Compromising on Consequential Damages

Author: Corbin Devlin

The potential loss to the owner if something goes wrong during construction (e.g. business interruption, loss of production…) is often far greater than the cost of construction. Owners reasonably want to hold contractors accountable for delays or other events in the contractor’s control that may affect the owner’s bottom line. But contractors reasonably don’t want to take on a risk that greatly exceeds the value associated with a particular contract. For a time it was common to see broad exclusions of consequential damages in industrial construction contracts. Sophisticated contractors in Alberta were simply unwilling to accept a risk of the magnitude likely to be associated with the delay or shutdown of a revenue-generating asset.

Now the trend appears to be towards a more complex sharing or allocation of risk.

• Limitations (monetary caps) on consequential damages, rather than a complete exclusion of liability for consequential damages (alternatively, a cap on all possible damages arising from the contract).
• More elaborate definitions of risks that are or are not excluded (e.g. instead of an exclusion clause that simply refers to consequential or indirect damages, a more detailed listing of excluded damages such as losses caused by business interruption, loss of profits, loss of downstream contracts…)
• More exceptions to the exclusion (Contractors: beware of the clause that excludes liability for consequential damages, excepting any consequential damages that are foreseeable; ask yourself, is it foreseeable that a construction mishap could take down the existing plant for a period of time? If the answer is yes, then this exclusion clause does not protect against liability for the very significant losses associated with such an event!)
• More prevalent use of liquidated damages in industrial construction contracts (in place of consequential damages for delay, some form of liquidated damages may be payable, ideally in an amount sufficient to hold the contractor accountable but not so great as to present a risk of bankrupting the contractor).

Contract provisions excluding consequential damages are not all the same. Now more than ever, these clauses can be very narrow or very broad in scope and effect, and should be the subject of deliberate review and negotiation.