Limitations Upon Contractual Remedies Are All the Craze!

Nowadays it is rare to see a contract governed by common law that does not contain one or more forms of limitation of remedy.  [See, “Does the UCC or Common Law Govern Your Contract?" posted 12/13/23].  Some contracts limit  the type or amount of damages that may be recovered.  Other contracts limit  the time within which a claim must be brought or asserted.  Most contracts governed by common law limit the procedures by which claims and disputes must be resolved.  Meanwhile, contracts governed by the Uniform Commercial Code are subject to an entirely different set of laws.  Yet, the enforceability of  these limitation of remedy clauses is entirely dependent upon the law(s) that govern the contract or transaction.  [See, “Understanding How Conflict of Law Rules Impact Your Transaction," posted 8/21/24; “Beware of Choice of Law Provisions and Forum Selection Clauses," posted 3/20/24].

The AIA family of documents or American Institute of Architects initiated the craze in the 1970's. That's when standard AIA form contracts limited the type and amount of available remedies by waiving all consequential damages (i.e. lost profits, lost income) by both contracting parties. [See, “Choosing the Proper Contract is Critical to the Success of Every Transaction!” posted 7/10/24].  Many designers, including architects and engineers, or A/E's have since begun limiting liability to the contract amount or the available insurance coverage. Owners began inserting no damage for delay clauses into contracts limiting  contractors remedies for delay to time, but no money. Creative lawyers began arguing for exceptions to  limitations upon the type and amount of damages based upon interference, bad faith, and unforeseen events.  Courts now recognize various exceptions that introduce uncertainty into the enforceability of such forms of limitation, especially within government contracts.  

The AIA also initiated the concept of imposing limitations upon when a claim must be asserted. [See, “The Tortured Relationship Between Statutes of Limitations and Statutes of Repose!", posted 10/18/23].  Since the 1970's every AIA form contracts limit claims to those asserted within a defined number of days after events giving rise to the claim were discovered or should have been discovered. Contracting parties further limited claims by requiring the waiver of all claims not timely asserted, including the failure to demand resolution no later than 30 days after denial of the claim.  Now it is becoming common for contracting parties to limit the statute of limitations or SOL for all contract claims to just one (1) year, shortening the otherwise applicable SOL from six (6) or more years.  Courts, typically enforce these procedural time limitations contained within contracts between private parties.  

Finally the AIA initiated the limitations upon how claims and disputes must be resolved.  Back in the 1970's AIA standard form contracts began to limit dispute resolution to arbitration through the American Arbitration Association or AAA.  [See, “Arbitration is Becoming Litigation Light," posted 2/21/24].  Contracting parties have since required a multi-step procedure further limiting the form of dispute resolution.  Some contracts limit disputes by requiring the parties to mediate all disputes prior to initiating the arbitration process otherwise known as Med/Arb provisions.  Other contracts further limit disputes by requiring a negotiation between executives prior to invoking the Med/Arb process otherwise known as a Neg/Med/Arb provision.  Many contracts even further limit  the dispute resolution process by prohibiting initiation of the process until the work or services under the contract have been fully completed.  Some commentators criticize the growing limitations upon the dispute resolution process calling it an exhaustion of the claimant requirement.

While the craze of limitations upon contractual remedies arose with respect to construction, it has now spread across almost every other industry.  Contracting parties under contracts for the sale of goods, governed by the UCC are now revising the standard terms governing their transactions.  {See, “Beware of Recent Changes to the UCC Governing the Sale of Goods in Georgia!” posted 8/14/24].   Whether you are a buyer or seller of goods and services, limitations upon contractual remedies will very likely impact your procedural and substantive rights.  Whether you are in a position to dictate contract terms, or whether such terms are foisted upon you, the resulting limitations and impacts must be appreciated and understood.  Whether you identify the risks associated with the various limitations upon contractual remedies may very well dictate the profitability of your next contract.