The case of SAMS Hotel Group, LLC v. Environs, Inc., decided May 31, 2013, bears interest to U.S. contract law, specifically where it concerns limited liability clauses. The case summary is as follows: SAMS Hotel Group contracted Environs, Inc., an architectural firm, to design a building. The contract also included a clause limiting Environs, Inc., liability to be limited to $70,000. However, when the building was nearly complete, architectural design flaws were discovered, causing it to be condemned.
SAMS Hotel Group estimated its total losses at $4.2 million and argued that the limited liability clause was unenforceable as it did not refer to damages for Environs’s own negligence. The court ruled in favor of Environs as the two parties were “two sophisticated business entities of equal bargaining power who were aware of the risks involved” (SAMS v. Environs, 2013). Furthermore, it extended that a party under contract cannot be liable under a tort theory for economic loss if no personal injury or damage to other property was done. Additionally, the court noted that the same rulings would not apply in consumer contracts or contracts of adhesion, where the parties do not have equal bargaining power. This case affirms two precedents that are relevant to contract law. First, that a limited liability clause is enforceable in cases where damages arise from the contractor’s negligence, regardless of the proportion of alleged losses to the liability agreed in the contract. Second, that such a decision may be different in cases where the two parties do not have equal bargaining power, such as consumer contracts.
These precedents have significant ramifications for businesses in general, specifically when establishing contracts with limited liability. The court’s equal bargaining power clause reinforces the necessary specificity in the terms of limited liability clauses when dealing with other sophisticated business entities. The economic loss rule invoked also prevents plaintiffs from seeking damages under tort theories, further reinforcing this necessity. However, the clause regarding contracts of adhesion or customer contracts, where the parties do not have equal bargaining power, creates the possibility of a difference in interpretation. Thus, a limited liability clause in such contracts, no matter how specific, is not guaranteed to be enforceable, depending on the court’s view of the particular case. As such, organizations cannot rely on such clauses to safeguard them against financial loss from causes covered by the contract’s conditions. For organizations agreeing to contract work under a limited liability clause, however, the court’s ruling in this case extends and reinforces the safeguards afforded by such clauses. This reduces the possibility of incurring unforeseen losses in situations where the contract’s other party seeks damages exceeding those discussed in the limited liability clause.
An organization like Citigroup, operating as a banking and financial services company and interesting for its size and influence, can be affected by these rulings. Generally, the implications are the same as outlined in the analysis above. Specifically, this applies to any work, including construction work, as in the examined case, for which Citigroup can seek outside contractors. For these contracts, limited liability clauses, if present, should be drafted as specifically and explicitly as possible, with no implied cases. This also applies to any customer contracts and contracts of adhesion, where the other party can be expected to lack legal sophistication or bargaining power. In such cases, even an explicitly worded clause may not be enforceable.
Reference
SAMS Hotel Group, LLC v. Environs, Inc., 716 F.3d 432 (2013).