•  Differing Site Condition Clause Shifts Risk from Contractor to Owner

•  No Damages For Impaired Bonding Capacity

•  Colorado's New Laws On Employment Verification

•  Recent Colorado Appellate Decisions Highlight How Unpredictable Construction Litigation Can Be

•  Colorado Adopts the Notice-Prejudice Rule

•  Owner Confuses CGL Policy For A Performance Bond

•  Scheduling Specifications Can Make Or Break Delay Claims

•  Surety Discharge Due To Changes

•  Effective Advocacy In Mediation

•  Court of Appeals Rules That Delay Damages Not Recoverable

more...

TABLE OF CONTENTS

1. INTRODUCTION...

1. Types Of Risks To Which Parties To A Construction Contract Can Be Exposed, And Which Can Be Managed, Allocated And Transferred
   
   
2. Methods Of Management, Allocation And Transfer Of Construction Project Risks

2. PROCEDURAL RISK MANAGEMENT, ALLOCATION AND TRANSFER CLAUSES..

1. Choice Of Law Clauses
   
   
2. Forum Selection Clauses
   
   
3. Notice Clauses
   
   
4. Contractual Statutes of Limitation
   
   
5. Mediation Clauses
   
   
6. Arbitration Clauses
   
   
7. Waiver Of Trial By Jury
   
   
8. No Discovery Clauses
   
   
9. Summary Of Procedural Clauses

3. DAMAGE LIMITATION CLAUSES..

1. Limitations On Types Of Damages For Which A Party Can Be Liable
   
   
2. Limitations On Recovery Of Incidental And Consequential Damages
   
   
3. Liquidated Damage Clause
   
   
4. Punitive Damages
   
   
5. Specific Occurrences:  No Damage For Delay
   
   
6. Limitations On Amounts Of Damages For Which A Party Can Be Held Liable
   
   
7. Attorney Fees And Costs
   
   
8. Exculpatory Clauses:  No Liability For Negligence
   
   
9. Indemnity Clauses
   
   
10. Mechanic’s Lien

4. ALLOCATION OF COST OF COVERING RISKS..

1. Insurance Coverage
   
   
2. Site Investigation
   
   
3. Indemnification
   
   
4. Performance Bonds

5. SHOULD YOU USE THE RISK ALLOCATION AND TRANSFER CLAUSES?

1. Are The Clauses Valid And Enforceable?
   
   
2. Even If The Clauses Are Valid And Enforceable, Do You Want To Use The Clauses?

6. CONCLUSION
 
1. INTRODUCTION

Every construction project, indeed, every portion of a construction project, almost by definition carries with it numerous risks to the parties to the contract.  In sum, construction projects are inherently risky – to all parties.  This article deals with the types of clauses that might be used by the parties in their contracts to manage, allocate and transfer among the parties to the contract the risks involved in the construction activity.  Of course, usually the parties to a contract cannot allocate or transfer risks of liability/responsibility insofar as the rights of the third parties.

Most people’s initial reaction to management, allocation and transfers of risks is — “let’s transfer every risk I have.”  A natural response.  Nevertheless, upon more considered deliberation, most people in the construction industry recognize that there is an allocation of risks that properly recognizes the role of each party to the construction project and the ability of each party to bear the risks.  Hence, the most important section of this article may be the last section:  should you and can you transfer risks.

 Please note that the sample clauses hereafter are not drafted for insertion into contracts.  Rather, they are drafted to provide basic ideas as to the types of clauses that can be considered.  One who decides to use such types of clauses must draft the clauses to meet the particular facts and circumstances presented, only after fully considering the validity and desirability of the clause.

 a. Types Of Risks To Which Parties To A Construction Contract Can Be Exposed, And Which Can Be Managed, Allocated And Transferred

As indicated above, there are numerous risks inherent in a construction project, but not all risks are risks of all parties involved in the project.  More important, however, is what risks should be the risks of which parties.  For example, being unable to obtain financing for a project normally is a risk for the owner/developer.  Should financing be a risk of the subcontractor?  Ever?  In what circumstances?

 This article is about management, allocation and transfer of construction project risks through contract clauses.  Of course, many risks have been managed by the legislature.  For example, the contractor, subcontractor, supplier and labor have always had a risk of not being paid, because of one or more risks occurring.   The legislature has minimized that risk and shifted much of the risk to the owner, by providing for mechanic’s liens (except as to certain residential projects).  Thus, the owner may urge that it should not be responsible to unpaid subcontractors; however, the legislature generally has transferred at least a portion of the risk of the contractor not paying its subcontractors to the owners.  However, can the parties override the legislative grant of mechanic’s liens?  See C.R.S. § 38-22-119.

i. Examples of risks on a construction project

(1) Owner risks

(a) Inability to obtain financing

(b) Default of the financier

(c) Unforeseen conditions

(d) Defective design

(e) Defective construction

(f) Delayed construction

(g) Cost overrun

(h) Destruction of project by the elements (fire, wind, flood, etc.)

