Enforceability of Limitation of Liability Clauses
Author: Saloni Shah and Joanna Kopcyzk
Limitation of Liability
Indiana courts permit parties to contractually limit liability. See Pinnacle Comput. Servs. v. Ameritech Publ’g, 642 N.E.2d 1011, 1014 (Ind. Ct. App. 1994). In Pinnacle, the Court of Appeals of Indiana enforced a clause containing a limitation of liability and an exculpatory clause in an advertising contract, although the court appeared to refer to the terms interchangeably. Id. at 1019 (“[A]lthough the limitation of liability is valid in this case, there are limits to the enforceability of such clauses. We can envision circumstances in which the exculpatory clause would be unconscionable[.]”); see also Orkin Exterminating Co. v. Walters, 466 N.E.2d 55, 59 (Ind. Ct. App. 1984) (upholding limitation of liability clause in contract between homeowner and exterminator), abrogated on other grounds by Mitchell v. Mitchell, 695 N.E.2d 920 (Ind. 1998); Gen. Ctr. v. Am. Alarm Co., Inc., 430 N.E.2d 407, 412 (Ind. Ct. App. 1982) (enforcing clause in alarm system contract that limited company’s liability to $250); Cottey v. Brink’s Home Sec., Inc., 2011 WL 11526, *4 (S.D. Ind. Jan. 4, 2011) (“clauses . . . designed ‘to exculpate or limit damages to a nominal amount’ are generally enforceable because they are presumed to be the product of a freely bargained agreement between the parties”).
Indiana law also permits parties to contractually limit remedies and warranties in sales contracts provided that there is mutual assent. Ind. Code Ann. §§ 26-1-2-316, 26-1-2-719(1)-(3) (West 2021); Martin Rispens & Son v. Hall Farms, Inc., 621 N.E.2d 1078, 1087 (Ind. 1993), abrogated on other grounds by Hyundai Motor Am., Inc. v. Goodin, 822 N.E.2d 947 (Ind. 2005). “Assent to a limitation of liability may be assumed where a knowledgeable party enters into the contract, aware of the limitation and its legal effect, without indicating non-acquiescence to those terms.” Id.
Indiana courts occasionally use “limitations of liability” and “exculpatory clauses” interchangeably. See Pinnacle, 642 N.E.2d at 1018; Gen. Bargain Ctr. v. Am. Alarm Co., Inc., 430 N.E.2d 407, 412 (Ind. Ct. App. 1982) (“[T]here is no real distinction for present purposes between a liquidated damage clause, a limited damage clause and an exculpatory clause.”). Thus, the standards regarding exculpatory clauses may apply with equal force to limitations of liability.
Indiana courts generally enforce exculpatory clauses unless: (1) the parties have unequal bargaining power; (2) the contract is unconscionable; or (3) the transaction underlying the contract affects the public interest. Pinnacle, 642 N.E.2d at 1014; see also Pennsylvania Wood, Inc. v. Martin, No. 3:13-cv-834, 2017 WL 2492626, at *6 (N.D. Ind. June 8, 2017); McAdams v. Foxcliff Estates Cmty. Assoc., 92 N.E.3d 1144, 1150 (Ind. Ct. App. 2018). Indiana courts divide unconscionability into two branches: substantive and procedural. Doe 1 v. Carmel Operator, LLC, 144 N.E.3d 743, 753 (Ind. Ct. App. 2020) abrogated on other grounds by Doe v. Carmel Operator, LLC, 144 N.E.2d 743 (Ind. 2021). Substantive unconscionability refers to oppressively one-sided contract terms, whereas procedural unconscionability involves the manner and process by which the contractual terms were incorporated therein. Id. An exculpatory clause must “specifically and explicitly” refer to the negligence of the party seeking release from liability. Anderson v. Four Seasons Equestrian Ctr., Inc., 852 N.E.2d 576, 581 (Ind. Ct. App. 2006). However, even a general exculpatory clause may bar liability for damages incurred which are inherent in the nature of the activity. Id. at 581-82. Thus, the specificity requirement only applies most forcefully when the risk of harm is a latent danger, including the defendant’s own negligence. Id. A party’s failure to read the release before signing it does not render the release unenforceable in the absence of evidence of fraud or misrepresentation. Shumate v. Lycan, 675 N.E.2d 749, 753 (Ind. Ct. App. 1997). An exculpatory clause in a construction contract stating that the general contractor is responsible to use the proper means, methods, techniques, or procedures in executing its contractual obligations does not exculpate the architect for its independent contractual obligation of rejecting non-conforming work. Rusnak v. Brent Wagner Architects, 55 N.E.3d 834, 841 (Ind. Ct. App. 2016).
