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TEXACO, INC. v. EAST COAST MGMT.

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY


August 15, 1989

TEXACO, INC., Plaintiff,
v.
EAST COAST MANAGEMENT, Defendant

The opinion of the court was delivered by: COHEN

OPINION

MITCHELL H. COHEN, SENIOR UNITED STATES DISTRICT JUDGE

 Before us, in this breach of contract action, is a cross-motion by defendant, East Coast Management ("ECM"), for partial summary judgment on Counts I and II of the Complaint filed by plaintiff, Texaco, Inc. ("Texaco"). This cross-motion was initiated as a response to a motion for summary judgment by Texaco filed on March 16, 1989. On May 17, 1989 Texaco filed a request with this Court that its motion for summary judgment be voluntarily withdrawn without prejudice. For the reasons that follow, Texaco's request to voluntarily withdraw its motion without prejudice shall be GRANTED, and ECM's cross-motion for summary judgment shall be DENIED.

 I. FACTS

 On December 12, 1983, Texaco and ECM contracted for ECM to perform repair work on certain compressors at Texaco's Eagle Point Refinery in Westville, New Jersey. Under the terms of this contract, ECM was required to "fully defend, protect, indemnify, hold harmless and render [Texaco] whole" as to any and all claims connected with or arising out of ECM's performance, regardless of whether a resulting personal injury, death or property damage was caused by ECM's sole negligence, the concurrent negligence of ECM and Texaco, strict liability, or even the sole negligence of Texaco. See Contract Between Texaco and ECM Dated December 12, 1983 ("Contract") at 10. The Contract also required ECM to maintain, at its sole cost, insurance coverage with policy limits as specified therein. *fn1" Contract at para. 11. This insurance provision required that Texaco be named as co-insured, and that ECM deliver a "certificate" to Texaco "prior to commencement of the work," as evidence of its compliance with the terms of its insurance obligations. Id. Like the indemnification clause, the insurance terms covered any and all claims connected with or arising out of ECM's performance, regardless of whether the resulting personal injury, death or property damage was caused by ECM's sole negligence, the concurrent negligence of ECM and Texaco, strict liability, or the sole negligence of Texaco. Id. Pursuant to the Contract, the "certificate" naming Texaco as co-insured and evidencing acquisition of the enumerated coverages was required to "specifically quote" the Contract's indemnification provision. Id. The comprehensive general liability insurance stipulation reiterated that general liability coverage "shall cover, among other risks, the contractual liability assumed under the indemnification provision." Id. It is important to note that the text of the Contract does not specifically address the question of Texaco's rights and/or remedies should ECM fail to so deliver a "certificate." The Contract does provide, however, that:

 Failure of [ECM] to keep the required insurance policies in full force and effect during the work covered by this Agreement. . . . shall constitute a breach of this Agreement and [Texaco] shall have the right, in addition to any other rights, to immediately cancel and terminate this Agreement. . . .

 Id.

 ECM commenced work pursuant to the Contract, and on December 23, 1983, Jerry Andrew Johnson, an employee of ECM, slipped and injured himself while working at the Eagle Point Refinery. Johnson filed a tort action against Texaco for his injuries in 1985, Johnson v. Texaco, No. 85-4124 (E.D. Pa. 1985), and in 1986, his lawsuit was settled for $ 270,000. According to the Settlement Agreement, $ 135,000 was contributed on behalf of Texaco by its insurance carrier, the Insurance Company of North America ("INA") and $ 135,000 was contributed by INA on behalf of ECM (both Texaco and ECM used the same insurance carrier). Texaco maintains that it fully reimbursed INA for the settlement amount made on its behalf (plus defense costs), as required by Texaco's reinsurance agreement with INA.