(i) Construction site injuries to construction personnel and third parties

(a) Misunderstanding owner’s intent for the project

(b) Defective design

(c) Underestimating cost

(d) Negligent inspection/observation

(e) Unforeseen conditions

(f) Nonpayment

(a) Underestimating costs (fixed price contract)

(b) Defective construction

(c) Nonperformance by its subcontractors and suppliers

(d) Unforeseen conditions

(e) Destruction of project during construction

(f) Insufficient/defective plans and specifications

(g) Performance being delayed:  by owner’s notice to proceed, by architect’s plans, by material from suppliers, and by owner deficiencies, obstacles and problems

(h) Nonpayment

(i) Strikes

(j) Injuries to construction personnel and to third parties

(a) Defective plans and specifications

(b) Late receipt of plans and specifications, materials, equipment

(c) Interference

(d) Lack of access

(e) Defective performance

(f) Nonpayment

(g) Strikes

(a) Incorrect specifications

(b) Nonpayment

(c) Late delivery

(d) Defective goods

This list is obviously partial.  Note that multiple parties may have certain of the risks in common.

ii. The “means” of parties managing, allocating, and transferring construction project risks.

Most construction project risks can be managed by contractual provisions.  All risks can be imposed upon one party or distributed among all parties.  However, a proposed allocation may not be desirable:  The burden of a risk may be placed upon a party, but that party may not have the ability to control or manage the risk, or the finances by which to cover the risk if realized.

iii. What defines the management, allocation and transfer of the construction project risks?

The rights and obligations of parties to a construction contract include the assumption and acceptance of risks.  In some instances, the contract may transfer a risk that otherwise flows to one party, to the second party.  Generally, the rights and obligations (include risk assumption and transfer) between parties to a construction contract are defined and governed by three sources:

(a) The agreement of the parties, written or oral (unless the statute of frauds applies), express or implied.

(b) “The law.”  Of course, the law is incorporated into every contract, and, indeed, into every relationship.  In the absence of agreement, and sometimes in spite of agreement, the law totally governs.   The law includes applicable federal, state and local statutes, ordinances and regulations, as well as the common law.

(c) The custom of the industry.  Unless its application is negated by the agreement of the parties, the custom of the industry to which the agreement relates is incorporated into every contract, and into every relationship.

Furthermore, the rights and obligations of two parties may be affected by provisions in a contract between one of the parties and a third party. For example, a subcontract may incorporate the contract between the owner and the prime contractor, or even between the owner and the architect. The terms of that contract may become terms of the subcontract and create additional rights and obligations between the prime contractor and the subcontractor.  Alternatively, the contract between the owner and prime contractor, even if not incorporated into the subcontract, may define the prime contractor’s duties in ways which inure to the benefit (or detriment) of the subcontractor.  Examples include the duties to coordinate subcontractors, establish schedules, and maintain safe working conditions.

Because all these sources potentially impose contract obligations, and because liability may attach to breaches of these obligations, parties may wish to use the one source over which they have full control—their contract—to manage, allocate and transfer the kinds and degrees of risk that they undertake in entering into an agreement.  This article therefore explores the use of contract clauses to both “manage the risk” assumed by a party as well as to exculpate—to free a party from liability or responsibility or to transfer liability or responsibility.  No party should rely totally upon any contract clause to avoid liability for every situation, especially where the clause might be perceived by others or by “the law” as unfair or unreasonable.  However, in many instances, a contract may supersede the law in defining the rights and responsibilities of parties, and thus may serve as an effective tool to consciously manage risk.

This article explains how and why such clauses are useful in managing risk, presents an example, and concludes with a discussion of enforceability.  In regard to enforceability, the discussions focus upon enforceability issues endemic to each specific type of clause.  Although there is no mention of generic contract defenses, it should be noted that risk management clauses, like any other contract clause, can be invalidated if they are the product of mistake or of prohibited behavior such as fraud, dress, undue influence, adhesion, etc.

iv. Risk management, allocation and transfer under the “law.”

As set forth above, in the absence of contractual provisions, and sometimes in spite of contractual provisions, “the law” defines the management, allocation and transfer of risks on a construction project. A few examples.

Suppose the architect under the contract with the owner provides the drawings that have defects.  The owner provides these defective drawings to its contractor.  The contract between the owner and the contractor is silent on the issue of defective drawings.  The contractor suffers the risk of defective drawings — increased costs because of the defects.  The “law” allows the contractor to shift that loss to the owner:  the law states that the owner (generally) impliedly warrants the drawings, including constructability.  The law in turn allows the owner to shift the risk to the architect:  recovery of damages for breach of contract.  But, this shifting does not enable the owner to escape liability to the contractor; it only enables the owner to have its loss reimbursed.

 Should those risk transfers imposed by law be altered?  Should the contractor’s risk not be transferred to the owner?  Should the contractor’s risk be shifted directly to the architect?  Should the owner not have a right to transfer the loss from the architect’s negligence to the architect?

 Usually, the law reflects what most people believe is the proper allocation and transfer of risks; but in other circumstances the law does not reflect the needs and abilities of specific parties.  The means then becomes contractual management, allocation and transfer of risk clauses.

 b. Methods Of Management, Allocation And Transfer Of Construction Project Risk

The most common, and usually most effective, method of management, allocation and transfer of construction clauses is by the contract terms between the parties.  For example,

(a) There is a risk that the building being built will fall down during construction, whether by reason of unusual wind, fire, sabotage or negligent construction.

(b) The risk of the building collapsing during construction, for whatever reason, is placed on the contractor.

(c) To provide financial strength to contractor’s undertaking this risk, contractor must (a) provide a performance bond or

(b) obtain insurance which covers the risk.

Theoretically, this transfer of the risk to the contractor (which, for the most part, already resides with the contractor under law) costs nothing:  the contractor includes in its bid the cost of insurance or a bond, and the owner omits from its budget those costs.

