This year, in an important decision for contractors, design professionals and owners, the U.S. Court of Appeals for the 7th Circuit, which includes Indiana, upheld enforcement of a contractual limitation of liability clause, which resulted in the design professional’s liability being capped at $70,000, despite the owner’s claim that its damages were in excess of $4.2 million.
In SAMS Hotel Group, LLC v. Environs, Inc., (7th Cir. 2013), the “Owner” contracted with the “Designer” for architectural services for the construction of a multi-story hotel development. The contract between the parties provided that the Owner would pay the Designer a fixed fee of $70,000. The contract also contained the following limitation of liability clause:
“[The Owner] agrees that to the fullest extent permitted by law, [the Designer’s] total liability to [the Owner] shall not exceed the amount of the total lump sum fee due to negligence, errors, omissions, strict liability, breach of contract or breach of warranty.”
Not long after construction was completed, the Owner discovered significant structural defects with the project. The building was ultimately condemned by local building officials and demolished without ever opening. The Owner estimated its loss at more than $4.2 million.
The Owner brought a lawsuit against the Designer, alleging both negligence and breach of contract. On cross-motions for summary judgment, the U.S. District Court ruled that the negligence claim was barred under the economic loss rule, since there was no personal injury or damage to “other property” outside of the project itself, citing to the Indiana Supreme Court’s ruling in Indianapolis Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010). The District Court further ruled that the breach of contract claim was subject to the parties’ limitation of liability clause, such that if the Designer was liable to the Owner for breach of contract, that Designer’s maximum liability could not exceed $70,000 (i.e., the “total lump sum fee” paid by the Owner to the Designer under the contract).
At the trial, the District Court, without deciding the total amount of damages actually incurred by the owner, had found the Designer breached the contract with the Owner, but held that the Owner’s recovery was limited to $70,000.
On appeal, the Owner argued that the limitation of liability clause was not enforceable because the clause did not specifically state that it applied to the Designer’s own negligence.
Applying Indiana law, the 7th Circuit concluded that the limitation of liability clause was enforceable, thus limiting the Designer’s liability exposure to $70,000. In so holding, the 7th Circuit noted that the Indiana Supreme Court, in the Indianapolis Marion County Public Library case, has drawn a line between negligence claims and breach of contract claims. Once the Owner’s negligence claim was dismissed under the economic loss rule, the Owner was left with the express terms of its contract with Designer. The 7th Circuit stated that to ignore the contractual limitation of liability clause would allow for an end-run around Indiana’s economic loss rule and the Owner’s contract with the Designer.
The takeaway from this case for contractors, design professionals and owners is a simple, but important one: provisions in a professional services contract that define or limit a design professional’s liability are enforceable.
Consequently, contractors, owners and design professionals should take due care to review their contract agreements to identify these types of clauses, and also to confirm that the clauses accurately reflect the parties’ agreement. Specifically, the questions to ask are:
- “Do we need a limit of liability on this project?”
- “How will that limit of liability, or lack thereof, affect the price of the project?”
- “If we have a limit of liability, what is an appropriate dollar figure for that limit?”
Ideally, the limit of liability, if applicable, should be tied to some tangible basis, such as fees paid on the project, limits of available of insurance, or some figure or percent that represents a reasonable cap on a design professional’s liability relative to the scope of the overall project.
For more information about construction contract drafting and review, please contact Steve Theising at STheising@KDDK.com or (812) 423-3183; or contact any member of the KDDK Construction Law Practice Team.
About the Author
Steven M. Theising, an Associate at Kahn, Dees, Donovan & Kahn, LLP, in Evansville, Indiana, practices primarily in the areas of business, construction, real estate, tax, and collection and creditors’ rights law. Steve utilizes his accounting and financial background to provide both legal and practical business analysis in negotiating, resolving and closing business, construction and real estate transactions and disputes. He also assists clients with addressing and resolving environmental and estate planning issues.