 On May 20, 1988, Texaco filed the within action alleging, inter alia, that ECM breached the subject Contract in two material ways: (1) by failing to either defend or indemnify Texaco in the Johnson suit as required by Contract para. 10; and (2) by failing to obtain insurance naming Texaco as co-insured as required by Contract para. 11. Although Texaco's Complaint contains three Counts, only the first two are at issue at this time. In Count I, Texaco seeks damages in the amount of $ 135,000 plus interest, as well as attorney's fees and costs incurred in the within action and Johnson, supra, on the ground that all of these damages flow from ECM's failure to defend and indemnify Texaco as required by Contract para. 10. In Count II, Texaco seeks the same damages, but on the ground that ECM failed to provide comprehensive general liability insurance naming Texaco as co-insured as required by Contract II.

 II. DISCUSSION

 ECM avers that the indemnification clause contained in Contract para. 10 is void in its entirety, since it purports to indemnify Texaco for its sole negligence - a result that is explicitly prohibited by N.J.S.A. 2A:40A-1. ECM also maintains that Contract para. 11, although articulated in terms of insurance, is for all practical purposes another attempt by Texaco to achieve the statutorily proscribed goal of complete indemnification for its sole negligence. Finally, ECM advances the notion that Texaco waived any requirement of co-insurance by permitting ECM to commence work without first tendering a certificate of insurance, as required under the Contract, and by failing to mitigate its damages by obtaining insurance itself. We shall now discuss each of ECM's arguments in support of its motion for summary judgment ad seriatim.

 A. The Validity of the Indemnification Clause

 ECM avers that under N.J.S.A. 2A:40A-1 and the New Jersey cases which discuss it, the law is crystal clear that a contract clause that tries to indemnify a party for its sole negligence is void in its entirety. N.J.S.A. 2A:40A-1 provides in relevant part that:

 A covenant, promise, agreement or understanding in, or in connection with or collateral to a contract, agreement or purchase order relative to the . . . repair . . . of a building [or] appurtenance . . . purporting to indemnity or hold harmless the promisee against liability for damages arising out of bodily injury to persons . . . caused by or resulting from the sole negligence of the promisee, his agents, or employees, is against public policy and is void and unenforceable; provided that this section shall not affect the validity of any insurance contract . . . issued by an authorized insurer.

 Id. As a matter of public policy, ECM explains, the reason for such a rule is a simple one; discouraging "moral hazard." Should a party to a construction contract be able to completely insulate himself from negligence liability, "it has no motivation to maintain a safe working area, to encourage safe working practices or to actively endeavor to prevent accidents." ECM's Brief at 11. By prohibiting indemnification for sole negligence, ECM explains, the statute ensures that an indemnified party still has an interest in avoiding accidents. Id.

 ECM believes that the indemnification clause at issue here reflects the relative unequal bargaining position of the parties, because the clause was not fully negotiated and accounted for in the contract price, but rather, was standard "take it or leave it" boilerplate verbiage muscled upon them by an international business giant. ECM submits that it is precisely this type of casual shifting of liability that the New Jersey Legislature sought to address with N.J.S.A. 2A:40A-1. See ECM's Brief at 12 (citing Grippo v. Schrenell and Co., 223 N.J. Super. 154, 160, 538 A.2d 404 (App. Div. 1988)).

 Texaco defends by pointing out that the statute cited by ECM pertains only to holdharmless/indemnification clauses which insulate the promisee from liability for its own "sole negligence," and that the statute "clearly does not prohibit parties to a contract from [indemnifying] the promisee under circumstances of joint or concurrent negligence." Texaco's Brief at 19-20 (emphasis in original). Thus, Texaco argues, if it was not solely responsible for Mr. Johnson's injuries, N.J.S.A. 2A:40A-1 does not apply and ECM is bound by its covenant in Contract para. 10. Texaco further submits that ECM has failed to meet its burden of pointing to evidence which would establish that Texaco was solely responsible for Mr. Johnson's injuries. We agree.