Ind. Code Ann. § 26-2-5-1 (West 2021) prohibits indemnity agreements in construction or design contracts which purport to indemnify the promisee against liability for death or bodily injury, injury to property, design defects, or any loss from the sole negligence or willful misconduct of the promisee, as they are against public policy. Sole negligence, however, does not include vicarious liability, imputed negligence, or assumption of a nondelegable duty. This statute was enacted to “protect employees in the construction industry and the public from irresponsible contractors who have shifted their own liability onto a subcontractor whose insurance does not cover contract liability.” Ogilvie v. Steele by Steele, 452 N.E.2d 167, 169-70 (Ind. Ct. App 1983). This statute, however, does not apply to maintenance contracts. Bethlehem Steel Corp. v. Sercon Corp., 654 N.E.2d 1163, 1166-67 (Ind. Ct. App. 1995) (stating that “construction” means “to build, erect, or create” and therefore a contract for maintenance falls outside the scope of Section 26-2-5-1). Indiana law also makes any promise to indemnify a promisee from liability “other than liability for damages and losses arising out of third party claims” caused by the willful misconduct or negligence of the promisor, such as a provider of professional services such as design professionals, architects, engineers, and geologist, void and unenforceable as against public policy. Ind. Code Ann. § 26-2-5-4 (West 2021).
Enforceability of Waiver of Consequential Damages Clauses
Indiana courts have directly addressed the enforcement of waiver of consequential damages clauses in the construction context. In Brownsburg Mun. Bldg. Corp. v. R.L. Turner Corp., 933 N.E.2d 905 (Ind. App. 2010), the court referenced the parties’ mutual waiver of consequential damages clause (Article 4.3.10 of the AIA A201-1997) and opined that the contract waived consequential damages but affirmed the trial court’s denial of defendant’s motion for partial summary judgment as a factual dispute existed regarding the foreseeable of certain types of damages . Id. at 909; see also Sams Hotel Grp., LLC v. Environs, Inc., 2012 WL 3139765, at *14 (S.D. Ind. 2012) aff’d, 716 F.3d 432 (7th Cir. 2013) (enforcing limitation of liability clause capping plaintiff’s liability to the total lump sum amount of the architectural services contract in connection with a hotel construction project); Wal-Mart Stores, Inc. v. S.C. Nestel, Inc., 2010 WL 1190534, at *3–4 (S.D. Ind. 2010) (holding that broad waiver of future claims for consequential damages arising out of or related to the parties’ contract barred the defendant’s subsequent claim for consequential damages in the form of lost profits).
Indiana courts recognize exceptions to the general rule for enforcement of such clauses, however. The court in Gen. Bargain Ctr. v. Am. Alarm Co., 430 N.E.2d 407 (Ind. Ct. App. 1982) held that exculpatory clauses are enforceable if: (i) they are made knowingly and willingly by the parties to a contract; and (ii) the contract is free from fraud. Id. at 411–12; see also Menchhofer v. Honeywell, Inc., 2002 WL 24454, at *4–6 (S.D. Ind. Jan. 7, 2002) (citations and quotation marks omitted) (applying this test and concluding that an exculpatory contract clause was enforceable and thus barred plaintiff’s negligence and contract claims and noting that “exceptions exist where the parties have unequal bargaining power, the contract is unconscionable, or the transaction affects the public interest…”).