Thus, early questions in managing project risks include:

a. Who “ought” to bear the risk, and why?
b. Who (and how) can most economically bear the risk?
c. What impacts, if any, does transfer of risks have?  Does it affect control?

2. PROCEDURAL RISK MANAGEMENT, ALLOCATION AND TRANSFER CLAUSES

The first category of contract provisions that can be used to manage, allocate and transfer risks of one party are procedural clauses—those contract provisions that define the methods and procedures to be followed should particular situations or problems arise.  In fact, such clauses can dramatically affect the management, allocation and transfer of risks.

a. Choice Of Law Clauses

This Agreement shall be governed, interpreted and enforced in accordance with the laws of the State of Colorado. 

The laws of the several states differ; the laws of one state may be more favorable to one party as to the distribution of risks, whereas the laws of another state may be more favorable to the other party; hence, in a multi-state transaction, the rights and responsibilities of the parties may differ depending upon which state’s law is applied to the transaction.

The simple example is the attitude of state laws toward contractual risk management, allocation and transfer clauses:  Some states are very liberal in enforcing them.  Others are very conservative, and construe them narrowly, or even refuse to enforce certain ones.  Thus, the choice of law clause may be the most important of the clauses discussed herein.

If the parties make no provision, the applicable law will be chosen for them by the court in accordance with the forum state’s often subjective choice-of-law rules.  E.g., UCC § 1-105(1) (transactions bearing an “appropriate” relation to the forum state are subject to the state’s commercial code); Restatement (Second) of Conflict of Laws § 6 (1971) (most significant relationship); Farris v. ITT Cannon, 834 F. Supp. 1260 (D. Colo. 1993).  Instead, parties can enhance the predictability of their relationship by choosing the state substantive law by which they prefer their relationship to be governed and their risks defined.  For example, if a contractor and subcontractor are both located in Colorado, but the project is located in Wyoming, they may prefer to have their rights and duties defined by more familiar Colorado law.  Moreover, the parties could even choose to have different issues in their contract governed by different laws.  See generally Restatement (Second) of Conflict of Laws § 187, comment i.

Of course, choice of law clauses cannot be utilized to frustrate the forum’s public policy as to remedies.  Cf., Mitsubishi Motors Corp. v. Soler Chrysler - Plymouth, Inc., 473 U.S. 614, 637 n.19 (1985).

Enforceability:  Generally, choice of law provisions are held binding and enforceable.  Hansen v. GAB Business Services, Inc., 876 P.2d 112 (Colo. App. 1994); Lauritzen v. Larsen, 345 U.S. 571, 588-89 (1953); Seeman v. Philadelphia Warehouse Co., 274 U.S. 403, 407 (1927).  The key limitation is that the chosen state must bear a reasonably close relationship to either the parties or the transaction.  Restatement (Second) Conflict of Laws § 187; UCC § 1-105(1) (1989).  Courts consider a number of factors in discerning whether the requisite relationship exists, including the parties’ principal place of business, place of incorporation, location of the contracted property, place of execution, place of performance, place of payment, and purpose of the contract.  A. Covey & M. Morris, The Enforceability of Agreements providing for Forum and Choice of Law Selection, 61 Den. L. J. 837, 854-55 (1984).

Although the case by case method and subjective nature of this inquiry infuses some uncertainty regarding the provision’s enforceability, the “reasonable relationship” test is easily met in most cases.  Parties normally will not choose a state’s substantive law unless they have some meaningful relationship with the chosen state.  Thus, one or more of the factors listed above will be present, and a reasonable relationship will exist.

b. Forum Selection Clauses

The parties hereby agree that any dispute between them will be resolved, if legally possible, in a state court located within the City and County of Denver, State of Colorado.

See Packaging Store, Inc. v. Leung, 917 P.2d 361 (Colo. App., 1996).  (The defendant also appointed the Corporation Company in Colorado as its agent for service of process).

          In the event that any dispute shall arise with regard to any provision or provisions of this Agreement . . .  Jurisdiction shall be in the State of Colorado, and venue shall lie in the County of El Paso, Colorado.

Cf., Excell, Inc. v. Sterling Boiler & Mechanical Inc., 106 F.3d 318 (10th Cir. 1997).  (Held mandatory jurisdiction in the El Paso County District Court, and not a Colorado Federal District Court.)

          No alteration, change, addition or deviation shall be made from that shown or described in the contract documents, except upon the execution by both parties of a written change order.

One of the risks of a construction project is the high cost of litigating a dispute because of the location of the forum.  In addition to choosing the applicable substantive law, parties may select the particular forum for litigating any disputes.  For example, a project may be located in Arapahoe County, but if the parties are based in Denver County, they might prefer that all disputes be decided by a court located in Denver.  Assuming federal jurisdictional requirements are met, they may even select between a federal or state court located in Denver.

More commonly, a forum selection clause is used when a party who is participating in a project out of state desires that any controversy that arises be litigated in his home state.  Similarly, an owner who is subject to jurisdiction of various states might want all controversies regarding the project to be resolved in the state where the project is located.  Often the time spent traveling to the locality of the court is extensive.  Thus, it is very important to the parties that disputes be resolved in a convenient forum.

