Sams Hotel Group, LLC v. Environs, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-2979
SAMS H OTEL G ROUP, LLC, doing business as
H OMEWOOD S UITES H OTEL,
Plaintiff-Appellant,
v.
E NVIRONS, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:09-cv-00930-TWP-TAB—Tanya Walton Pratt, Judge.
A RGUED M ARCH 1, 2013—D ECIDED M AY 31, 2013
Before R OVNER, W ILLIAMS, and H AMILTON, Circuit Judges.
H AMILTON, Circuit Judge. Plaintiff SAMS Hotel Group,
LLC appeals the district court’s determination that a
limitation of liability clause in its contract with de-
fendant Environs, Inc. for a building design is en-
forceable against SAMS in this case alleging that Environs
breached the contract by providing poor quality services
that led to the demolition of the building. Pursuant to
that clause, SAMS’s damages were limited to just $70,000
2 No. 12-2979
of a claimed loss of $4.2 million after a judgment in its
favor on its breach of contract claim. We affirm.
We begin with the facts of the parties’ transaction and
then proceed to the course of the lawsuit. SAMS con-
tracted with Environs, an architectural firm, to provide
architectural services for the construction of a six-story
Homewood Suites hotel in Fort Wayne, Indiana. Environs
was to be paid a flat fee of $70,000 for its work. The con-
tract contained the following clause limiting Environs’s
liability for a breach of contract:
The Owner [SAMS] agrees that to the fullest extent
permitted by law, Environs Architects/Planners, Inc.
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.
The contract was signed on March 1, 2007, and the design
and construction process began soon after that. The
hotel structure was nearly complete in the spring of 2008
when serious structural defects were discovered. The
county building department soon condemned the struc-
ture. Attempts to remedy the structural flaws failed, and
the hotel was demolished in 2009 without ever opening.
SAMS estimated its loss at more than $4.2 million.
SAMS filed this diversity-jurisdiction suit against
Environs for breach of contract and negligence. The theory
underlying both claims was that Environs provided a
defective design and negligently performed its contractual
obligations. While SAMS’s suit was pending, however, the
Indiana Supreme Court held in Indianapolis-Marion County
No. 12-2979 3
Public Library v. Charlier Clark & Linard, P.C., 929 N.E.2d
722 (Ind. 2010) (“IMCPL”), that the “economic loss rule”
applies to construction contracts under Indiana law.
Under that rule, a party to a contract cannot be liable
under a tort theory for any purely economic loss caused
by the party’s negligent performance of the contract,
absent any personal injury or damage to other property.
See id. at 726-27. The district court applied IMCPL and
the economic loss rule to grant summary judgment in
favor of Environs on SAMS’s negligence claim. SAMS
Hotel Group, LLC v. Environs, Inc., 2011 WL 809048, at *2
(S.D. Ind. March 2, 2011). In the same ruling, the court
also held that the limitation of liability clause was en-
forceable so that SAMS’s potential recovery on its sur-
viving breach of contract claim would be limited to
$70,000. See id. at *2-3.
SAMS’s breach of contract claim was then tried to the
court. The district court found that Environs was liable
for breach in several ways, the details of which are not
relevant to this appeal. Without deciding the total
amount of damages SAMS incurred as a result of Envi-
rons’s breaches, the court limited SAMS’s recovery to
$70,000 pursuant to the limitation of liability clause. Id.
at *14. Environs does not contest the district court’s
findings of breach, but SAMS appeals the district
court’s determination that the limitation of liability pro-
vision is enforceable. The interpretation of this written
contract is a question of law that we review de novo. See
Ace American Ins. Co. v. RC2 Corp., 600 F.3d 763, 766
(7th Cir. 2010). Indiana law applies, and our task is to
apply Indiana law as we believe the Indiana Supreme
4 No. 12-2979
Court would. See Clark v. State Farm Mutual Auto. Ins. Co.,
473 F.3d 708, 712 (7th Cir. 2007).
The broad language of the limitation of liability provi-
sion plainly applies to SAMS’s claims for breach of con-
tract. SAMS argues, however, that the limitation of
liability provision in the parties’ professional services
contract is not enforceable against SAMS, regardless of
what SAMS and Environs knowingly and willingly
agreed. SAMS relies on the fact that the provision did
not refer specifically to a limit on damages for Environs’s
own negligence. According to SAMS, the provision
covered only Environs’s liability for negligence of third
parties. We must therefore predict how the Indiana
Supreme Court would answer the following question: Is
a limitation of liability clause in a professional services
contract that generally refers to liability for “negligence”
and breach of contract, and that was freely bargained
by two sophisticated commercial entities, enforceable
in favor of a breaching party even though the clause
does not specifically refer to that party’s own negli-
gence? We predict that the Indiana Supreme Court
would say yes, so we affirm the district court’s judgment.
