Contractors, subcontractors and property owners should all take active steps to limit their liability during construction projects. As we discussed in a previous post there are many ways to reduce your financial risk, including insurance and indemnity provisions. However, for a contractor, subcontractor or supplier, the following three key clauses add additional safeguards.
1. Limitations on liability
Your construction contract can be drafted to limit your liability, or the amount of damages another party can receive in the event of a defect, delay or other dispute.
You can go about this in one of two ways. You can either limit your exposure to a certain dollar amount or to the amount of insurance available.
However, it is important to consider all possible claimants when developing these agreements. Remember, third parties - those not listed in the contract - are not governed by the terms of the contract. That is where indemnity agreements come into play.
2. Liquidated damage clauses
A liquidated damages clause is an agreement in which parties stipulate to a set amount of damages in the event of a breach or dispute, and forgo actual losses. These clauses must be carefully drafted to include the following:
- A clear designation regarding when the clause applies, such as the duration, and the scenarios and parties covered.
- A reasonable damage amount. This estimate is extremely important and must consider all the costs involved when a project exceeds its timeline, repair costs and lost revenues, among others.
- Make it the exclusive remedy. Ensure your contract states that the agreed-upon liquidated damage amount is the sole remedy.
- Cap the amount of damages. Limit the aggregate amount of liquidated damages to the amount equal to your fee, to the amount of your insurance coverage, or another justified amount.
3. Consequential damage waivers
Consequential damages are often the largest damages stemming from a breach of contract claim. As a contractor or subcontractor, limiting - or eliminating - your exposure to these damages is imperative. This is accomplished through a waiver. When one party waives consequential damages they effectively eliminate their right to pursue consequential damages in the event of an alleged breach.
To learn more about limiting your liability in construction contracts please visit the Trainor Fairbrook website.