Enforceability:  See Riley v. Kingsley Underwriting Agencies, Ltd., 969 F.2d 953 (10th Cir. 1992), cert. denied, 506 U.S. 1021 (1992).

c. Notice Clauses

The Owner shall not be liable to the Contractor for damages caused by delay, by any reason whatsoever, unless the Contractor gives notice of the delay to the Owner within five business days after the cause of the delay occurs.

The contractor shall not be entitled to an extension of time or to additional compensation or damages, unless the contractor submits a written request to the owner within seventy-two (72) hours after the event giving rise to the request.  The request shall set forth all facts upon which the request is based, together with all supporting documents.

The essence of a notice clause is that notice of some act or intended action is a condition precedent to liability.
There are multiple potential benefits to and reasons for notice clauses:

(i) The party who will be liable should have an opportunity to investigate the facts while the facts are fresh.
(ii) A party should be required to decide whether to assert or not assert a claim promptly.
(iii) The progress of a job depends upon everyone knowing where everyone else stands.

Other examples of notice provisions that you should consider inserting into contracts include:

Any claim by the parties that arises out of or in connection with this Agreement shall be barred, unless a notice thereof is given to the other party within one month after the date of the act or omission that gave rise to such claim.

Enforceability:  Most notice provisions are valid, so long as the time is reasonable.  The principal problem is usually whether the court will construe the clause to apply to a particular situation.  See generally, 17A Am. Jur. 2d Construction Contracts.

d. Contractual Statutes of Limitation

Any claim arising out of or in connection with this Agreement shall be asserted by a complaint in a civil action commenced within eight months after the claim arose, and, if not, shall thereafter be barred.

All states have statutory time limits within which a party may be sued by another party.   For a relevant example, the statute of limitations in Colorado for most construction claims is C.R.S. ' 13-80-104.  Sometimes the parties desire to shorten that period of time in order to insure that they are safe from the threat of litigation sooner than provided by state law.  A construction project must come to an end, including the claims that arise therein.  There is little benefit to permitting a party to delay asserting a claim, unless the party does not know of the claim.

Enforceability:The courts generally enforce such a clause even though the statutory period of limitation or period of repose may be substantially longer -- so long as reasonable.  See Hepp v. United Airlines, Inc., 540 P.2d 1141 (Colo. App. 1975).

e. Mediation Clauses

If a dispute arises out of or relates to this contract, or the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association under its commercial mediation rules before resorting to arbitration, litigation or some other dispute resolution procedures.

American Arbitration Association Mediation clause.

A mediation clause can pressure one party to compromise, and ultimately accept less than litigation would have awarded.  Mediation is a process whereby the parties, with the assistance of a neutral third party, negotiate a resolution to their differences.  Mediation, in many instances, has been extremely effective in resolving contract disputes, thus avoiding the time, energy and cost of arbitration or litigation.  Nevertheless, it may result in fewer — or more — benefits to one of the parties.

Enforceability:  Even when parties assert that they are going to refuse to settle, the courts recognize that, in fact, settlements and compromises are often obtained through mediation notwithstanding the parties’ predisposition.  Thus, although mediation, unlike arbitration, concludes a dispute only through agreement of the parties, courts generally enforce a mandatory mediation clause.

f. Arbitration Clauses

Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its commercial arbitration rules, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

An arbitration clause may manage risks and substantially affect the allocation and transfer/elimination of risks.  For example, under Colorado law an arbitrator cannot award punitive damages.  C.R.S. § 13-21-102(5) (Probably not applicable to arbitrations governed by Federal Arbitration Act, 9 U.S.C. § 1, et seq.).  This may eliminate the risk to the parties of suffering punitive damage awards.  (On the other hand, this may simply mean a separate judicial proceeding must be held as to punitive damages.  See generally, Mulder v. Donaldson, Lufkin & Jenrette, 648 N.Y.S. 2d 535 (App. Div. 1996).)

Does arbitration change the ultimate bearer of the risk?  Is the amount of liability of a defendant less in arbitration than in a court or jury trial?  Is the likelihood of a defendant even being found liable greater or lesser in an arbitration than in court trials?  Many believe the answer is yes.  If so, an arbitration clause is a substantial tool in the management, allocation and transfer of risks.

In Mastrobuono v. Shearson Lehman Hulton Inc., 115 S. Ct. 1212, 1217-19 (1995), the United States Supreme Court held that punitive damages could be precluded by a choice of law rule, at least when the Federal Arbitration Act is applicable.

A related consideration is whether parties desire arbitration in lieu of litigation to resolve disputes.  The subject of the pros and cons of arbitration is not here to be covered in depth.  However, main considerations are:

g. Waiver Of Trial By Jury

In the event a dispute arises out of or in connection with this Agreement, the parties agree that it shall be tried to a judge without a jury, and expressly waive any right to a trial by jury.

or

Each party to this Agreement hereby expressly waives any right to trial by jury of any claim, demand, action or cause of action (1) arising under this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or (2) in any way connected with or incidental to the dealings of the parties hereto or any of them with respect to this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or the transaction related hereto or thereto, in each case whether now existing or hereafter arising or whether sounding in contract or tort or otherwise; then each party hereby agrees and consents that any such claim, demand, action or cause of action shall be decided by court trial without a jury, and that any party to this Agreement may file an original counterpart or copy of this section with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. 

Weissman, Lender Liability:  How to Protect Yourself Against Unwarranted Suits 101 (1988), quoted in Rusoff, “Contractual Jury Waivers:  Their Use in Reducing Lender Liability,” The Banking Law Journal, January/February 1993, p. 6.

