Consequential damages—the types, magnitude, recoverability—can be a gamble.  A waiver of consequential damages clause is one way to hedge that bet. 

In the COVID-19 era and looming recession, business interruption and other forms of consequential damages can magnify losses attributable to design or construction defects.  Waivers of consequential damages are one effective tool to contain and minimize this risk.

1.    You have to know when to hold ‘em, know when to fold ‘em

Looking at Atlantic City, NJ today, it is hard to fathom that it was once a rival to Las Vegas.  Yet, our journey starts in a casino in Atlantic City in the early 1980s.  

The Sands, the venerable Las Vegas casino operator, purchased an existing casino in Atlantic City that suffered from being in a bad location, namely one block off the boardwalk.  Sands hoped to lure patrons from the boardwalk as well as wealthy New Yorkers by renovating the property.  Images of the 1980s TV show Dallas firmly in mind, one part of the renovation was construction of a “new glitzy glass façade” to “act as a magnet” to patrons.  The Sands retained Perini for $600,000 to act as construction manager for the multi-million-dollar renovation.  

Sands informed Perini that the renovations needed to be completed by June 1st, the beginning of the summer season, or be delayed by one full year.  Although other parts of the renovation were completed prior to June 1st, the “glitzy glass façade” and “high-roller” suites were not completed until August and September.  The contract did not contain a time-is-of-the essence provision or a waiver of consequential damages clause.

After Perini filed suit for payment under the contract and after the case was abated and sent to binding arbitration, Sands filed a counterclaim for $14.5 million in lost profits. The arbitration panel awarded Sands all of its lost profits. In subsequent litigation to overturn the panel’s award. Perini argued that consequential damages were not contemplated by the parties and were greatly disproportionate to its fee.  Overruling Perini’s arguments, the New Jersey Supreme Court affirmed the award.

In 1997, in response to the Perini case, the American Institute of Architects grafted a waiver of consequential damages provision onto its widely used AIA Document A201, General Conditions of the Contract for Construction.  That and similar waivers continue to feature prominently in the current version of the AIA Document as well as several other widely used standard form agreements. 

 2.    I found an ace that I can keep

The AIA waiver of consequential damages clause is mutual with each party releasing the other from them, and delineates specific types of damages that comprise consequential damages.  The owner waives the following types of damages:

• • Rental expenses
  • Loss of use
  • Loss of income
  • Loss of profit
  • Loss of financing
  • Loss of business
  • Loss of reputation
  • Loss of management
  • Loss of employee productivity

The contractor waives the following types of consequential damages:

• • Principal office expense
  • Loss of financing
  • Loss of business
  • Loss of reputation
  • Loss of profit, except anticipated profit arising directly from the work

3.     Know when to walk away, know when to run

Not all waivers of consequential damages are created equally, with some provided more protection than others.  The issue is particularly magnified in Texas where the definition of actual and consequential damages seemingly varies with the facts of each case.  What happens when the waiver is bare-bones, stating something as follows?

Except as specifically set forth herein, neither party shall be liable to the other party for incidental, special, indirect, punitive or consequential damages.

Without a defined list of consequential damages, parties must look to Texas courts to define direct and consequential damages.  On May 1, 2020, the Texas Supreme Court once again revisited its definition of those types of damages, stating,

Consequential damages are those that “‘result naturally, but not necessarily,’ from the defendant’s breach, and are not ‘the usual result of the wrong.’” In contrast, direct damages are those that the breaching party is “‘conclusively presumed’ to have foreseen as a result of its breach because they ‘are the necessary and usual result of,’ and ‘flow naturally and necessarily from,’ that wrongful act.”

Unsurprisingly, applying those technical definitions to the facts of a specific dispute can be difficult.  The lack of a specific waiver of lost profits, for instance, or the lack of any definition of consequential, compensatory, or actual damages, may lend the terms to more than one “reasonable” interpretation. This can result in the clause being rendered ambiguous, requiring a fact-intensive inquiry to clear-up the ambiguity, and thereby creating an opportunity for unexpected results.  The gamble of a bare-bones waiver clause is whether the damages thought to be consequential and barred are instead direct and recoverable. 

In determining whether a waiver of consequential damages provision is worth the gamble, it is always prudent to consult with an attorney licensed in the state whose laws govern the contract. The attorneys in our Austin and Dallas offices are available to answer any questions you may have.

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