Following the construction industry and related legal topics in the United States.

Wednesday, August 6, 2008

Mutual Waiver of Consequential Damages Re-Visited

From an Owner's perspective, the mutual waiver of consequences damages that was introduced into the AIA standard form design and construction contracts in 1997 and survives in the 2007 edition of these contracts continues to be problematic. While Architects and Contractors embrace this waiver, it is not so good for owners. In reflecting recently on how best to describe to an Owner the potential consequences of waiving consequential damages in the Owner's agreement with the Architect, I created the scenario below that illustrates how this waiver could be seriously detrimental to an owner. Although unlikely to occur exactly as played out below, the scenario is based on fact.

The Architect makes a negligent mistake in the mechanical design of the HVAC system in an assisted living facility. As a result, the air doesn't circulate properly. Word gets around about how terrible the air quality is in the facility. There is some bad press about it, and in fact the air quality is so unpleasant that a few people move out of their units. A particularly fragile lady falls and breaks a hip while moving out, and the family sues the Owner, claiming that she would not have had to move out except for the terrible air quality in her unit. Another resident develops pneumonia and dies, and the family sues the Owner claiming that the faulty air circulation was the proximate cause of the pneumonia. More bad press.

Whatever costs the Owner incurs in defending against these lawsuits and in repairing its public image, and whatever liability it is ultimately found to have would likely be consequential damages. If the Owner waives its right to recover consequential damages, the Owner would have no claim against the Architect for the damages the Owner suffered as a result of the lawsuits and the bad publicity it received.

The point is that Owners should not lightly accept a mutual waiver of consequential damages simply because it appears in the standard form agreement. (This entry was published by Karen Carey, a member of Womble Carlyle's real estate development and construction law practice group.)


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