Are liabilities and damages affected by whether a judge or a jury determines them?  Many would say yes.

Enforceability:  Most jurisdictions uphold the validity of a jury waiver clause.  See generally, Anno., Contractual Waiver of Jury Trial, 73 A.L.R.2d 1332 (1960).

h. No Discovery Clauses

In the event of litigation between the parties, the parties agree that there shall be no discovery of any nature, whether written or oral. 

Obviously, one party can usually benefit by the other party’s not having a right of discovery.  Many believe that discovery, or the lack thereof, can substantially affect the outcome of litigation.  On the other hand, eliminating discovery can also substantially reduce the cost of litigation. 

The basic rule of enforceability was defined in “Developments in the Law—Discovery,” 74 Harv. L. Review 940, 979, n.301 (1991):

A court may refuse to enforce a contract limiting discovery if it is unconscionable.  This would depend on the inequality of the parties’ bargaining power, the scope of the restriction imposed, and the stage in the parties’ relationship in which the agreement is made.  Thus if it is made after the cause of action accrues, both parties will presumably be aware of the issues to be proved and the facts that must be uncovered.  Such an agreement is therefore more likely to be upheld than one made, for example, at the beginning of a course of business dealings, before the parties have any idea of their respective obligations of proof in a lawsuit not yet materialized. . . .  For the same reasons, a limitation of discovery in a contract for a single business transaction is much more likely to deal with foreseeable and specific problems of disclosure than is a contract made with a view to a long period of business dealings. 
See also C.R.S. § 4-2-302 (unconscionable contract or clause in sales contract).

i. Summary Of Procedural Clauses

The foregoing clauses, when properly drafted for the particular circumstances, can have a substantial impact upon the risks of each party to the Agreement.  Should such clauses be used, and whether they are enforceable, must wait a few pages.

3. DAMAGE LIMITATION CLAUSES

Each party is interested in limiting the liability that it might have to another party.  Damage limitation clauses can serve the useful function of circumscribing the scope of a party’s liability and of providing more certainty regarding the outer boundaries of a party’s potential monetary risk.

a. Limitations On Types Of Damages For Which A Party Can Be Liable

One effective method of limiting exposure is to place restrictions on the kinds of recoverable damages.  There are several categories of damages, having varying probabilities of enforceability, that are possible candidates for limitations.

b. Limitations On Recovery Of Incidental And Consequential Damages

The parties stipulate and agree that neither party shall be liable to the other for any incidental or consequential damages of whatsoever nature, however caused, whether by the negligence of the party or otherwise.

One type of clause would limit liability for incidental or consequential damages.  The UCC defines incidental damages as including expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods.  Consequential damages are defined as losses resulting from particular requirements and needs of a buyer made known to the seller.  See also Haynes & Boone v. Browser Bouldin, Ltd., 896 S.W.2d 179, 182 (Tex. 1995); McAlister v. Citibank, 829 P.2d 1253, 1257 (Ariz. 1992).

An example of incidental or consequential damages is where an owner contracts to have a motel built, and the motel is not finished on time.  Incidental/consequential damages could be the money the motel owner loses by his inability to rent rooms due to late completion.

Another example of limitation of liability for consequential damages might read:

Neither party to this agreement shall be liable for any special, indirect, incidental or consequential damages of any nature, including, without limitation, loss of profits, loss by reason of shutdown, and loss of use or interest.

The EJCDC consequential damage limitation clause provides:

Owner hereby agrees that to the fullest extent permitted by law Design Professional shall not be liable to the owner for any special, indirect or consequential damages whatsoever, whether caused by the Design Professional’s negligence, errors, omissions, strict liability, breach of contract, breach of warranty or other cause or causes whatsoever, including but not limited to (list here particular types of consequential damages that Design Professional may be concerned about by reason of the nature of the project, e.g., costs of replacement power, loss of use of equipment or facility, loss of profits or revenue, etc.).

See EJCDC Doc. No. 1910-9E (1986).
 
Enforceability:  Cf. C.R.S. § 4-2-719 (UCC).  Generally, a no consequential damages clause is valid and enforceable.  However, in Cooley v. Big Horn Harvestore Systems, 813 P.2d 736 (Colo. 1991), our Supreme Court said with respect to contracts subject to the UCC:

[W]hile contracting parties may generally limit the remedies available in the event of foreseeable and bargained-for contingencies, when a limited remedy fails of its essential purpose any contractual limitation directly related to the assumption that the limited remedy constituted a sufficient remedy must also fail.

813 P.2d at 747.  However, the Court did seem to leave open the validity of a clear and unambiguous exclusion of consequential damages even if the remedy provided fails of its essential purpose.  Id. at 748.
 
c. Liquidated Damage Clause

If either of the parties to this Agreement fails to comply with the terms and conditions of this Agreement or to carry out any provisions of this Agreement by such party to be performed, such party shall pay to the other the sum of $10,000 as liquidated and agreed damages.

Enforceability:  In Colorado, a liquidated damage clause is valid and enforceable, if

1) the anticipated damages are uncertain in amount or difficult to prove;

2) the parties intended to liquidate the damages in advance of occurring;

3) the amount stated is a reasonable amount, i.e., not greatly disproportionate to the presumable loss or injury.

