By the time a construction contract lands on your desk, you’ve likely spent weeks negotiating price and scope. But buried in the fine print, you’ll often find a clause that defines how much you can recover if the project goes wrong.
Limitations of liability in construction contracts determine how you and the other party divide risk long before any dispute begins. If a dispute arises, a construction litigation attorney at Furukawa Castles Karic LLP can explain how these clauses apply to your case. This guide explains what these clauses cover and what they do not.
What Is a Limitation of Liability Clause in a Construction Contract?
Limitation of liability clauses cap the damages one party can recover from another or exclude certain categories of loss. These clauses appear in contracts between owners and contractors and in agreements involving architects and engineers.
California courts generally uphold these clauses when both sides negotiated the contract on relatively equal footing. That said, a court may set aside the clause if it is unconscionable or attempts to shield a party from liability for fraud or willful misconduct, which California law does not allow. Reviewing the clause with an attorney before signing helps clarify what protection it actually offers.
How Liability Caps Work in Construction Contracts
These caps generally fall into a few common structures:
- Fixed dollar caps: Limit recovery to a stated amount no matter how large the actual damages turn out to be.
- Fee-based caps: Tie the maximum recovery to the amount the design professional or contractor earned on the project.
- Percentage-of-contract caps: Limit recovery to a stated percentage of the contract value.
- Insurance-based caps: Tie maximum recovery to the coverage limit of a specified insurance policy.
Knowing which structure applies to your contract can clarify your financial exposure if a claim arises.
Indemnity Provisions and Risk Allocation
Unlike liability caps, indemnity provisions shift responsibility for specific losses from one party to another. These provisions often require one side to cover the other’s legal costs or damages tied to a third-party claim, such as one from a subcontractor’s employee. In practice, indemnity often works alongside a liability cap rather than replacing it.
When Do Indemnity Clauses Become Unenforceable?
California Civil Code Section 2782 places limits on indemnity provisions in construction contracts, particularly when a party tries to require indemnification for its own sole negligence. For qualifying subcontract agreements, section 2782.05 of the California Civil Code also restricts indemnity for a general contractor’s active negligence.
Consequential Damages Versus Direct Contract Damages
Consequential damages can include indirect financial losses from a breach, such as lost rental income after a project delay or the cost of relocating a business when the finished space cannot be used. Direct contract damages can include the cost of repairing or replacing defective work. Many construction contracts waive consequential damages, while direct damages may still be subject to a separate liability cap.
This distinction carries particular weight on larger projects, where delay-related losses can outweigh the cost of repairing the underlying defect. Confirming which category of damages your contract preserves can prevent confusion later.
Reducing Construction Contract Risks Before You Sign
Construction contract risks extend well beyond the limitation of liability section, touching everything from insurance requirements to how the contract handles disputes. Learning about contracts helps you recognize key terms, while reading your entire agreement shows how they work together and affect your financial exposure.
A few areas are worth close attention before you sign:
- Scope of the waiver: Confirms whether the clause excludes all consequential damages or only specific categories.
- Mutual application: Checks whether the limitation applies to both parties equally or only protects one side.
- Carve-out language: Identifies any exceptions written into the clause, such as gross negligence or willful misconduct.
A contract that addresses these areas tends to leave less room for disagreement once a project is underway.
Discuss Your Contract With Furukawa Castles Karic LLP
Limitations of liability in construction contracts often take shape early in negotiations, well before either side knows what an actual dispute might involve. That timing is important, since revisiting the clause after a project is already underway leaves far less room to negotiate its terms.
We represent design professionals, including architects and engineers, in matters involving contract disputes and construction litigation across San Francisco. For disputes involving common construction defects, our related guide explains how those claims typically arise. If you have questions about a specific provision in your contract, contact Furukawa Castles Karic LLP at 415-510-2823.