While it is common in commercial contracts to limit consequential damages or other specific types of damages (or to exclude such recovery entirely), many clients see no reason to limit the risk of design firms to direct losses caused by the firm’s negligence in the performance of professional services. Direct losses can occur in any design contract, especially those with well-established and objective formulas for measuring damages. Such losses include the cost to cure a problem caused by the responsible party. Direct losses could include:
- the cost of repairing a negligently designed element of a project;
- the incremental or remedial construction cost of adding an element to a project negligently omitted from the design; or
- other harm that is directly caused by the design firm’s negligence in design or construction contract administration.
Every professional services project has the potential for a client to assert that a design firm’s actions—whether negligent or not—caused consequential damages that go beyond direct losses. Courts usually define consequential damages, and the definitions often vary because they are difficult to evaluate. Such damages could be of great significance to the client and catastrophic to the design firm. Lost profits caused by delays in completing the project is one example.
Such potential losses beg the question: should the design firm be responsible for what the client thinks it should be able to recover even though the design firm had no prior knowledge of the extent of the possible loss?
When a client hires a design firm, that client is providing the firm with a limited scope of services and limited authority for what is usually a limited fee. That client has a need and is willing to make an investment to address that need. Like with any investment, the involvement of professional services gives rise to risk.
Waiving consequential damages means that both parties to the agreement are acknowledging known and calculable risks and recognizing that many unclear and incalculable risks also exist. A mutual waiver of consequential damages is not a completely exculpatory clause for either party, but one that simply limits the liability of each party to a significant, but not catastrophic, amount. Such an apportionment of risk is fair and gets the professional relationship off to a positive start.
A mutual waiver of consequential damages has been standard since the 1997 edition of AIA document B101, Standard Form of Agreement Between Owner and Architect. The current language in B101-2017 states:
The Architect and Owner waive consequential damages for claims, disputes, or other matters in question, arising out of or relating to this Agreement. This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination of this Agreement, except as specifically provided....
EJCDC E-500 (2020 edition), Standard Form Agreement Between Owner & Engineer for Professional Services, includes a more specific provision:
To the fullest extent permitted by Laws and Regulations, Owner and Engineer waive against each other, and the other’s officers, directors, members, partners, agents, employees, subconsultants, and insurers, any and all claims for or entitlement to special, incidental, indirect, or consequential damages arising out of, resulting from, or in any way related to this Agreement or the Project, from any cause or causes. Such excluded damages include but are not limited to loss of profits or revenue; loss of use or opportunity; loss of good will; cost of substitute facilities, goods, or services; and cost of capital.
A design firm’s negligence in performing professional services may entitle the client to sue under either a tort theory for negligence or a contract theory for breach of contract caused by negligence. When a client proceeds under both tort and contract causes of action, each theory of liability has its own distinct damages and its own distinct statute of limitations. First, a court measures damages recovered under a contract theory differently than damages recovered under a tort theory. For an action in tort, courts tie the limitation of damages to the idea of proximate causation. For that reason, it makes business sense for a design firm to negotiate with the client to exclude liability for consequential damages by limiting the design firm’s responsibility to correction of the work caused by defective design or, when that is not economically feasible, to the diminished value of the project.