Construction Law Insider

AIA forms of agreements between owners and architects contain mutual waivers of consequential damages which, in the context of such agreements, invariably involve lost profits. Where manuscript forms are provided by an owner, and do not contain such a waiver for the benefit of the architect, counsel for architects routinely request the waiver. In both instances, as set forth in more detail below, owners would be prudent not to include a waiver of consequential damages against the architect or other design professionals, such as engineers. At the very least, the waiver should only extend to consequential damages not covered by the amount of insurance the professional is required to maintain under the contract.

It is well settled in New York that the theory of damages against design professionals for malpractice is to “make good” and replace the loss caused by the professional’s acts or omissions. As stated by the Court of Appeals:

Damages are intended to return the parties to the point at which the breach arose and to place the nonbreaching party in as good a position as it would have been had the contract been performed.

See Brushton-Moira Cent. Sch. Dist. v. Thomas Proctor Constr. Co., 91 N.Y.2d 256, 261 (N.Y. 1998).

An example of an error or omission (which New York courts consider a combination of breach of contract and negligence) is a design that is not compatible with the intended use of the project or is simply not constructible. Direct damages that might flow from such a breach could include the cost to correct installed work or modify working drawings before their implementation. More far reaching, however, are damages from delays to the completion of the project caused by the error or omission in the initial designs, which are generally considered consequential damages.

Notwithstanding the very real possibility that the owner might suffer extensive damage from delay--such as a prolonged loss of the use of the project, extended construction financing, additional carrying costs, extended project administration fees, and lost profits--a waiver of consequential damage might preclude the owner from recovering all or most of these costs. From an owner’s perspective, such waiver should, therefore, be stricken from the AIA form and not added to a manuscript form.

Notably, unlike a commercial general liability policy a general contractor or construction manager might carry, the insurance coverage under a professional liability policy typically covers any “wrongful act,” which is defined (in a typical policy) as “an error, omission, or other act that causes liability in the performance of professional services for others by” the professional. Hence, because the design professional is likely covered by insurance for delay or other consequential damages, the owner has good reason to resist the waiver.

Every contract is, of course, subject to its unique circumstances and negotiations. Owners should understand the significance of a waiver of consequential damages and proceed with caution when considering the inclusion of such waiver.

For more information on the topic discussed, contact:

• Melissa T. Billig  |  billig@thsh.com  |  212-508-6730
• Kenneth M. Block  |  block@thsh.com  |  212-508-6790
• Brandon P. Reiner  |  reiner@thsh.com  |  212-508-7527
• Stuart Rosen  |  rosen@thsh.com  |  212-508-6719
• Hillel E. Sussman  |  sussman@thsh.com  |  212-508-6704