Contract Risk Management: A Comparative Study of Risk Allocation in Exculpatory Clauses and Their Legal Treatment

Abstract

Contracts used in the construction industry allocate numerous risks among the different contracting parties. The clauses of a contract that address risk allocation are often termed exculpatory clauses. Generally, exculpatory clauses shift the risk of injury, liability, and damages from one contracting party to the other. Previous research has concentrated on studying how exculpatory clauses influence the cost premium associated with the inherent stipulated risks in construction contracts without providing for how individual risks are allocated among project parties through exculpatory clauses and how their legal enforceability is determined. Accordingly, to fill this critical knowledge gap, this paper aims to offer a better understanding of the risk allocation process stipulated by exculpatory clauses under three commonly used US standard forms of the construction contract as well as their legal treatment under the US legal system. The forms under investigation are those published by the American Institute of Architects (AIA), ConsensusDocs, and the Engineers Joint Contract Documents Committee (EJCDC). The authors followed a multistep desktop methodology. First, the risk categories of exculpatory clauses were identified. Second, an analysis of the contractual allocation of the stipulated risks was performed on each standard contract. Third, law cases were considered in order to analyze the legal enforceability of exculpatory clauses in relation to common law principles. The outcomes of this paper include comparative tables that analyze exculpatory clauses as they relate to risk description, risk taker, and the risk response strategy provided by each standard form of construction contract. In addition, the results show that each contract allocates the same risks to different project parties when compared to the other contracts and that each contract possesses some specific risks not stipulated by the other forms. Ultimately, the findings of this paper protect the interests of contracting parties by helping them to proactively assess and manage their contractual risks.