 A careful analysis of N.J.S.A. 2A:40A-1 and its correlative legislative history (which Texaco did not research fully) lends support to Texaco's postulations. On March 13, 1980, Assemblyman Bornheimer introduced a bill which rendered hold harmless clauses in construction contracts requiring indemnity for the sole negligence of the indemnitee void and unenforceable as against public policy. See Grippo v. Schrenell and Co., 223 N.J. Super. 154, 160, 538 A.2d 404 (Sup. Ct. 1988). This bill, however, was rejected by the Senate Committee, which modified the language of the original bill to render void and unenforceable all hold harmless or indemnification clauses in construction contracts, "whether sole negligence or joint negligence were the basis for the shift in responsibility." Senate Judiciary Committee Statement, Assembly No. 1349, L. 1981 Ch. 317 1366. In this form, the modified bill became law, effective December 3, 1981.

 By 1983, the New Jersey Senate and Assembly had reconsidered their position, and amended the 1981 law to prohibit "only such hold harmless clauses which purport to indemnify a person for damages which result from his sole negligence." Senate Judiciary Committee Statement, supra, at 1366. The Legislature had come full circle, and reverted back to Assemblyman Bornheimer's original conception, that is, indemnification clauses which purport to indemnify for the sole negligence of the promisee are proscribed, while indemnification clauses involving contributory negligence are allowed. Assembly Judiciary, Law, Public Safety and Defense Committee Statement, Assembly No. 590, L. 1983 Ch. 107. As the Assembly Judiciary, Law, Public Safety and Defense Committee explained:

 there is no essential public policy impediment to certain hold harmless agreements. The principle derives from recognition that, ordinarily, the responsibility for risk of injury is shifted by the primary parties to insurance carriers, and the parties should be left to determine how the insurance burdens shall be distributed. In effect, it is an allocation of costs which, in practice, finds its way into the contract price.

 Id.

 Because N.J.S.A. 2A:40A-1 as it appears today is merely a resuscitation of Assemblyman Bornheimer's original conceptualization and formulation (ultimately rejected by the Senate Committee in 1981) much insight can be gleaned from scrutinizing the Assemblyman's 1981 statement, as sponsor of the antecedent bill, and the Senate Judiciary Committee's discussion of it. In support of the seminal bill which sought to make void and unenforceable hold harmless agreements where liability is shifted for the sole negligence of the promisee, the accompanying Assembly Statement declared the following as its express objective:

 It is becoming increasingly common, particularly in the construction field, for hold harmless agreements to be included in contracts and printed on the back of purchase order forms. Such agreements may vary in the extent to which one party shifts liability to the other, but whatever the shift, the casual manner in which the liability is tendered and assumed is particularly dangerous. Such agreements frequently impose liabilities, the assumption of which is not intended, and against which individuals may be unable to obtain insurance. This bill would make void and unenforceable certain hold harmless agreements. . . .

 Assembly Statement, Assembly No. 1349 (1981) (emphasis supplied).

 In criticizing the Bornheimer approach (which, as heretofore indicated, has been rehabilitated in the present form of the statute), the Senate Judiciary Committee lamented that "a contractor could shift responsibility for damages where both parties were jointly negligent." Senate Judiciary Committee Statement, supra, at 1366 (emphasis supplied). Under such a scheme, the Committee observed,

 if [for example] the damages amounted to $ 10,000.00 and the contractor was solely negligent, he could not have shifted responsibility to a subcontractor. However, if the damages amounted to $ 10,000.00 and under the theory of comparative negligence, the contractor was 90% and the subcontractor 10% negligent, [the Bornheimer approach] would not have prevented the contractor from inserting a hold harmless clause and shifting liability to the subcontractor.

 Id.