In the context of transactions for the sale of goods, the Indiana Uniform Commercial Code allows a buyer to recover consequential damages from the seller under appropriate circumstances. See Ind. Code Ann. §§ 26-1-2-711 – 26-1-2-714, 26-1-2-715(2). However, Indiana code section 26-1-2-719 permits the buyer and the seller to contract to limit or exclude consequential damages unless the contractually specified limitation or exclusion is unconscionable or where the circumstances cause the contractually specified limited or exclusive remedy to fail of its essential purpose.
Application of Economic Loss Doctrine
Indiana courts recognize the economic loss doctrine, meaning that courts will not allow a plaintiff to recover in tort for purely economic losses. See Gunkel v. Renovations, Inc., 822 N.E.2d 150, 152 (Ind. 2005) (“[C]ontract is the sole remedy for the failure of a product or service to perform as expected”). The economic loss doctrine applies to both sales of products and contracts for services. Id. at 153. Damages may be recoverable under a tort theory only where a defect causes personal injury or damage to “other property.” Id. at 153.
The doctrine is also applied to “negligence actions against engineers and other design professionals” even where there is no contractual privity. Indianapolis-Marion Cnty. Pub. Library v. Charlier Clark & Linard, P.C., 929 N.E.2d 722, 734 (Ind. 2010). However, those individuals may still be held liable in tort for personal injuries sustained as part of their work. Id. In construction cases in general, however, Indiana courts have maintained that “the economic loss rule [applies] to all participants in … a network or chain of contracts in a major construction project … .” Id. at 736. In 2022, the Supreme Court of Indiana found it premature to dispose of a negligence claim on a motion to dismiss, despite recognizing the case may later be barred under the economic loss doctrine and the “chain of contracts” rule, where the complaint did not include anything about “if, or to what extent, the parties were connected contractually.” See Residences at Ivy Quad Unit Owners Ass’n v. Ivy Quad Development, LLC, 179 N.E.3d 977, 983-84 (Ind. 2022).
The Indiana Court of Appeals recently found that the doctrine does not extend to categorically preclude tort claims against accounting professionals. See Magic Circle Corp. v. Crowe Horwath, LLP, 72 N.E.3d 919, 925 (Ind. Ct. App. 2017). In addition, at least one federal district court in Indiana has found that the economic loss doctrine does not extend to intentional torts, such as fraud. See, e.g., DMC Mach. Am. Corp. v. Heartland Mach. & Eng’g, LLC, No. 1:17-cv-00369-SEB-MPB, 2019 WL 175272, at *4 (S.D. Ind. Jan. 11, 2019). The same court applied the rule, however, to a negligent misrepresentation claim. Id.
Other Property and Integrated Systems
Indiana courts have held that “property acquired separately from the defective good or service is ‘other property,’ whether or not it is, or is intended to be, incorporated into the same physical object.” Gunkel, 822 N.E.2d at 155; see Indianapolis-Marion Cnty. Pub. Library, 929 N.E. 2d at 731 (applying the doctrine in the context of library construction because items were not acquired separately); see also Citizens Ins. Co. of Am. v. Manville, No. 1:11-CV-01263-SEB, 2013 WL 1438096, at *8 (S.D. Ind. Apr. 9, 2013) (discussing the standard in Indiana for other property in construction cases). In 2019, the Court of Appeals of Indiana limited the “other property exception” in a case involving two pieces of farm equipment that were purchased several months apart but were so related in their operation that they constituted an “integral part” of the overall equipment, thus triggering the economic loss rule. See Ind. Farm Bureau v. CNH Indus. Am., LLC, 130 N.E.3d 604, 613–16 (Ind. Ct. App. 2019).
