In the construction industry, there is typically a focus on the existence and scope of an indemnity clause in a construction contract. But while these clauses are important for their risk-transfer potential, there are other important clauses in construction contracts that are also worth examining in detail before executing the contract.
First, it is worth examining the contract in detail to determine whether there is a liquidated damages provision proposed to compensate either the general contractor or the Owner for delay or acceleration costs. Liquidated damages clauses are typically enforceable in California as long as the agreed upon amount of damages bear a reasonable relationship to the actual damages the parties could have anticipated at the time of contracting. If you are the party receiving the liquidated damages, you should ensure that any liquidated damages provision explains the basis for the amount and calculation of liquidated damages in the contract.
Second, is also important to determine whether there is a consequential damages waiver in the construction contract. Clauses waiving consequential damages, such as damages for delay, lost rent, and lost profits on behalf of either or both parties are typically enforceable in California. On occasion, however, courts have been reluctant to enforce a waiver if it is either too vague or too onerous to one party. With respect to vagueness, the more detail the clause provides in terms of the species of damages waived, the more likely a court will enforce the clause. For example, a clause that merely waived “consequential damages” with no further detail is somewhat vague because the distinction between a consequential damage and a direct damage can be blurry depending on the nature of the transaction. But a clause that specifically states that “All claims for consequential damages in the form of delay damages, lost profits, extended overhead, or lost rents are hereby waived on behalf of the parties” leaves little room for argument about what types of claims the parties intended to be covered by the waiver.
With respect to the onerous effect on one party or another, it is a good idea to ensure that the clause is: (1) mutual and (2) waives damages which each party would typically want to recover from the owner. Thus, a clause mutually waiving lost profits and extended overhead on behalf of the owner and the contractor has an excellent chance of being enforced because both parties agreed to waive damages which they would otherwise be entitled to recover from the other in exchange for the added protection.
A third clause to pay attention to in a construction contact is the waiver of subrogation. A waiver of subrogation clause typically provides that one party or both waives their right to collect damages from the other to the extent the damages were covered by insurance. A key detail to focus on is the type of insurance to which the waiver applies. For example, in some standard form contracts the waiver of subrogation is written to waive claims between the parties to the extent covered by fire insurance “or other property insurance applicable to the work.” The question then becomes: does the waiver apply to damages covered by an applicable commercial general liability policy? There is no published and controlling California case on this question although it has been litigated on at least a few occasions at the trial court level with inconsistent results. An easy way to avoid having to litigate the issue later is to simply make the waiver applicable to all insurance. Thus, the clause may read “the parties waive all claims for damages against each other to the extent covered by any insurance.”
Finally, it is always a good idea to consult with counsel before entering into any construction contract to ensure that there are no surprises hidden in the text that may seriously deviate from a party’s typical expectations.
Zachariah H. Rowland is a partner in the law firm of Dunn DeSantis Walt & Kendrick. He advises clients on all types of commercial litigation and construction matters in state and federal courts throughout California. He can be reached at zrowland@ddwklaw.com.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects.
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