AIA 201 Document: Waiver of Consequential Damages

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September 22, 2015

In 1997, the AIA inserted one of the more controversial of its provisions into the A201. §15.1.6 provides that the Owner and Contractor waive all claims against each other for consequential damages arising out of or relating to the contract. Often time this provision is arguably more beneficial to the Contractor for a number of reasons, but may be considered a necessary elimination of unknown and substantial risks to the Contractor.

Consequential damages are “losses or injuries which are a result of an act but are not direct and immediate.”3 These damages can include the Owner’s lost profits, loss of use, additional financing costs, and other losses that arise because the contract was not completed in accordance with the Contract Documents. Often times Contractors will seek to limit consequential damages, because the consequential damages are hard to anticipate, and may easily become more than the amount of the contract. These items represent a large, and hard to
quantify risk to the Contractor. From the Contractor’s side, consequential damages could include the loss of other contracts, additional non-project expenses, loss of reputation and related claims. For instance, if the Contractor obtained another project but was unable to perform due to a breach by the Owner, the Owner could be liable for any lost profits or other damages resulting to the Contractor from the Owner’s breach.

Part of the justification for the waiver of consequential damages is to allow the parties to quantify their risk. Further, the waiver of consequential damages, and therefore limiting the parties to only direct damages, is seen as a tool to reduce the incentive of the parties to escalate their claims. The hope is that this will help lead to resolution of claims, rather than encouraging protracted disputes.

Both the Owner and Contractor should consider whether modification §15.1.6 is necessary. If there are specific concerns as to potential costs to either party from a breach, then these issues can be specifically identified and addressed, rather than just waiving, or leaving open, the potential for consequential damages. For example, the parties could agree to liquidated damages for any delay in completing the project. Finally, the parties should discuss and determine if there is a possibility of obtaining insurance for any of the potential damage items.

3 Black’s Law Dictionary (6th Ed.)

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