Michael J. Hays, Partner & Civil Litigation Attorney at Tuesley Hall Konopa, LLPIndiana Courts have long explained that the general rule of freedom of contract includes the freedom to make a bad bargain. On May 31st, the federal Seventh Circuit Court of Appeals in Chicago (applying Indiana law) reaffirmed this principle.

The case of SAMS Hotel Group, LLC v. Environs, Inc., arose out of a construction contract for a six-story Homewood Suites hotel to be built in Ft. Wayne, Indiana. SAMS hired Environs, an architectural firm, to design the hotel. As construction was nearing completion, the developer discovered serious structural defects that eventually led to demolition. SAMS estimated its losses exceeded $4.2 million.

Under the contract, SAMS paid Environs a $70,000 flat fee for its design services, and the parties agreed to a clause limiting Environs liability to the fee it received to the fullest extent permitted by law. When SAMS sued seeking to recover its $4.2 million from Environs, the federal court in Indianapolis ruled Environs could not be liable for more than $70,000. The Seventh Circuit affirmed.

SAMS made a strong argument that the limitation of liability was meant to cover third-party claims and that Indiana law requires more specificity for an agreement of this type, but the courts disagreed, noting the parties were sophisticated commercial entities that knew the risks and freely bargained for the terms of the contract. The moral of the story is the same advice your mother probably gave you: don’t sign anything until you read it and understand it. The fine print can get you when things go wrong.

Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon investigation of specific facts. You should consult an attorney for advice regarding your individual situation.