Perino v. Jarvis, 312 P.2d 108 (Colo. 1957).
 
d. Punitive Damages:

The parties agree that neither shall have liability to the other for punitive (exemplary) damages unless the wrongdoer’s liability arises from the party’s intentional wrongdoing.

or

Neither party shall be liable to the other for punitive (exemplary) damages.

or

The arbitrator(s) shall not have jurisdiction or authority to award punitive (exemplary) damages.
Punitive damages are another type of damages that the parties may consider limiting.  In general, most states allow an award of punitive damages are only for grossly negligent, willful, wanton or intentional wrongs.  See C.R.S. § 13-21-102.

 Enforceability:  Many courts refuse to enforce a clause that eliminates recovery of punitive damages for intentional wrongdoing on the grounds of public policy.  See Restatement (Second) Torts § 195, 500; Winterstein v. Wilcom, 293 A.2d 821 (1972).  On the other hand, a court may very well enforce such a clause that precludes liability for punitive damages for simple grossly negligent conduct.

Similarly, a prohibition upon the award of punitive damages by an arbitrator may be interpreted as meaning only that the punitive damage aspect of a claim must be decided by a court.  See Mulder v. Donaldson, Lufkin & Jenrette, 648 N.Y.S. 2d 535 (App. Div. 1996).

e. Specific Occurrences:  No Damage For Delay

Contractor shall not be liable to Subcontractor for any delay to Subcontractor’s performance of its work caused by the act or omission of the Owner or Architect, or by any act beyond the Contractor’s control.

or

If Contractor’s performance is delayed by [non-negligent] acts of the Owner or by events beyond the Contractor’s control, the Contractor shall be entitled, upon request, to a reasonable extension of time for performance, but shall not be entitled to an increase in compensation or to damages by reason of the delay.

A party may also attempt to avoid liability for specific types of occurrences.  For example, perhaps the most common limitation of damage clause in the construction industry is the no damage for delay clause. Neither party shall be liable to the other for damages for any delay arising out of clauses beyond its reasonable control and without its fault or negligence.

In Colorado, governmental bodies are prohibited by statute from including no damage for delay clauses in their contracts.  C.R.S. § 24-91-103.5(1)(a).

Enforceability:  In general, the courts are reluctant to automatically enforce no damage for delay clauses.  C.R.S. ' 24-91-103.5(1)(a) relating to public works contracts provides that a provision releasing or extinguishing the right of a contractor to recover for a delay from a public entity is void as against public policy.  See Anno., No Damages for Delay Clauses, 74 A.L.R.3d 187 (1976).  The most successful arguments to avoid the application of the clause appear to be (1) the delay was caused by the active interference (omission) of the owner; (2) the delay was from a cause not contemplated by the parties when entering into the agreement; and (3) the delay is not within the specific wording of the clause.

f. Limitations On Amounts Of Damages For Which A Party Can Be Held Liable

The parties stipulate and agree that the liability of each party to the other as to claims arising out of or in connection with the subject matter of this contract shall be limited to $50,000.

The parties may agree to simply place a limitation on the amount of damages.  For example, if a party enters into a $100,000 contract, perhaps neither side is willing to be exposed to more than $50,000 in liability.  Such a clause might read:

12.2.1  Compensation.  Neither the architect, the architect’s consultants, nor their agents or employees shall be jointly, severally or individually liable to the owner in excess of the compensation to be paid pursuant to this agreement or of ________________ Dollars ($_____), whichever is greater, by reason of any act or omission, including breach of contract or negligence not amounting to a willful or intentional wrong.

AIA Doc. B511, Guide for Amendments to AIA Document B141 (1993 Ed.).

Similarly, the EJCDC suggested clause reads as follows:
Owner hereby agrees that to the fullest extent permitted by law Design Professional’s total liability to Owner for any and all injuries, claims, losses, expenses or damages whatso-ever arising out of or in any way related to the project or this agreement from any cause or causes including but not limited to Design Professional’s negligence, errors, omissions, strict liability, breach of contract or breach of warranty shall not exceed the total compensa-tion received by Design Professional’s under this agreement.

EJCDC Doc. 1910-9E (1986).

This clause can be made more effective if it provides that the owner can pay designated sums (e.g., for insurance) so as to not have the liability so limited.  In other words, the parties should emphasize that the limited liability was a bargain for term based upon costs.

Similarly, damages can be limited to insurance:

12.2.1 Insurance.  Neither the architect, the architect’s consultants, nor their agents or employees shall be jointly or individually liable to the owner in any amount in excess of the currently maintained professional liability insurance coverage carried by the architect.

(8)  In the event that a public contract or agreement for the construction, alteration, repair, or maintenance of any building, structure, highway bridge, viaduct, water, sewer, or gas distribution system, or other works dealing with construction, or any moving, demolition, or excavation connected with such construction, contains any covenant, promise, agreement, or combination thereof to indemnify or hold harmless any public entity from that public entity’s own negligence, then such covenant, promise, agreement, or combination thereof is void as against public policy and wholly unenforceable.  This subsection (8) shall not apply to construction bonds, contracts of insurance, contract clauses regarding insurance, or contract clauses regarding costs of defense of litigation arising out of the work or to any covenant, promise, agreement, or combination thereof to indemnify or hold harmless a contracting party against claims arising out of the negligent acts of the indemnitor and its subcontractors in the performance of the work under the contract.  However, no contracting party shall be required to indemnify or hold harmless from any liability or damages arising from the negligent acts of the indemnified party.  This subsection (8) is intended only to affect the contractual relationship between the parties relating to indemnification of public entities for the negligent acts of the public entity, and nothing in this subsection (8) shall affect any other rights or remedies of public entities or contracting parties.

