Sams Hotel case is an important case for design professionals and project owners.
In March 2007, Sams hired Environs as its architectural design firm to build a multi-story Homewood Suites Hotel in Fort Wayne, Indiana. Under the contract, Environs was entitled to $70,000 for its architectural services. In addition, the contract included the following limitation on Environs’ liability:
The Owner agrees that to the fullest extent permitted by law, Environs….total liability to the Owner shall not exceed the total lump sum fee due to the negligence, errors, omissions, strict liability, breach of contract or breach of warranty.
Environ’s sole officer and president, Michael Sapp, was a licensed architect at the time of the project. Although Sapp took a variety of structural engineering courses, he was not a licensed professional engineer. Sapp affixed his seal to the project’s structural drawings and therefore became responsible for the building’s overall structural design as the
“engineer of record.”
On July 31, 2007, Environs submitted the first full set of completed, signed design drawings to the State for their review. Apparently, the submitted drawings did not adequately provide for a lateral shear wall system even though Sapp was aware that such a system was needed. Sapp testified that he believed the lateral shear wall system would be designed by Nucon Steel along with Environs’ engineering subcontractor, DSI Engineering, Inc. Further, Environs’ structural drawing did not identify the footing depths recommended in the final soils report.
Environs was not present when the foundation was installed. On March 25, 2008, Sams’ construction liason discovered cracks in the north stair tower. The general contractor quickly fixed the cracks but they reappeared along the same path. The Allen County Building Department’s structural inspector later discovered discrepancies between the design drawings and the ongoing construction. The Building Department later issued a Notice of Condemnation for the hotel and required Sams to bring in a structural engineer to investigate the problems. The inspectors discovered that the stair towers did not include enough shear wall support and had the incorrect type of footing. The independent engineer recommended demolishing the three stair towers and rebuilding them. Informal remediation estimates were valued at $9.4 million while the cost to demolish and rebuild the building was approximately $8.6 million. Sams was not able to obtain the necessary funding to begin the proposed remediation. Later, the Building Department issued a separate order to demolish the hotel to its on-grade slab. The hotel was demolished in late March 2009.
Sams filed a lawsuit against Environs, Nucon Steel and DSI Engineering. The lawsuit claimed that Environs breached the contract by not designing the hotel’s structure to adequately resist lateral loads, which Sams alleged was a substantial factor in causing the Building Department to order demolition of the building. Sams further alleged that the plans were not suitable for the purposes of construction and that Environs failed to carry out its duties consistent with the professional standard of care required of an architect acting as the “engineer of record.” The parties subsequently stipulated to the dismissal of Nucon Steel and DSI Engineering — presumably in exchange for a confidential settlement.
After conducting a trial without a jury, the court determined that Environs breached its contractual obligations to Sams but Environs was not liable to Sams for the entire value of Sams’ damages because the parties executed a contract expressly limiting Environs’ maximum liability to its $70,000 design fee. Last week, on August 1st, the Court issued an Order amending its March 29, 2012 findings of facts and conclusions of law confirming that Indiana law did not require Sams to prove that Environs’ inadequate design was the sole cause of demolition order. In order to prevail on its breach of contract claim, Sams merely needed to prove that the inadequate design was a “substantial factor” in causing Sams’ damages.
For Owners: Carefully consider the risk of proposed limitation of liability clauses where the design fee is disproportionate to the potential damage caused by a negligent design. Here, the Owner’s recovery against the architect was limited to less than 1% of the $8.6 million estimated replacement costs.
For Designers: Negotiate limitations on liability when possible. However, if you affix your seal to a structural design prepared by your sub-consulting engineer, be aware of the heightened risk associated with providing services as the “engineer of record.”
Categories: Design Negligence, Limitation on Liability