The Seventh Circuit Court of Appeals recently ruled in the construction case SAMS Hotel Group, LLC v. Environs, Inc., whichinvolved the design and construction of a hotel in Fort Wayne, Indiana. SAMS contracted with Environs to provide architectural and structural engineering services for construction of the hotel. Under the terms of the contract, Environs was to be paid $70,000. The contract further stated that Environs’ total liability to SAMS “shall not exceed the amount of the total lump sum fee [$70,000] due to negligence, errors, omissions, strict liability, breach of contract, or breach of warranty.”
Structural design deficiencies led the local Building Department to order the demolition of the hotel before it ever opened, resulting in a $4.2 million loss to the hotel developer.
The district court held that Environs breached its professional standard of care by not employing a registered structural engineer and by failing to make timely inspections during the construction. However, the district court applied the economic loss rule to bar SAMS negligence claim against Environs. The economic loss rule generally states that a party to a contract cannot be liable under a tort theory (e.g., negligence) for a purely economic loss caused by a breach of the contract unless there was a personal injury or damage to property. The district court also held that the limitation clause of the contract limited SAMS recovery from Environs under its breach of contract claim to $70,000.
On May 31, 2013, the 7th Circuit Court of Appeals had to decide whether the clause in the contract limiting Environs’ liability was enforceable. The court ruled that the parties were sophisticated commercial entities that knew the risks and freely bargained for the terms of the contract, including the limitation of liability clause. Thus, Environs’ total liability for the $4.2 million in damages was limited to $70,000. You can read the full decision of the 7th Circuit here.
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