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18 Constr. Law. 22 (1998)
Negotiating Dispute Clauses That Affect Damage Recovery

handle is hein.journals/conlaw18 and id is 78 raw text is: Negotiating Dispute Clauses That Affect Damage Recovery Charles Sink Attorneys in the construc- tion industry frequently are asked to assist clients in nego- tiating contract provisions that specify or limit the damages to be allowed if a dispute aris- es. This article offers practical assistance for such negotia- tions. Although I offer this discussion specifically for drafting procedures in arbitrat- ed disputes, many principles Charles Sink also should apply wherever dispute procedures are subject to negotiation. I probably should begin by offering the routine disclaimer that contract clauses and damage remedies always should be tailored to the particular risks of each project. But then, you knew that already. I. Basic Model Dispute Provisions Some model contract provisions that generally or specifi- cally cover arbitration damages often are used as a starting point or as a compromise when the parties cannot agree on more customized dispute clauses. These published clauses usually are intended to be reasonably balanced, favoring nei- ther the owner nor the contractor/design professional. The most basic approach may be the least controversial, such as the following: Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitra- tion administered by the American Arbitration Associa- tion in accordance with its Construction Industry Rules. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. If substantial risks or sums of money are involved, how- ever, you may wish to expend more effort and thought in your dispute clause. One reasonable extension of a basic arbitration provision is to address expenses that are common to almost all arbitrations (and which are discussed in greater detail hereafter): All fees and expenses of the arbitration shall be borne by the parties equally. However, each party shall bear the expense of its own counsel, experts, witnesses, and prepa- ration and presentation of evidence. The prevailing party shall be entitled to an award of rea- sonable attorney's fees. 22 THE CONSTRUCTION LAWYER April 1998 The parties shall each bear their own costs and expenses and an equal share of the arbitrator's fees and administra- tive fees of the arbitration. These clauses may be sufficient in many construction agreements, but much more can be accomplished to shape the possible damages that may (or may not) be awarded in a construction dispute, as discussed below. II. Consequential Damages Particularly if your client is providing design services, labor, material, or equipment to a project, you may wish to limit an award of consequential losses. Such a limitation would be consistent with a recent trend that includes the con- troversial mutual waiver of consequential damages in the 1997 edition of the A 201 General Conditions promulgated by the American Institute of Architects and supported by the Associated General Contractors.1 The basic language for such a waiver might include: The arbitrators shall have no authority to directly or indi- rectly award any form of consequential damages, as such damages have been waived by the parties to this contract. If you represent a project owner, you might attempt to negotiate the following additional language: Such prohibited damages include, but are not limited to, lost profits; home office overhead or any form of over- head not directly incurred at the project site; wage or salary increases; ripple or delay damages; loss of produc- tivity; increased cost of funds for the project; extended capital costs; lost opportunity to work on other projects; inflation costs of labor, material, or equipment; non-avail- ability of labor, material, or equipment due to delays; increased cost of bonding due to delay; or any other indi- rect loss arising from the conduct of the parties to this contract. Alternatively, if you represent a contractor or design pro- fessional, you might attempt to negotiate the following sup- plemental language: Such prohibited damages include, but are not limited to, lost rent or revenue; rental payments for temporary offices; increased costs of administration or supervision; costs or delays suffered by others unable to commence work or provide services as previously scheduled, for which a party to this contract may be liable; increased costs of borrowing funds devoted to the project; delays in

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