 The hold harmless clause at issue, in the case at bar, purported to indemnify Texaco for the twin contingencies of Texaco's sole or joint negligence. See Contract para. 10. From the legislative history we have just examined, we see no reason why that which is offensive to N.J.S.A. 2A:40A-1 cannot be excised, thereby leaving intact ECM's covenant to indemnify Texaco in the event the jury finds Texaco and ECM jointly negligent, an outcome which both plaintiff and defendant concede to be a possibility. As we understand the Senate Judiciary Committee Statement, the validity of a particular hold harmless clause (or to put it another way, whether or not responsibility can be shifted in the manner provided) depends on determining, as a de facto condition precedent, the relative percentages of liability as between the indemnitor and indemnitee. On its face, Contract para. 10 violates the statute because of its inclusion of language which would indemnify Texaco for acts even of its own sole negligence. However, that specific inclusion aside, the rest of that paragraph is entirely consistent with the statutory scheme. Several reasons support our conclusion that Contract 10 may be so severed.

 First, the statute itself provides merely that if a "covenant, promise, agreement or understanding in, or in connection with . . . a contract" is violative of the legislature's carefully demarcated proscription, it is "void and unenforceable." In its proper context in the statute, this clearly means that only that portion of an indemnification clause which purports to indemnify for damages caused by the promisee's sole negligence is void. The statute does not provide for the extrication of the entire indemnification clause, or impact the validity of the contract as a whole.

 Second, ordinary canons of construction demand such a severance. "A contract of indemnity is construed in accordance with the rules for the construction of contracts generally." Longi v. Raymond-Commerce Corp., 34 N.J. Super. 593, 603, 113 A.2d 69 (App. Div. 1955). In Houston Petroleum Co. v. Automotive Products Credit Ass'n, 9 N.J. 122, 87 A.2d 319 (1952), for example, the New Jersey Supreme Court was faced with a deed containing restrictive covenants violative of New Jersey public policy on zoning. Id. at 130. Rather than declare the entirety of the deed null and void, the Court merely rooted out the offensive covenants by ruling that "plaintiff is not entitled to their enforcement." Id.

 Third, ECM's contentions to the contrary, the indemnification clause at issue does at least appear to be fully negotiated and accounted for in the contract price. *fn2" As a result, it may not properly be characterized as the variety of visually unobtrusive boilerplate verbiage hidden on the back of a purchase order form that so concerned the Legislature. In fact, Contract para. 11 required ECM to maintain, at its sole cost, insurance coverage naming Texaco as co-insured, with policy limits as explicitly specified therein. And, in addition, ECM was required under the contract to deliver a "certificate" evidencing ECM's compliance with the terms of its insurance obligations. These requirements do not appear to shift liability in a "casual" manner. If anything, they support an inference that they are well negotiated terms which were ultimately accounted for in the contract price.

 B. The Validity Of The Insurance Clause

 As we noted supra, ECM alleges that as a practical matter, the insurance clause of the Contract amounts to a back door attempt at indemnification of Texaco, and for all the reasons ECM has heretofore voiced, is void.

 Texaco defends by carefully distinguishing ECM's obligation to provide indemnification from ECM's obligation to bear the cost of insurance coverage. Texaco points out that the explicit text of N.J.S.A. 2A:40A-1 specifically provides that "this section shall not affect the validity of any insurance contract," leading it to conclude that the statute does not prohibit construction contracts from requiring the promisor to maintain insurance. We agree.

 Texaco maintains that it was not the Legislature's intent to prevent parties from agreeing, as between themselves, as to who shall bear the cost of insurance covering a construction project. To Texaco, there is a significant difference between a clause which allocates insurance costs and one which allocates the responsibility to defend and indemnify. Our survey of the legislative history leads us to the same conclusion. Under Texaco's understanding of the clauses in question here:

 If ECM had complied with [the] requirement [to insure], then the insurance company would have had to defend and indemnify. . . . The insurance provision [here] merely requires ECM to obtain and pay the premium on such a policy covering both ECM and Texaco.

 Texaco's Opposition Brief at 14 (emphasis supplied). We are in accord with this view. Consequently, the insurance provisions embodied in Contract para. 11 are valid and enforceable insofar as they relate to statutorily permissible indemnification (indemnification for the joint negligence of the indemnitor and indemnitee, but not for the sole negligence of the indemnitee).

