Before “Consequential” Becomes Catastrophic: Addressing the Uncertainty of Vague Waivers

Consequential damage waivers are often the subject of dispute in construction contracts. Disagreements over these provisions can have lasting effects, including costly claims and increased financial risk. These clauses can affect a contractor’s financial exposure, yet they are frequently drafted and agreed to without a full understanding of what is being waived.

This article explains what consequential damages are, how they differ from direct damages, and why precise contract drafting matters when addressing consequential damages. It also explores how courts interpret these provisions and offers practical guidance for writing better, more effective language so you know what risks you are actually taking—or avoiding.

Direct vs. Consequential Damages

At times, it can be difficult to differentiate between direct and consequential damages. Direct damages are typically the direct costs that flow immediately and as a natural consequence from a breach of contract. In construction, these often include costs to repair defective work, replace materials, or complete unfinished work.

By contrast, consequential damages are the indirect losses that arise from the specific circumstances or consequences of a breach. In the construction context, these may include indirect financial losses such as lost profits, loss of use, or business interruption resulting from delays or performance failures.

For example, consider a project to build a manufacturing facility where the owner plans to produce and sell widgets. If the contractor performs defective work that delays completion of the project, the owner’s direct damages would include the costs to fix that work—such as hiring another contractor or purchasing replacement materials. The owner’s consequential damages would include business interruption costs that result from the delay caused by those repairs. Because fixing the defective work pushed back completion of the project, the facility could not begin operations as planned, resulting in lost profits.

Understanding this difference is important because it determines what losses a waiver may limit, and which ones might still be recoverable.

Why Consequential Damage Waivers Matter

Consequential damages are often addressed in limitation of liability provisions that seek to cap or exclude certain categories of losses. These clauses can be one-sided (protecting only the owner or only the contractor) or mutual (where each party waives similar rights).

ConsensusDocs 200 includes a standard clause that provides for a mutual waiver of consequential damages

Limited Mutual Waiver of Consequential Damages

Except for damages mutually agreed upon by the Parties as liquidated damages in and excluding losses covered by insurance required by the Contract Documents, the Parties agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agreement, except for those specific items of damages excluded from this waiver as mutually agreed upon by the Parties and identified below. Owner agrees to waive damages, including but not limited to Owner’s loss of use of the Project, any rental expenses incurred, loss of income, profit, or financing related to the Project, as well as the loss of business, loss of financing, loss of profits not related to this Project, loss of reputation, or insolvency. Constructor agrees to waive damages, including but not limited to loss of business, loss of financing, loss of profits not related to this Project, loss of bonding capacity, loss of reputation, or insolvency. The provisions of this section shall also apply to the termination of this Agreement and shall survive such termination. The following are excluded from this mutual waiver: .[1]

These waivers aim to reduce uncertainty, limit exposure to unpredictable and potentially massive claims, and allocate responsibility for indirect losses outside direct costs, like defective or delayed work. However, the effectiveness of a waiver generally depends on how it is written. Overly broad or vague language can sometimes unintentionally eliminate valid claims that one party believed would still be recoverable. Conversely, that same broad or vague language could lead to a more limited interpretation of the waiver, in turn exposing a party to unanticipated risk.

How Courts Interpret Consequential Damage Waivers 

The line between direct and consequential damages is not always clear-cut, and courts often struggle to define where one ends, and the other begins. A consequential damages waiver clause that seems straightforward to a contractor at bid time may read very differently to a judge years later when something has gone wrong.

Generally, clear and unambiguous language can help produce more predictable results, while vague language can invite uncertainty and risk. When courts interpret these provisions, they typically ask three questions:

• Were the damages foreseeable at the time of contracting?
• Are they direct or consequential in nature?
• Does the contract clearly exclude them?

The answers often depend on the jurisdiction. In New York, courts take a stricter approach. Waiver language must be clear and specific.[2] If a party wants to exclude liability for lost profits or revenue, the contract must say so directly; broad references to “consequential damages” are not enough.[3]

California courts focus on the commercial context of the deal.[4] Because the meaning of “consequential damages” can vary depending on the project and industry, courts expect the contract to list specific types of excluded losses, such as lost profits, loss of use or business interruption.[5]

Different states may take varying approaches when interpreting ambiguous contract terms. When a waiver is unclear, courts frequently look to the parties’ intent at the time of contract execution. That is rarely a comfortable position to be in years later, when the project is in trouble and the working relationship has long since soured. In any event, it is important to understand the applicable law.