The Indiana courts have long recognized and respected
the freedom of parties to enter into contracts and have
presumed that those contracts represent the freely bar-
gained agreements of the parties. See Haegert v.
University of Evansville, 977 N.E.2d 924, 937 (Ind. 2012),
citing Fresh Cut, Inc. v. Fazli, 650 N.E.2d 1126, 1129 (Ind.
1995); see also Trimble v. Ameritech Publishing, Inc., 700
N.E.2d 1128, 1129 (Ind. 1998). “It is in the best interest of
No. 12-2979 5
the public not to restrict unnecessarily persons’ freedom
of contract.” Trimble, 700 N.E.2d at 1129, quoting Fresh
Cut, Inc., 650 N.E.2d at 1129. This is our baseline.
The contract between SAMS and Environs was not a
consumer contract or a contract of adhesion. The undis-
puted facts show that the negotiating parties were
two sophisticated business entities of equal bargaining
power who were aware of the risks involved in
designing and building a hotel. They had done an
earlier hotel construction project with a contract that
contained a limitation of liability provision similar to
this one.1 They were in the best position to allocate the
relevant risks between them, and it is undisputed that
they signed the contract with knowledge and under-
standing of each of its terms. SAMS does not argue that
the limitation of liability provision of its agreement
with Environs contravened a statute, tended to injure the
public, was contrary to Indiana public policy, or was
1
Ash Lakhany was the president and managing member of
SAMS. He negotiated and signed the contract with Environs
on behalf of SAMS. In 2000, another entity in which Lakhany
was a member, Super Host Hospitality, contracted with Envi-
rons to design a three-story Hilton Garden Inn hotel in
Ft. Wayne, Indiana. That contract also contained a limited
liability provision that stated:
The Owner agrees that the total liability of the Architect
shall not exceed the total compensation received for claims
arising from negligence, errors, omissions, and breach of
contract or breach of warranty.
That hotel was constructed successfully.
6 No. 12-2979
ambiguous in any way. Nor does SAMS argue that the
broad language of the provision would not apply to its
claims in this case. SAMS argues only that it should be
excused from the terms of its bargain, even though the
meaning of the language is clear and unambiguous,
because the language did not refer explicitly to
Environs’s own negligence.
In making this argument, SAMS relies primarily not
on cases applying limitation of liability clauses but on
cases with contract clauses that would completely in-
demnify or exculpate a defendant for its own negligence.
In such provisions, the key contractual language must
“ ‘clearly and unequivocally manifest a commitment by [the
plaintiff], knowingly and willing[ly] made, to pay for
damages occasioned by [the defendant’s] negligence.’ ”
Marsh v. Dixon, 707 N.E.2d 998, 1000 (Ind. App. 1999)
(holding that exculpatory clause did not refer specif-
ically to defendant’s own negligence and thus did
not bar plaintiff’s negligence claim for a broken ankle
suffered in defendant’s wind tunnel ride), quoting
Indiana State Highway Comm’n v. Thomas, 346 N.E.2d 252,
260 (Ind. App. 1976) (emphasis in original) (contractor
not required to indemnify state for injuries to con-
tractor’s employee because indemnity provision did not
refer specifically to state’s own negligence); see also
Avant v. Community Hosp., 826 N.E.2d 7, 10-12 (Ind. App.
2005) (exculpatory clause referred explicitly and specifi-
cally to gym’s negligence and was enforceable against
injured gym visitor).
These Indiana cases require that an indemnification or
exculpatory clause, to be effective, must refer explicitly
No. 12-2979 7
to the indemnified or exculpated party’s own negligence.
See, e.g., NES Rentals Holdings, Inc. v. Steine Cold Storage,
Inc., ___ F.3d ___, ___, 2013 WL 1395700, at *7 (7th Cir.
April 8, 2013) (applying Indiana law, indemnification
provision did not show that defendant knowingly and
willingly accepted burden of indemnifying plaintiff for
plaintiff’s own negligence where provision did not refer
explicitly to plaintiff’s own negligence); Wabash County
Young Men’s Christian Ass’n v. Thompson, 975 N.E.2d 362,
366-67 (Ind. App. 2012) (because plaintiff’s injury arose
not from defendant’s negligence but from risks inherent
in participation in organized sport, release that did not
refer specifically to defendant’s negligence was enforce-
able), citing Marsh, 707 N.E.2d at 1000. The Indiana
courts, however, have not applied this strict rule for
indemnification and exculpatory clauses to a case like
this one, in which two commercial entities, well aware
of the risks involved, freely and knowingly negotiated
a limitation of liability clause so as to allocate those
risks in advance.
