March 27, 2019

By: James R. Artzer, Associate, Jones Walker LLP

Securing a new project brings opportunity for profit and success, but that opportunity also brings great risk. Contract limitations of liability can help manage that risk and hopefully avoid betting the company. Risk management is an essential task for any contractor entering into a new project. This article describes various types of limitations of liability, including waiver of consequential damages, indemnification limitations, liquidated damages and potential caps on those damages, and total liability caps.

Waiver of Consequential Damages
The most common limitation of liability in construction contracts is a waiver of consequential damages. Consequential damages are losses or injuries that do not flow directly and immediately from the other party’s breaches. Instead, consequential damages stem from the result or consequence of the breach. Lost profits are a classic example of consequential damages.
Waiver of consequential damages clauses are found in most private construction contracts, including in standard form contracts such as ConsensusDocs. Below is a basic consequential damages waiver from Article 6.6 of ConsensusDocs 200:

The Parties agree to waive all claims against each other for any consequential damages that may arise out of or relate to this Agreement … Owner agrees to waive damages, including but not limited to the 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. [Contractor] 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.

Despite the prevalence of consequential damages waivers in private contracts, similar provisions are not usually included in public contracts with federal, state or local government bodies.

Although consequential damages waivers are common, contractors should not assume the existence of the waiver. Always thoroughly review the contract to confirm there is an express waiver of consequential damages. These provisions usually apply to and protect both parties to a contract, so if your contract does not have a consequential damages wavier, negotiating its addition may be easier than some of the other liability limitations discussed below.

In addition to making sure your contract contains a consequential damages waiver, it is very important to clearly define what the term “consequential damages” includes. Although there is a substantial amount of case law on this topic, it is better to avoid getting into an extended legal battle over the definition by listing in the clause at least some of the consequential damages being waived, as in the example provided above.

Lost profits are perhaps the most significant type of consequential damages and should be specifically referenced in the waiver. This is due to the fact that lost profits can quickly outpace the total value of a construction contract.

Liquidated Damages and Capping Liquidated Damage Liability
Liquidated damages are typically a per day delay damage amount the contractor agrees to pay for unexcused project delay. Although liquidated damages are collected by the owner, agreement on liquidated damages, along with waivers of consequential damages, provide certainty about the contractor’s potential exposure for delay and allows the contractor to effectively plan for and manage the risk of delay.

The general understanding is that liquidated damages are the sole and exclusive remedy available to the owner for delay. Some states, like Oklahoma, expressly prohibit the recovery of liquidated and actual damages. Nonetheless, it is too risky to make such assumptions or to rely on general law to protect you. Make certain the contract is clear that liquidated damages are the sole and exclusive remedy for delay, and also be sure to understand the applicable law that controls your contract.

Another generally held belief about liquidated damages is that they only run until substantial completion, and not until final completion. Here again, attention to detail is critical. Most liquidated damages provisions are tied to substantial completion and are the owner’s sole and exclusive remedy for delay, but the contractor should always make certain that is explicitly stated.

The liquidated damages provision used in ConsensusDocs 200 Article 6.5 states:

The Constructor understands that if the Date of Substantial Completion established by this Agreement … is not attained, the Owner will suffer damages which are difficult to determine and accurately specify. The Constructor agrees that if the Date of Substantial Completion is not attained, the Constructor shall pay the Owner [______] dollars ($[____]) as liquidated damages and not as a penalty for each Day that Substantial Completion extends beyond the Date of Substantial Completion. The liquidated damages provided herein shall be in lieu of all liability for any and all extra costs, losses, expenses, claims, penalties, and any other damages of whatsoever nature incurred by the Owner which are occasioned by any delay in achieving the Date of Substantial Completion.

Another potential way to limit contractor liability is to negotiate for a lower per day liquidated damages charge and/or a cap on the total amount of liquidated damages that can be assessed. Contractors often have narrow margins on a project, and daily liquidated damages can mount quickly and rapidly consume those limited margins. Although it is not always possible, getting the daily rate low and/or negotiating a cap on the total amount of liquidated damages may be critical to staying in the black on a project.

Total Liability Caps
A limitation of liability can apply to any and all liabilities arising under a contract or it can be limited to certain kinds of liability, such as liquidated damages or indemnification as discussed in detail below. A blanket liability limitation operates to cap all liability in the aggregate. The total liability can in theory be tied to any amount, but an owner is unlikely to agree if the cap is unreasonably low. One way to set a liability cap is to tie it to the value of the contract as in the example below.

Contractor’s entire liability for all claims or damages related to the Contract Agreement will not exceed the amount of any actual direct damages incurred by Owner up to the Contract Sum, regardless of the basis of the claim. This limit applies collectively to Contractor, its subsidiaries, subcontractors, and suppliers.

A cap on the contractor’s aggregate liability on the entire project is great to have but difficult to get.

Indemnification Limitations
One area where limitations of liability are regularly included is in indemnification provisions. An indemnification provision is a contract clause that requires one party (usually the contractor) to hold another party (the owner) harmless for any losses caused by the first party.

One way to limit liability exposure from indemnification is to limit the scope. Many states now have laws in place regarding the extent to which one party can be contractually required to indemnify another party for that party’s own negligence or fault. Some states allow broad form indemnification, where the contractor is required to indemnify the owner for any and all claims arising on the project, even if the owner is solely at fault for the damages. An increasing number of states now limit a contractor’s indemnification obligations using a comparative fault standard, under which a contractor is only required to indemnify the owner to the extent the contractor is somehow responsible for the damages. Again, it is too risky to make assumptions regarding indemnity limits or to rely on general law to protect you, but pointing out that a broad indemnification provision may not comply with applicable law is an easy way for a contractor to immediately work towards limiting its indemnification risks and, even if the other party refuses to remove or limit the provision, if the clause does conflict with applicable law there is little likelihood of the provision’s enforcement.

An additional way to limit liability from indemnification obligations is for the contractor to include a cap on any liability arising from their indemnification obligations. There several ways to structure such a cap. Indemnification obligations can be tied to the insurance coverage minimums required in the contract. For example, if the contractor has a builder’s risk policy covering up to $1 million in property damages, then the contractor’s indemnification obligation for damages falling under that policy are limited to $1 million. A contractor could also attempt to place an express dollar amount cap on the indemnification obligations similar to the liquidated damages discussed above. Finally, the indemnification obligations can be capped at the total value of the contract (or any other percentage of the total value). It should also be noted that indemnification limitations are often inapplicable to liability arising from third-party claims for personal injury or property damage. An owner has no incentive to limit this type of indemnity as events leading to these types of claims are totally within the contractor’s control. If a contractor can avoid a carve out for third-party personal injury or property damages claims, great. But, if not, contractors should be prepared and find other ways of managing this additional risk.

Risk management is a key aspect for any contractor entering into a construction agreement. Although properly managing and administering the actual scope of work to be performed is crucial, negotiating reasonable limitations of liability can be just as important to protecting the company during and after the execution of a project. Including a blanket liability cap, waiver of consequential damages, a cap on liquidated damages, or indemnification limits or all of the above is a great way to help contractors manage risk on a project by project basis.

Jones Walker LLP has grown over the past several decades in size and scope to become one of the largest law firms in the United States. They serve local, regional, national, and international business interests in a wide range of markets and industries. Today, they have approximately 355 attorneys in Alabama, Arizona, the District of Columbia, Florida, Georgia, Louisiana, Mississippi, New York, and Texas. For more information about Jones Walker LLP please visit

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.