The Engineer’s Joint Contract Documents Committee (“EJCDC”) standard general conditions of the construction contract (Doc. No. 1910-8) have a somewhat different indemnification provision.     

6.31.  To the fullest extent permitted by Laws and Regulations, CONTRACTOR shall indemnify and hold harmless OWNER, ENGINEER, ENGINEER’s Consultants and the officers, directors, employees, agents and other consultants of each and any of them from and against all claims, costs, losses and damages (including but not limited to all fees and charges of engineers, architects, attorneys and other professionals and all court or arbitration or other dispute resolution costs) caused by, arising out of or resulting from the performance of the Work, provided that any such claim, cost, loss or damage:  (i) is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), including the loss of use resulting therefrom, and (ii) is caused in whole or in part by any negligent act or omission of CONTRACTOR, any Subcontractor, any supplier, any person or organization directly or indirectly employed by any of them to perform or furnish any of the Work or anyone for whose acts any of them may be liable, regardless of whether or not caused in part by any negligence or omission of a person or entity indemnified hereunder or whether liability is imposed upon such indemnified party by Laws and Regulations regardless of the negligence of any such person or entity.

6.32.  In any and all claims against OWNER or ENGINEER or any of their respective consultants, agents, officers, directors or employees by any employee (or the survivor or personal representative of such employee) of CONTRACTOR, any Subcontractor, any Supplier, any person or organization directly or indirectly employed by any of them to perform or furnish any of the Work, or anyone for whose acts any of them may be liable, the indemnification obligation under paragraph 6.31 shall not be limited in any way by any limitation on the amount or type of damages, compensation or benefits payable by or for CONTRACTOR or any such Subcontractor, Supplier or other person or organization under Workers’ Compensation Acts, Disability Benefit Acts or other employee benefit acts.

6.33. The indemnification obligations of CONTRACTOR under paragraph 6.31 shall not extend to the liability of ENGINEER and ARCHITECT and ENGINEER’s Consultants, officers, directors, employees or agents caused by the professional negligence, errors or omissions of any of them.

Obviously, the EJCDC document was drafted after the AIA document paragraph 4.18. 

As to the AIA Subcontract Indemnification Provision, see AIA Doc. A401, Standard Form of Subcontract Agreement between Contractor and Subcontractor, Section 4.6. 

An example of a required insurance clause is contained in AIA Doc. A201, Article 11.  In brief, this provision requires the Contractor to maintain insurance for workmen’s compensation, bodily injury, etc., of contractor’s employees, third party claims for bodily injury, and in general all damage to person or property caused by the contractor.  Article 11.2 is the owner’s liability insurance. 

The liability of the contractor to the owner (or the subcontractor to the contractor) in turn can be limited to the insurance carried. 

Notwithstanding any other provision herein, the liability of the Contractor to the Owner shall in no regards exceed or be outside the insurance to be carried by the Contractor pursuant to the terms hereof.
Alternatively: 

12.2  Insurance.  Neither the architect, the architect’s consultant’s, or their agents or employees shall be jointly or individually liable to the owner in an amount in excess of the currently maintained professional liability insurance coverage carried by the architect. 

AIA Doc. B511, Guide for Amendments to AIA Doc. B141 (1993 Ed.). 

Enforceability:  Indemnification clauses are generally valid and enforceable.  It is when the indemnification includes indemnification of the negligent party for his own negligence that most problems arise.  Many states have adopted anti-indemnification statutes.  However, very generally, even such indemnification clauses are valid if properly worded.  See Halpern, “Indemnity Provisions in Construction Contracts,” Construction Law Advisor (Sept. 1988).  See Section III, H. supra.  Perhaps the best way to provide this risk transfer is by a policy of insurance covering, inter alia, the risk, and the contract defining who pays the premium. 

d. Performance Bonds

Performance bonds are required by statute, code or ordinance by many governmental entities.  In general, to the extent the contractor (or its subcontractors) fails to perform the contract, the surety is monetarily liable for performance.  In short, it is analogous to insurance.  However, whereas an insured does not have to reimburse the insurer for losses sustained, the principal does have to reimburse the surety.  Thus, in fact the performance bond ordinarily does not shift risk.

5. SHOULD YOU USE THE RISK ALLOCATION AND TRANSFER CLAUSES?

So, you have reviewed and considered the risk allocation and transfer clauses outlined above, and a lot of others.   And, you and your client like some of them, and maybe all of them.   Should you incorporate them into your next construction contract? 

a. Are The Clauses Valid And Enforceable?

As discussed above, all of the clauses in particular circumstances probably are valid and enforceable.   However, in specific circumstances, which may include the circumstances of your client, any of the clauses may be void/voidable or unenforceable.  The following is a brief discussion of the basic theories pursuant to which risk management and transfer clauses may be held invalid in any particular circumstances. 

Cooley v. Big Horn Harvestore Sys., 813 P.2d 736, 744-45 (Colo. 1991) established the basic principle that a limitation of remedy “fails of its essential purpose” and is therefore void, “if it operates to deprive a party of the substantial value of the contract.” 

i.  Duress. 
 