 C. Texaco's Alleged Waiver Of Co-Insurance Requirement And Failure To Mitigate Damages

 1. Waiver

 The Contract required that a certificate of insurance specifically quoting the Contract's indemnification clause and naming Texaco as co-insured be delivered to Texaco prior to commencing work. Under the terms of the Contract, "[f]ailure to keep the required insurance policies in full force and effect . . . shall constitute a breach . . . and [Texaco] shall have the right to immediately cancel and terminate this Agreement." Contract para. 11 (emphasis supplied).

 ECM now advances the notion that the mere failure to deliver (not "keep") the certificate of insurance granted Texaco the right to terminate, which it did not do. ECM states that:

 [Texaco] has failed to establish, by affidavit or otherwise, that no certificate of insurance was issued. Far from being "undisputed," this allegation was denied in defendant's answer and is a fact which [Texaco] must prove.

 ECM's Brief at 20.

 In response, Texaco attempts to foist ECM by its own petard and show that on a motion for summary judgment, it is ECM's burden to show either (1) that a certificate was issued; or (2) that Texaco did not demand a certificate and that in fact it was not produced. Defining waiver as the "voluntary and intentional surrender of a known right," Texaco recites that ECM has introduced no evidence of such relinquishment on Texaco's part, and that at most, the only right which Texaco may have waived was its right to have proof of insurance displayed. See also Contract para. 17. We agree with Texaco insofar that ECM has failed to satisfy its burden with respect to the waiver issue. It is well established that "a party seeking summary judgment always bears the initial responsibility of . . . identifying those portions of 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1975) (quoting Fed. R. Civ. P. 56(c)). By asserting that ECM's alleged failure to deliver a certificate of insurance "is a fact which [Texaco] must prove," ECM has abdicated its "initial responsibility" under Celotex, supra, thereby foreclosing the propriety of summary judgment on the waiver issue.

 2. Mitigation

 ECM contends that Texaco, upon not being presented with proof of insurance, should have either terminated the Contract or obtained the required insurance itself. To simply ignore such a significant breach and merely rely on the contract language for protection at the risk of leaving third parties unprotected, ECM argues, would be precisely the risk which the Legislature sought to avoid by enacting N.J.S.A. 2A:40A-1. Thus, ECM concludes, Texaco is estopped from seeking damages.

 Once again, ECM has failed to meet its "initial responsibility" of identifying those portions of the materials enumerated in Fed. R. Civ. P. 56(c) which it believes to demonstrate the absence of a genuine issue of material fact. Celotex, supra, 477 U.S. at 323. Furthermore, as Texaco properly points out, its alleged failure to mitigate damages bears no relevance to the question of liability for breach of contract, to which ECM's cross-motion for partial summary judgment is exclusively directed. See Texaco's Supplemental Opposition Brief at 8.

 III. CONCLUSION

 For the foregoing reasons, Texaco's request to voluntarily withdraw its motion for summary judgment without prejudice shall be GRANTED. ECM's cross-motion for partial summary judgment on Counts I and II of the Complaint shall be DENIED. An appropriate Order follows.

 ORDER - August 15, 1989, Filed

 This matter having come before the Court on a motion by plaintiff, Texaco, Inc., to mark its application for summary judgment voluntarily withdrawn and without prejudice, and on a cross-motion by defendant, East Coast Management, for partial summary judgment on Counts I and II of the Complaint; and

 For the reasons set forth in the Court's opinion filed this day; and

 For good cause shown;

 It is on this 15th day of August, 1989 ORDERED that said motion by plaintiff for summary judgment be and same is hereby WITHDRAWN, which withdrawal shall be without prejudice; and

 IT IS FURTHER ORDERED that said cross-motion by defendant for partial summary judgment be and the same is hereby DENIED.


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