A Costly Lesson from the Field

The importance of clear drafting is not just theoretical—it plays out on real jobsites with real dollars at stake. A recent case from the District of Nevada is illustrative, showing how an ambiguous waiver of consequential damages can turn into a multimillion-dollar loss.[6]

The dispute arose from a hospital renovation project, where a contractor engaged a subcontractor to design and construct a temporary phasing facility (TPF) to house operations during phased work. The subcontract required the subcontractor to dismantle and reconstruct the TPF between phases. When performance problems delayed the first phase, the subcontractor stopped work, and the contractor stepped in to complete it. To mitigate further delays and preserve its relationship with the owner, the contractor decided to install a second TPF, an approach never contemplated under the subcontract, to complete the phased work concurrently. This decision accounted for more than $7 million of the contractor’s $10 million claim.

The subcontractor moved for summary judgment, arguing that the contractor’s costs for the second TPF were barred as consequential damages under the subcontract. The subcontract included a reciprocal waiver of consequential damages, stating that the contractor and subcontractor waived “claims against each other for their consequential damages arising out of or relating to this Contract, including without limitation, any consequential damages due to either party’s termination.”

The court found the waiver language ambiguous because it did not define what the parties intended “consequential damages” to mean; a term that courts interpret differently from one another. Given that ambiguity, the court examined the parties’ intent and agreed with the subcontractor that a second TPF was never contemplated at the time of contracting. Because the subcontract called for only one TPF, the court held that the contractor’s costs for a second TPF were consequential and therefore barred by the waiver.

This result had expensive consequences and was potentially avoidable. Before the case even reached trial, the contractor lost more than 75% of its claim. The outcome may have been entirely different had the parties clearly defined what “consequential damages” encompassed.

Reducing Ambiguity in Practice

A well-drafted waiver of consequential damages has greater potential to bring predictability to a project, while a vague or poorly worded clause can leave a party exposed to unnecessary risk.

Avoid relying on generic language like “no consequential damages” and assuming it covers everything. Instead, try to address which losses are excluded such as lost profits, lost revenue, loss of use, or business interruption. The more specific the clause, the less room there may be for argument later.

Some types of losses, like lost profits, can be direct or consequential, depending on the circumstances. If you want to exclude them altogether, say so explicitly—for example, by stating that the exclusion applies “whether such losses are classified as direct or consequential.”

Depending on the governing state law, broad phrases such as “including but not limited to” can invite disputes over what the waiver covers. Alternatively, outlining an exhaustive list of excluded damages can also present risks, as it is difficult to capture every possible scenario, and courts may interpret the language narrowly. Because approaches vary by jurisdiction, it is important to understand the law that governs your contract and how courts in that state interpret and enforce these provisions.

Equally important is maintaining consistency within the contract. Your limitation of liability clause should align with other provisions—such as indemnity, warranty, and insurance—to avoid contradictions or unintended gaps in coverage.

Finally, document your intent during negotiations. Courts sometimes consider the parties’ understanding when language is ambiguous (if the applicable laws permit parties to look “beyond the four corners of the document”). But also understand that contemporaneous evidence may not be allowed in that situation—each case’s circumstances and applicable laws can change those outcomes. Again, it is important to understand the applicable law.

In short, greater clarity during drafting may help reduce the risk of costly disputes later. Taking time to define terms, align provisions, and document intent can further reduce the likelihood of misunderstandings once the project is underway. While no clause can eliminate all risk, thoughtful drafting can ensure that if disputes arise, you’re in a stronger position to navigate them.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.

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[1] Consensus Docs 200 – Standard Agreement and General Conditions Between Owner and Constructor (2016, Revised October 2021), Section 6.6.

[2] See Am. Elec. Power Co. v. Westinghouse Elec. Co., 418 F. Supp. 435, 459 (S.D.N.Y. 1976); Am. Telephone and Telegraph Co. v. New York City Human Res. Admin., 833 F. Supp. 962, 990 n.22 (S.D.N.Y. 1993).

[3] See Metro. Life Ins. Co. v. Noble Lowndes Int’l, Inc., 84 N.Y.2d 430 (1994).

[4] See Civic Ctr. Drive Apts Ltd. P’Ship v. SW Bell Video Surves., 295 F. Supp. 2d 1091 (N.D. Calif. 2003).

[5] See Broadway Air Conditioning Heating & Sheet Metal v. 161, 2021 Cal. Super. LEXIS 154904 (June 2, 2021); Burkhart Bros. Constr., Inc. v. Miller, 2023 Cal. Super. LEXIS 92670 (Nov. 27, 2023).

[6] See United States v. JE Dunn Constr. Co., No. 2:20-cv-00790-GMN-NJK, 2024 U.S. Dist. LEXIS 50047 (D. Nev. Mar. 21, 2024).