Abstract
The American Institute of Architects, as of 1997, amended its frequently used contract form A201. One of the most significant changes in this form is the addition of sub-section 4.3.10 which is a mutual waiver of consequential damages. In the construction industry, many attorneys have doubtlessly seen these contract provisions, whether in the A201 form or otherwise. Attorneys seeking predictability and foreseeability of potential liabilities which unfortunately may accompany a construction job require such provisions in contracts executed by their clients.
Depending on one's client's perspective, an attorney may not question that it benefits his client to have the other party waive or release the right to pursue consequential damages against his client. For example, general contractors may prefer to use consequential damages waivers when working in close proximity to active operations of premises owners. The question arises to what extent and under what conditions a Texas court will recognize and uphold this waiver of consequential damages. Also, to make a sound decision, it would be important to understand exactly what one's client is giving up or receiving by using these clauses. This would require an understanding of what damages are ‘direct' and what damages are excluded under the typical damages limitations clause as ‘consequential.' This same understanding would also be of importance to a litigator faced with a demand or lawsuit alleging damages, and who is concerned with how and to what extent the damages limitation clause limits the opposing party's recovery.
This paper seeks to address these two important issues of enforceability and construction (specifically regarding the term ‘consequential damages') of limitations of damages provisions in contracts. Additionally, this paper briefly addresses those damages which are already unrecoverable (because not foreseeable) pursuant to case law as (1) an understanding of the limitations case law has put upon the claimant's recovery will assist the reader in understanding the scope of ‘consequential damages;' and (2) to remind the reader that even without a limitations of damages provision, some damages sought by a claimant will not be recoverable. Finally, the paper provides some drafting tips to consider when drafting a damages limitation clause.
As explained more fully below, a damages limitations clause in a construction contract can insulate a contractor from the risk of liability for many types of damages which would still otherwise be recoverable despite the rules of law prohibiting recovery of damages which cannot be foreseen. Such provisions are generally enforceable in Texas, but subject to the fair notice requirements applicable to indemnity provisions and may not be enforced where there is clearly a disparity in bargaining power. As for interpreting the provision after an injury or breach has already occurred, the typical damages limitation provision limits liability to ‘direct' damages. Perhaps the best way to contemplate the term ‘direct' damages when seeking to apply it to an actual demand or suit is to consider that ‘direct' damages are the only damages which a claimant may recover without specifically pleading what type of damages are being sought.
Table of Contents
- Overview: The Use of Limitations of Damages Clauses
- Inherent Limitations in Damages Not Requiring a Limitations Provision
- What are consequential damages?
- Tables
- Direct Damage and Consequential Damages
- Contract Cases
- Tort Cases
- Enforceability of Damages Limitation Clauses
- Drafting a Damages Limitations Clause
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