Though the Indiana courts have made specificity a
requirement in indemnification and exculpatory clauses,
they have not spoken so clearly regarding limitation of
liability clauses in sophisticated commercial contracts.
SAMS argues that the differences among these provi-
sions are not significant for these purposes, so that the
specificity requirement should apply to the limitation of
liability provision here as well. We are not persuaded.
These different types of clauses serve different pur-
poses, and Indiana case law does not indicate that they
8 No. 12-2979
should be analyzed alike. Limitation of liability clauses,
such as the clause in the SAMS-Environs contract, do
not operate as insurance the way that indemnification
clauses do. They also do not entirely prevent one party
to the contract from bringing a claim against the other,
as exculpatory clauses do. Limitation of liability clauses
serve to establish a contractual ceiling on the amount of
damages to be awarded if a plaintiff prevails in later
litigation between the contracting parties. We agree
with SAMS that when a clause limits a party’s liability to
only nominal damages, a limitation of liability clause
can be as harsh as a full exculpatory clause would be. This
would be particularly true if the plaintiff were an unso-
phisticated individual or if the plaintiff had been bound
to the provision through a contract of adhesion. But
SAMS and Environs were sophisticated commercial
entities that knew the risks and freely bargained for the
terms of the contract, including the limitation of liability
clause. SAMS did not unknowingly agree to the limita-
tion of liability clause or assume these risks. To the
extent it suffered a harsh result, it cannot blame the
general nature of limitation of liability clauses.
Further, we are unaware of any authoritative Indiana
appellate case that has clearly extended the rule of specif-
icity to limitation of liability provisions. The cases SAMS
cites in support of strict application of the specificity
standard to limitation of liability clauses do not per-
suade us that existing Indiana law has extended the
specificity requirement that far. SAMS relies primarily on
Carr v. Hoosier Photo Supplies, Inc., 422 N.E.2d 1272 (Ind.
App. 1981), a consumer case in which the court of
No. 12-2979 9
appeals found that, like an indemnification clause, a
limitation of liability clause must be “clear and unequivo-
cal” to be enforceable — although the court did not
state that in the context of limitation of liability provi-
sions, “clear and unequivocal” requires a specific refer-
ence to a party’s negligence. Id. at 1277, citing Thomas,
346 N.E.2d at 260. But regardless of what that appellate
opinion said or did not say, it was vacated on transfer
to the Indiana Supreme Court. See Carr v. Hoosier Photo
Supplies, Inc., 441 N.E.2d 450 (Ind. 1982). Under Indiana
law it therefore serves as no authority whatsoever. See
Ind. Rule App. P. 58.2
SAMS also relies on General Bargain Center v. American
Alarm Co., 430 N.E.2d 407, 411 (Ind. App. 1982), in which
the appeals court said that “the designation [’liquidated
damages’ clause, ‘exculpatory’ clause, or ‘limitation of
liability’ clause] given by the parties to the limitation
specified in the contract is not conclusive,” and held that
absent certain exceptions, each type of provision can be
enforceable under Indiana law. But, contrary to SAMS’s
understanding of that case, the court did not find that
exculpatory clauses and limitation of liability clauses
are always analyzed under the same standard. The court
simply concluded that the clauses functioned similarly
2
On transfer, the Indiana Supreme Court held that the limita-
tion of liability clause at issue was unambiguous and that the
plaintiff had understood the clause when he accepted the
contract. The court therefore reversed without addressing
whether the strict specificity standard applied. Carr, 441
N.E.2d at 455-56.
10 No. 12-2979
under the facts of that case. It held only that, absent
evidence that the contract was unconscionable or
against public policy, or that the agreement was not
entered into knowingly and willingly, each of these
types of clauses is generally enforceable. See id. at 411-12.
SAMS’s strongest authority is State Group Industrial
(USA) Ltd. v. Murphy & Assocs. Indus. Servs., Inc., 878
N.E.2d 475, 480-81 (Ind. App. 2007). In that case, the
court applied the specificity requirement in analyzing
a limitation of liability clause’s applicability to a party’s
criminal and fraudulent conduct, finding that the
clause was not specific enough to bar liability for such
unforeseeable acts. But it did not hold definitively that
the specificity requirement applied to limitation of
liability clauses purporting to limit damages in the event
of a negligent breach of contract — after all, intentional
misconduct is a circumstance very different from fore-
seeable failures to meet contractual standards for per-
formance. This cryptic signal from the appellate court
does not convince us that the Indiana Supreme Court
would probably adopt such a broad holding. The sug-
gestion that Indiana law does not distinguish between
these clauses for some purposes offers only meager
support for SAMS’s contention that Indiana law sees
no distinction between these types of clauses for all pur-
poses, particularly where reaching that result would
require us to rewrite the parties’ freely negotiated bar-
gain. Without more specific guidance from the
Indiana courts, we are not persuaded we should read
such a requirement into Indiana law to benefit SAMS, a
sophisticated and experienced commercial entity that
No. 12-2979 11
understood the risks involved in the design and con-
struction of a hotel and freely negotiated the limitation
of liability clause in its contract with Environs.
