Managing damages in construction agreements for big projects

Big infrastructure projects pose complex legal challenges. Design and scheduling issues can give rise to complications on any construction project; however, big projects involve additional demands that can easily lead to disputes, including complex regulatory approvals, permitting, environmental issues, Indigenous consultation and business partnerships, and access issues. These complexities increase not only the risk of disputes arising, but also the magnitude of the capital at stake.

This article addresses four common contract provisions through which project owners and developers may seek to control for the unique risks posed by big projects.

Liability caps

Liability caps help control exposure in potential disputes and may moderate the parties’ behaviour during contract performance. These clauses can be structured to address the unique risks on big projects.

• Different caps for different stages of the project. Different phases have different risks that may merit distinct approaches. While broad damages ceilings may be appropriate at the construction phase, owners and developers may want a more tailored cap during the operation and maintenance phase, when damages may reasonably fluctuate—for example, on a power project, a cap may be defined by the average production over a defined prior period. Consider having one cap apply to the construction phase, a different cap for the operational and maintenance phase, and a third cap for any decommissioning phase.
• Capping damages for force majeure. Historically, many project agreements excluded force majeure events from damages caps. The commercial experience of the COVID-19 pandemic demonstrated that force majeure claims can involve significant sums and be complex to litigate. Where a contract provides cost relief for force majeure events, owners and developers may wish to consider whether those claims should be excluded from the damages cap or should instead have their own damages cap.

Exclusion clauses

Clearly worded exclusion clauses can be enforced as a full defence to a claim, and can be a powerful answer to multimillion dollar disputes (read our analysis on the implications of exclusion clauses). As such, careful consideration should be given to the ways in which standard exclusions may apply over the lifecycle of big projects.

For example, lost profits are often a focus in exclusion clauses. Owners and developers may want to consider treating lost profits differently at different stages of the project lifecycle—for example, during the operation and maintenance phase, the owner’s lost profits may be a significant portion of any loss, whereas at the construction phase, compensation for direct costs without lost profit may be appropriate. Whether lost profits are excluded or not, consider expressly addressing whether overhead, including the cost of financing, is to be treated the same way.

Notice provisions

Strong written notice provisions can play an important role in project disputes. These provisions can:

• Limit liability exposure: clearly worded notice clauses may operate like an exclusion clause, disentitling a party to relief where the clause has not been complied with. However, harsh consequences for breach of written notice requirements may create litigation risk where substantive notice was provided but the counterparty insists on strict compliance with the contract.
• Promote proactive mitigation: real-time notice provisions can serve an important role in keeping a project on track, especially during the construction phase. Early notice of a potential damages issue allows contracting parties to cooperate on mitigation efforts. To increase effectiveness, project proponents should ensure field teams are aware of notice requirements and expectations.

Liquidated damages

Liquidated damages clauses need to be drafted correctly, to avoid disputes over whether they are enforceable. Historically, courts tended to focus on whether the liquidated amount represented a genuine pre-estimate of damages. More recently, courts have moved towards an approach where liquidated damages clauses will be enforced unless they are unconscionable (this resembles the approach courts take to exclusion clauses in the commercial context). To avoid disputes over the enforceability of a liquidated damages provision, explicit language should be used to show that the parties thoughtfully considered the proper quantification of damages at the time of contract formation.

Like exclusion clauses, an enforceable liquidated damages clause can help clarify the stakes for the parties and significantly reduce the amount of time spent in settlement negotiations or at trial. These clauses can motivate parties to act reasonably and help accurately assess risk. However, a focus on the reasonableness of the clause is key—these types of clauses may only increase litigation where their application leads to harsh or unrealistic results.