$70,000 Limitation of Liability Enforced on $4.2 Million Claim
Posted on Oct. 31, 2013

Limitations of liability clauses in contracts continue to be one of the best defenses against professional liability claims. These clauses establish a contractual limit on the amount of damages that can be awarded if a client prevails in litigation against its design professional.

A federal appeals court recently enforced a limitation of liability clause in an architect’s contract and thereby limited the architect’s liability to the amount of compensation for its services—in this case, $70,000 out of a $4.2 million claim for damages. The architect’s client (owner) claimed that the building the architect designed had structural problems that required a nearly completed hotel to be demolished. The United States Court of Appeals for the Seventh Circuit, in Sams Hotel Group, LLC v. Environs, Inc., 716 F.3d 432 (7th Cir. 2013), held that the limitation of liability clause applied to claims arising out of the architect’s own negligence. Applying Indiana law, the court stated that parties have the freedom to contract on their own terms and that “includes the freedom to make a bad bargain.” To allow the owner to avoid the negotiated limitation of liability clause “would permit an end-run around Indiana’s economic loss rule and [the owner’s] own contract with [the architect].”

The limitation of liability clause provided: “The 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 the negligence, errors, omissions, strict liability, breach of contract or breach of warranty.”

The owner did not dispute that it signed the contract with knowledge and understanding of its terms. The owner also did not argue that the limitation of liability clause was against public policy. The owner’s only argument was that it should be excused from limitation of liability clause because the language did not refer explicitly to the architect’s own negligence.

While the clause was not particularly well drafted, the court enforced it because the contract was between two sophisticated business entities of equal bargaining power and each were aware of the risks involved in designing and constructing a hotel. 

Design professionals should always try to include a limitation of liability clause in their professional services agreements. Ideally, liability is limited to the amount of the fee paid to the design professional for its services. If the client will not agree to that, then the design professional should seek to negotiate a limitation of a higher amount. The limitation should always be for less than the limits of the design professional’s professional liability insurance.

Construction Law
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About Adam

Adam
Attorney Adam T. Mow

Adam is a trusted resource for architects, engineers and other members of the construction industry in litigation, risk management, contract negotiations and mechanics’ liens. Adam is also a licensed architect and a past president of the Utah chapter of the American Institute of Architects. He has been elected by his peers to the Utah Legal Elite since 2009.

Awards and Recognition

AV Rating

Excellence in the Study of Architecture, American Institute of Architects Certificate of Merit, 1999

CALI Award for Excellence in Mediation and Advanced Negotiation, 2003

Community Mediator of the Year, Utah Dispute Resolution, 2007

Graduate of the Last Decade, Ball State University, 2008

Utah Business Magazine, Legal Elite, 2009-Present

Mountain States Rising Stars (Construction Litigation), 2009-Present