Limitation of liability clauses are frequently relied upon in design and/or construction contracts to manage risk by limiting the damages recoverable from contractors and design professionals. Historically, these clauses have generally been upheld, particularly when the contracting parties are both sophisticated entities. However, a growing concern over the trend of design professionals requiring contracting partners to indemnify them, despite the former’s own negligence, caused most states to adopt anti-indemnity statutes. What remains somewhat uncertain is how these anti-indemnity laws affect the enforceability of limitation of liability clauses. Two recent cases have invalidated a limitation of liability clause under the relevant anti-indemnity statute. While these cases still represent the minority view, they beg the question of the prudence of continued reliance on such clauses, particularly in jurisdictions which have not yet ruled on the issue.
In December 2006, the Connecticut Department of Transportation (“ConnDOT”) was surprised by the lack of contractor response to its request for proposals for a $400-million plus, seven-year project to build a ten-lane bridge replacement for the Pearl Harbor Memorial Bridge on Interstate 95. Not a single contractor bid on the project.
Contractors were likely hesitant to build on the Pearl Harbor Memorial Bridge project because of uncertainties and difficulties in predicting labor and material costs for a seven-year project. One surety commented that the length of the project also contributed to the "risk profile" of the project. Another deterrent was the fact that the contract terms placed most of the risk on contractors, while also imposing high liquidated damages for failing to meet milestones. In response to the lack of bids, ConnDOT may break up the project or re-allocate the risk to lessen the risk burden on the contractors.
By K&L Gates partner Jason L. Richey
Imagine a contractor who has done an outstanding job of building a magnificent skyscraper in the heart of one of the world’s largest cities. The skyscraper is 65% complete, expected to be finished on time and within budget. The contractor has not defaulted, and proudly touts that this construction project will be the centerpiece of the company’s accomplishments. Suddenly, the owner of the project notifies the contractor that it has been terminated from the job for the owner’s convenience. To complete the skyscraper, the owner replaces the contractor with one of its competitors. Can the owner unilaterally terminate the contractor even though the contractor was not in default? If so, what compensation is the contractor entitled to recover? The answer to these questions lies within the termination for convenience provision which has become increasingly common in private construction contracts.
Contractual provisions that mutually waive the rights of the owner and contractor to recover consequential damages have become common-place in today’s construction contracts. Effective waivers will expressly define the type of consequential damages the provision is intended to bar. Such a provision will allow courts and arbitration panels to dismiss all or part of a construction case at an early stage if the waiver clearly bars a demand for certain types of consequential damages. However, a broad consequential damages waiver that is improperly drafted may cause contractors and owners to expend significant time and money defending claims that seek damages for delay, lost profits or other damages commonly thought to only be “consequential.”
Express indemnity clauses are a common component in virtually all construction contracts, yet they are routinely included in such contracts without a full understanding of the risk transfer objectives of the parties or whether the indemnity clause fulfills those objectives. Indemnity clauses are risk transfer provisions whereby one party seeks to shift the risks of claims on a construction project down the line to the entity closer to the actual work. Typically such clauses transfer risk from the owner to the general contractor and subsequently to the subcontractors. This article examines the forms of indemnity clauses, issues often not specifically addressed in such clauses, jurisdictional limitations on indemnity provisions and the influence such clauses may have on additional insured coverage. Finally guidance is provided on ways to negotiate more effective indemnity clauses.
Proper risk allocation is critical to the ultimate success of a construction project. And, the cornerstone of proper risk allocation for any construction project is a well-conceived and appropriately tailored insurance program. Too often, the concept of insurance remains an afterthought because contracting parties blindly rely on standard language in form agreements prepared earlier without fully investigating and understanding the current insurance market conditions. Moreover, most contractors do not want to consider the possibility of a disaster or another party’s failure to perform that may have project-wide implications.