The United States Court of Appeals for the Seventh Circuit recently decided the case of SAMS Hotel Group, LLC v. Environs, Inc., 716 F. 3d 432 (Seventh Cir. 2013), which addressed the enforceability of a limitation of liability provision in a design professional’s contract.
Environs was hired by the owner to do the design work for the construction of a new hotel. The architect was to receive a flat fee of $70,000 for this design work. The contract between the owner and architect included a limitation of liability provision that capped the architect’s total liability at the total lump sum fees to be earned by the architect on the project.
Serious structural defects were discovered in the building following its completion. The building was eventually condemned by the County Building Department and then demolished. The owner claimed losses in excess of $4 million.
In the appeal to the United States Court of Appeals for the Seventh Circuit, the owner argued that the limitation of liability provision was not enforceable because it did not make it clear that the limitation of liability also applied to the architect’s own negligence. The Court of Appeals decided the case applying Indiana law. The Court of Appeals determined that the Indiana Supreme Court would uphold the limitation of liability provision, and the limitation of liability did not need to specifically refer to the architect’s own negligence to be fully enforceable.
As an architect, engineer or a general contractor, please consider placing a limitation of liability provision in your construction related documents. These types of limitations of liability are routinely enforced in the State of Indiana, and will assist your company in mitigating its risk on its construction projects. While design professional contracts routinely include a limitation of liability, we recommend that our contractor clients also consider the inclusion of a limitation of liability in their construction contracts.