Duress is usually easy to understand but difficult to defend.  Generally, duress is compulsion (such as to execute a contract) caused by threats that destroy freedom of will.  One court has described duress as the result of unlawful threats resulting in a contract essentially unjust toward the party seeking relief from it.  McClair v. Wilson, 18 Colo. 82, 85 (1892).  See 25 Am. Jur. 2d, Duress and Undue Influence, describing the elements as (1) one side involved fairly accepted the terms of another, (2) the circumstances permitted no other alternative, and (3) the circumstances were the result of coercive acts of the opposite party.  See particularly § 6, economic duress. 

ii. Unconscionability.
 
E.g., C.R.S. 4-2-301 (uncon-scionable contract or clause in sales contract).  Under the U.C.C., unconscionability has been defined as when the provision defeats the reasonable expectation of the parties.  Leprino v. Intermountain Brick Co., 759 P.2d 835 (Colo. App. 1988); Viner v. Brockway, 36 Cal. Rptr.2d 718 (Cal. App. 1994) (limitation of liability clause unconscionable); Valhal Corp. v. Sullivan Associates, Inc., 44 F.3d 195 (3d Cir. 1995) (upholding limitation on liability clause). 

iii.  Against public policy.

In Stanley v. Creighton Co., 911 P.2d  705 (Colo. App. 1996), the court declared void as against public policy an exculpatory clause in a residential rental agreement that relieved the landlord of liability for all but gross negligence.  See Viner v. Brockway, supra. 

In Jones v. Dressel, 623 P.2d 370, 376 (Colo. 1981), the court formulated a four factor test to determine the validity of exculpatory clauses: 

• Existence of a duty to the public
  
  
• Nature of the service performed
  
  
• Whether the contract was fairly entered into, and
  
  
• Whether the intention of the parties is expressed in clear and unambiguous language.

See also 57 Am. Jur. 2d Negligence § 52.
 
iv. Contract of adhesion.

In Bauer v. Aspen Highland Skiing Corp., 788 F. Supp. 472 (D. Colo. 1992), a skier sued the equipment manufacturer, rental shop and ski school for injuries suffered.  A part of the ski rental agreement contained the following language which pointed out that skiing is a hazardous activity, that injuries are common, the ski boot binding system cannot release to prevent injuries at all times and under all circumstances, etc.  It then concluded: 

I hereby RELEASE the ski shop and its owner, agents and employees, Marker and its owners, agents and employees from any and all liability for injuries or damage to the user of equipment listed on this form or to any other person, resulting from NEGLIGENCE, the selection, installation, maintenance, adjustment, and use of this equipment.  In addition, they shall not be held liable for any consequential damages.  I agree NOT to make a claim against or sue this ski shop or Marker for injuries or damages relating to skiing and/or the use of this equipment.

Colorado defines an adhesion contract as ‘generally not bargained for, but imposed on the public for a necessary service on a take it or leave it basis.’  Jones, 623 P.2d at 374.  However, printed form contracts offered on a take it or leave it basis, alone, do not render the agreement an adhesion contract.  Clinic Masters v. District Court, 192 Colo. 120, 556 P.2d 473 (1976).  Rather, ‘[t]here must be showing that the parties were greatly disparate in bargaining power, that there was no opportunity for negotiation, or that [the] services could not be obtained elsewhere.’  Id.  In Jones, the court held that the agreement was not an adhesion contract and the party seeking exculpation did not possess a decisive bargaining advantage ‘because the service provided by Free Flight was not an essential service.’  Jones, 623 P.2d at 377-78.

788 F. Supp. at 474-475.  The court granted defendant’s motion for summary judgment.  See also Batterman v. Wells Fargo Ag Credit Corp., 802 P.2d 1112 (Colo. App. 1990), cert. denied; Jones v. Dressel, 623 P.2d 370 (Colo. 1981); Clinic Masters v. District Court, 556 P.2d 473 (Colo. 1976). 

v. Contract construed against the drafter.

See Public Service Co. of Colorado v. United Cable Television of Jeffco, 829 P.2d 1280 (Colo. 1992); Stegall v. Little Johnson Associates, Ltd., 996 F.2d 1043 (10th Cir. 1993); Cheyenne Mountain School Dist. No. 12 v. Thompson, 861 P.2d 711 (Colo. 1993). Perhaps the parties can negate this common law rule by an express provision in the contract. 

vi.  Failure of essential purpose.

Will the clause in question cause the contract to fail in its essential purpose?  See Cooley v. Big Horn Harvestore Systems, Inc., 813 P.2d 736 (Colo. 1991). 

b.  Even If The Clauses Are Valid And Enforceable, Do You Want To Use The Clauses?
The law is reluctant to interfere with the bargaining process, and power, of the parties to a contract, and does so only in extreme circumstances.  The fact that you may be able to transfer and allocate risks to the other party to the contract does not mean that you should do it. 

(a) Those who impose an “unfair” contract upon another party often get what they deserve.  For example, suppose there is a breach of contract.  Most jurors, and judges, can quickly spot an unfair lopsided contract.  What will they do with it, even if they do not say so?

(b) When one party to a contract has been “taken advantage of,” too often that fact is reflected in the performance.   And then, see No. l above.

6.  CONCLUSION

The types of risk management allocation and transfer clauses discussed above are only a few of the many such types of clauses that might be considered.  Indeed, for every risk and every problem in a construction project, there is a contract clause to eliminate or alleviate the concern. 

However, as old-fashioned as it may seem, justice usually will ultimately prevail to place risks where they properly belong – within a broad range.  More important than drafting the clause, is the determination of whether it will be enforced by the courts, and whether it should be used at all.