Enforceability of No Damages for Delay Clauses
The Indiana Court of Appeals has held that “no public policy exists to prevent contracts containing exculpatory clauses,” including no damages for delay clauses, provided that such clauses are freely bargained for by the parties. Ind. Dep’t of Transp. v. Shelly & Sands, Inc., 756 N.E.2d 1063, 1072-73 (Ind. Ct. App. 2001).
Strict Interpretation of Contract
Indiana courts strictly interpret contracts by applying the “four corners” rule, which requires that the unambiguous provisions contained in the written contract determine the contract’s terms. Care Group Heart Hospital, LLC v. Sawyer, 93 N.E.3d 745, 756 (Ind. 2018). Thus, when the terms of the terms of the contract are unambiguous, Indiana courts will not construe the contract or look at extrinsic evidence and will simply apply the contract provisions. Breeding v. Kye’s Inc., 831 N.E.2d 188, 190 (Ind. Ct. App. 2005). If the terms of a contract are clear and unambiguous, courts will give those terms their clear and ordinary meaning. Dunn v. Meridian Mut. Ins. Co., 836 N.E.2d 249, 251 (Ind. 2005); see also Ryan v. TCI Architects/Engineers/Contractors, Inc., 72 N.E.3d 908, 914 (Ind. 2017). In interpreting a contract’s language, Indiana courts will ascertain the intent of the parties at the time the contract was made, as disclosed by the language used to express the parties’ rights and duties, and will look at the contract as a whole to construe the contract so that the interpretation harmonizes all its provisions. TCI, 72 N.E.3d at 914. Indiana courts construe contracts so as to not render any words, phrases, or terms ineffective or meaningless. Id. A contract will be found ambiguous only if reasonable persons would differ as to the meaning of its terms. Beam v. Wausau Ins. Co., 765 N.E.2d 524, 528 (Ind. 2002). If the contract is ambiguous or uncertain, extrinsic evidence may be employed to give effect to the parties’ reasonable expectations in contracting. First Federal Sav. Bank of Indiana v. Key Markets, Inc., 559 N.E.2d 600, 603-04 (Ind. 1990). Indiana courts hold that when there is ambiguity in a contract, such ambiguity is to be construed against the drafter. MPACT Const. Grp., LLC v. Superior Concrete Constructors, Inc., 802 N.E.2d 901, 910 (Ind. 2004).
Prompt Payment Requirements (Public/Private)
Indiana Public – Ind. Code §§ 4-13.6-7-4 to 4-13.6-7-8, 5-17-5-1 to 5-17-5; 5-16-5.5-1 to 5-16-5.8 (2022) (owner to prime as agreed or 35 days after receipt of goods and services or receipt of properly completed claim, 61 days after substantial completion; prime to sub 10 days from payment; interest at 1% per month).
Indiana Private – N/A
False Claims Statute
Ind. Code Ann. §§ 5-11-5.5-1 to 5-11-5.5-18 – The Indiana False Claims Act mirrors the FCA. The Indiana False Claims Act additionally extends liability to a person who causes or induces another person to perform any act outlined in the Indiana Act. Id. § 5-11-5.5-2(b)(8).
Indiana imposes liability for a civil penalty of at least $5,000 and up to three times the amount of damages sustained by the state, plus costs of a civil action brought to recover a penalty or damages. Id. § 5-11-5.5-2(b). Similar to the FCA, Indiana’s Act reduces the violator’s liability to not less than two times the amount of damage that the government sustained if a violator: (1) provides all the information known about that violation to the governmental investigators within 30 days of gaining that knowledge; (2) fully cooperates with the governmental investigators; and (3) provides the information without knowledge of the investigation and before the commencement of criminal prosecution, civil action, or administrative action. Id. § 5-11-5.5-2(c).
Licensing Requirements for Construction Managers
The State of Indiana does not impose statewide licensing requirements on construction managers or contractors. Some counties and municipalities, however, have registration or licensing requirements. Construction managers should inquire about local licensing laws when performing construction management services in Indiana.