Also, although the requirement that indemnification
or exculpation for a party’s own negligence must be set
forth in express terms is well established, we are not
convinced that the Indiana Supreme Court would extend
this requirement to claims for breach of contract, even
if the underlying conduct could also be called negligence.
The Indiana Court of Appeals found in Indiana Dep’t of
Transp. v. Shelly & Sands, Inc., 756 N.E.2d 1063, 1072 (Ind.
App. 2001), that even if an exculpatory clause would
not be sufficiently specific to absolve the defendant of
its own negligence, the plaintiff’s argument that the ex-
culpatory clause was similarly unenforceable against
its breach of contract claim was “misplaced.” “The [plain-
tiff’s] claim is for breach of contract, not negligence.
While the language in the exculpatory clause may not
be specific enough to bar a claim of negligence if the
[plaintiff] had brought such a claim, that is not a question
that we must resolve.” Id. The court then examined the
language of the exculpatory clause and held that it was
sufficient to protect the defendant from liability for the
plaintiff’s breach of contract claim. See id. at 1072-73.
Other Indiana appellate cases have recognized in dicta
that a contractual clause that is not sufficiently specific
to exculpate a defendant on a negligence claim may still
be effective for other claims. See Marsh, 707 N.E.2d at
1001 (“While this exculpatory clause may act to bar some
types of liability, it cannot act to bar liability arising from
12 No. 12-2979
[defendant’s] own negligence.”) (emphasis added), citing
Powell v. American Health Fitness Ctr. of Fort Wayne, Inc., 694
N.E.2d 757, 761-72 (Ind. App. 1998) (exculpatory clause
void only “to the extent” that it purported to release
defendant from liability caused by defendant’s own
negligence).
Turning back to the parties’ actual agreement here,
we note that the library case, IMCPL, involved strikingly
similar facts, although not this precise issue. IMCPL hired
a firm to serve as the architect for the renovation and
expansion of its main library. The architect then hired
several subcontractors to perform architectural and
engineering services. Construction began, but several
construction and design defects were discovered that
ultimately caused IMCPL to sustain damages of $40 to
$50 million. IMCPL, 929 N.E.2d at 725. IMCPL sued the
general contractor and several subcontractors alleging
in relevant part that they had negligently performed
engineering, administrative, and design work that they
were contractually obligated to perform. The defendants
moved for partial summary judgment, arguing that
IMCPL’s negligence claims were barred by the “economic
loss rule.” Id. at 726. The Indiana Supreme Court agreed,
ultimately finding that the economic loss rule barred
IMCPL’s negligence claims. Id. at 742.
But in a passage that is critical here, the court drew a
clear distinction between claims for breach of contract
and claims for negligence that arise from a contractual
duty resulting in purely economic loss. This careful dis-
tinction would be erased if SAMS were to prevail in
No. 12-2979 13
the case before us on what was, for these parties, a drafting
technicality. Like SAMS, IMCPL “looked to a series of
contracts to establish the relative expectations of the
parties.” Id. at 730. The court recognized that in situa-
tions in which the parties’ relationship is defined by a
contract, “the resolution of liability for purely economic
loss caused by negligence is more appropriately deter-
mined by commercial rather than tort law.” Id. at 729.
And “when it comes to claims for pure economic loss,
the participants in a major construction project define
for themselves their respective risks, duties, and
remedies in the network or chain of contracts governing
the project.” Id. at 740. Once its negligence claim was
dismissed, SAMS’s only claim was for breach of con-
tract. If SAMS could prevail on its argument that the
limitation of liability clause in the parties’ contract
should be jettisoned because it does not meet the
specificity standard required to limit negligence claims
by contractual terms, that result would permit an end-
run around Indiana’s economic loss rule and SAMS’s
own contract with Environs.
“[T]he general rule of freedom of contract includes the
freedom to make a bad bargain.” Indiana Bell Tel. Co. v.
Mygrant, 471 N.E.2d 660, 664 (Ind. 1984) (internal quota-
tion omitted). Without any indication in the Indiana case
law that the Indiana Supreme Court would extend the
specificity rule to a limitation of liability clause that was
freely and knowingly negotiated by two sophisticated
commercial entities in a dispute in which the under-
lying cause of action is for breach of contract and not
14 No. 12-2979
negligence, we conclude that the district court properly
held SAMS to the terms of its contract. The judgment of
the district court is A FFIRMED.
5-31-13