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Seventh Circuit Court of Appeals Enforces a Negotiated Limitation of Liability Provision Consistent With Indiana Law

Indiana courts recognize and uphold the freedom of parties to negotiate contracts and allocate risks between them. In a recent decision, SAMS Hotel Group, LLC v. Environs, Inc., 716 F.3d 432 (7th Cir. 2013), the U.S. Court of Appeals for the Seventh Circuit rejected a project owner’s attempt to expand a limitation of liability provision beyond its stated terms.

The case arose from the construction of a hotel. The owner hired an architect for a flat fee of $70,000. The contract included a provision stating that, “[t]he Owner agrees that to the fullest extent permitted by law, the [architect’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.” After the hotel was substantially completed, serious structural defects were discovered and the county building department condemned the building. After remedial efforts failed, the structure was demolished. The owner, claiming losses of over $4.2 million, sued the architect for breach of contract and negligence, alleging that the architect provided a defective design and negligently performed its contractual obligations.

Relying on Indianapolis-Marion County Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722 (Ind. 2010), decided after the owner filed suit, the district court applied the economic loss rule to grant summary judgment on the negligence claim. The court also upheld the limitation of liability, holding that the owner’s surviving breach of contract claim was limited to $70,000. After a trial, the district court entered a judgment of $70,000 in the owner’s favor.

On appeal, the owner argued that the limitation of liability provision was not enforceable because it did not specifically refer to a limit on damages for the architect’s own negligence. Sitting in diversity jurisdiction and applying Indiana law, the appeals court predicted that the Indiana Supreme Court would hold that a limitation of liability clause that generally refers to “negligence” and breach of contract, freely bargained for, is enforceable even though the clause does not refer that party’s own negligence. The foundation for the decision is Indiana’s long standing recognition of freedom of contract principles, and the assumption that contracts represent the freely bargained for agreements between the parties.

In this case, the parties were sophisticated businesses with equal bargaining power, who worked on a previous, successful hotel project under a contract including a limitation of liability provision. The owner did not argue that the provision contravened Indiana public policy or was ambiguous, but relied only on the lack of an explicit reference to the architect’s negligence. The owner relied on cases decided in the indemnity context, which dealt with contract provisions that completely exculpated a defendant for its own negligence. Indemnity cases require an exculpatory clause to specifically refer to the exculpated party’s own negligence. But Indiana courts “have not spoken so clearly regarding limitation of liability clauses in sophisticated commercial contracts.”

The appeals court was not persuaded by the owner’s arguments. The opinion discussed the nature and purpose of limitation of liability provisions, contrasting such provisions with indemnification and exculpation clauses, citing Indiana cases which distinguished the various provisions. Accordingly, the judgment was affirmed.

© 2022 BARNES & THORNBURG LLPNational Law Review, Volume III, Number 282
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