will suffer if, for exam- must, however, bear some rela- Kenneth M. Block and Joshua M. Levy are mem- bers of Tannenbaum Helpern Syracuse & Hirschtritt. ple, the project is delayed by the tionship to the actual damages Wednesday, November 13. 2019 the owner will suffer for delay, This brings us back to our Contractor and Owner waive otherwise they would be consid- discussion of consequential Claims against each other for ered an unenforceable penalty.) damages and the breadth of the consequential damages arising Second, a blanket waiver may waiver. If a blanket waiver is giv- out of or relating to this Agree- impede the ability of the owner en, arguably, the indemnity for ment, other than with respect to be indemnified for claims of claims of third parties may be to (a) claims of third parties third parties seeking consequen- lost, inasmuch as a claim by a against Owner, (b) claims that tial damages against the owner third party may be considered arise due to Contractor’s and/ resulting from the activities of consequential damages. In order or Subcontractors’ gross neg- the contractor, such as neighbors to remedy this possibility, in our ligence and/or willful miscon- who may have suffered property construction contracts, we first duct, or (c) claims by Owner for damage or interference with their carve out from the waiver any consequential damages against businesses. This implicates the claims of third parties. We also Contractor that are covered by contractor’s indemnification of the address other circumstances for insurance or arise from defec- owner and brings a slight detour which a waiver of consequential tive and nonconforming Work. in our discussion. While on the topic of consequen- Traditional indemnities in favor We have included in our con- tial damages, we should close by of the owner, including those struction contracts indemnities noting that, as to design profes- found in AIA documents, deal, of owners for third-party claims sionals, we do not believe there essentially, with personal injury, against the owner for economic should be any waiver of conse- bodily injury and property dam- loss. quential damages by an owner, age. They do not include indem- for the simple reason that profes- nification for claims of third par- damages would not be appropri- sional liability policies generally ties seeking monetary damages, ate, such as where the contractor cover architects and engineers for such as unpaid subcontractors, is guilty of gross negligence or all damages arising from errors neighbors, or civil authorities. willful misconduct; insurance is and omissions, regardless of the Because of this, we have includ- available to the contractor for the characterization of such damages ed in our construction contracts owner’s claim for consequential as direct or consequential. While, indemnities of owners for third- damages; or it arises from defec- as with contractor counsel, there party claims against the owner for tive or nonconforming work. The is initial push back from counsel economic loss. While, invariably, latter point covers situations for design professionals on this there is objection to this expan- where, for example, the owner point, once it is explained that sion of the traditional indemnity suffers a loss of income due to insurance is available, the demand by contractor counsel, once it is repairs necessitated by defective for the waiver is usually dropped. explained that we are only look- work, such as the closing of a ing for protection against third- retail establishment while reme- party claims for damages arising dial work is being performed. from the contractor’s negligence The language we have crafted Reprinted with permission from the November 13, 2019 edition of the NEW YORK or , the expan- addressing these carve outs is as LAW JOURNAL © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382 sion is generally accepted. follows: or [email protected]. # NYLJ-11122019-425743