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Carlson Restaurants Worldwide, Inc. v. Designline Construction Services

SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION


September 4, 2009

CARLSON RESTAURANTS WORLDWIDE, INC. AND TGI FRIDAYS, INC., PLAINTIFFS-APPELLANTS,
v.
DESIGNLINE CONSTRUCTION SERVICES, INC. AND C.J. SCHMIDT & SONS, INC., DEFENDANTS-RESPONDENTS, AND JMS SERVICES, DEFENDANT/THIRD-PARTY PLAINTIFF-RESPONDENT, AND RESTAURANT SERVICES INTERNATIONAL, INC., RSI PARTNERS, LLC, DV8 DESIGN GROUP, SCOTT & GOBLE ARCHITECTS, INC. F/K/A TAYLOR SCOTT ARCHITECTS, INC., THIRD-PARTY DEFENDANTS-RESPONDENTS.

On appeal from the Superior Court of New Jersey, Law Division, Camden County, Docket No. L-10276-06.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued January 14, 2009

Before Judges Rodríguez and Lyons.

Carlson Restaurants Worldwide, Inc. (Carlson) appeals from the grant of summary judgment to all defendants on the issue of liability. We reverse.

This lawsuit arose from a kitchen fire on February 1, 2003, at the Cherry Hill TGIF's restaurant Carlson owns. The fire started and caused damage to the restaurant. Carlson alleges that this fire was caused when a broiler table, which was either negligently installed or defectively manufactured, created a fire hazard, a condition which allegedly existed from the time of installation in 1999-2000.

At the time of the fire, Carlson carried a fire and property insurance policy underwritten by Lexington Insurance Company. As a result of the fire, Carlson sustained losses of $2,144,565, of which $500,000 was not covered by insurance. It is undisputed that Carlson entered into a contract with Designline Construction Services, Inc. (Designline) for construction of the restaurant for $1,229,855. Designline agreed that it would serve as the general contractor for the construction project. In Paragraph 11.3.6 of the contract, termed "Waivers of Subrogation," Carlson and Designline agreed to the following language:

The Owner and Contractor waive all rights against (1) each other and any of their Subcontractors, Sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect's consultants, separate contractors . . ., if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other perils to the extent covered by property insurance obtained pursuant to Paragraph 11.3. . . (emphasis added).

In Paragraph 11.3.1.3, Carlson was required to carry a property insurance policy on the restaurant with a $25,000 deductible until final payment had been made. Notwithstanding this requirement, pursuant to Paragraph 11.3.1:

Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance in the amount of the initial Contract Sum as well as subsequent modifications thereto for the entire Work at the site on a replacement cost. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing buy [sic] all persons and entities who are beneficiaries of such insurance, until final payment has been made . . . or until no person or entity other than the Owner has an insurable interest in the property . . ., whichever is earlier. (emphasis added).

Moreover, Paragraph 11.3.5, addressing insurance requirements after final payment. It states:

If during the Project construction period the Owner insures properties, real or personal or both, adjoining or adjacent to the site by property insurance under policies separate from those insuring the Project, or if after final payment property insurance is to be provided on the completed Project through a policy or policies other than those insuring the Project during the construction period, the Owner shall waive all rights . . . for damages caused by fire or other perils covered by this separate property insurance. All separate policies shall provide this waiver of subrogation by endorsement or otherwise. (emphasis added).

This Paragraph does not require any minimum deductible. Paragraph 11.3.6 sets forth the extent of the required waiver of subrogation. The waiver is "for damages caused by fire or other perils to the extent covered by property insurance. . ." (emphasis added).

Designline entered into a subcontract with C.J. Schmidt & Sons, Inc. ("Schmidt") to provide plumbing services in connection with the installation of the kitchen equipment, and a subcontract with JMS Services ("JMS") to install the commercial kitchen equipment, including the broiler and broiler plate. The broiler and broiler plate were designed and manufactured by Restaurant Services, International, Inc. (Restaurant Services) pursuant to a direct contract with Carlson.

According to the General Conditions of the contract, a "Subcontractor" is defined as:

[A] person or entity who has a direct contract with the Contractor to perform a portion of the Work at the site. The term "Subcontractor" is referred to throughout the Contract Documents as if singular in number and means a Subcontractor or an authorized representative of the Subcontractor. The term "Subcontractor" does not include a separate contractor or subcontractors of a separate contractor. [Paragraph 5.1.1]

However, pursuant to Paragraph 6, Carlson can contract with others, subject to certain limitations.

The issue on appeal is the grant of summary judgment, and thus we must use the same standard as that which was used by the trial court. Prudential Prop. & Cas. Ins. Co. v. Boylan, 307 N.J. Super. 162, 167 (App. Div.), certif. denied, 154 N.J. 608 (1998). The summary judgment standard requires the moving party to establish that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. R. 4:46-2(c); Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 529 (1995). According to R. 4:46-2(c), summary judgment will only be granted if "the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." A genuine issue of fact exists "only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact." R. 4:46-2(c). The court, however, does not decide issues of fact, it should only determine if such issues exist. Anderson v. Liberty Lobby Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed. 2d 202, 212 (1986); Brill, supra, 142 N.J. at 540.

The test for establishing whether there exists a genuine issue of fact was explained by the Court in Brill. The judge must weigh the evidence and determine if it is "sufficient to permit a rational fact-finder to resolve the alleged disputed issue in favor of the non-moving party." Brill, supra, 142 N.J. at 540. During the court's determination, it must view the evidence in the light most favorable to the non-moving party. Ibid. But, the court can clearly grant summary judgment "when the evidence 'is so one-sided that one party must prevail as a matter of law.'" Ibid. (quoting Liberty Lobby, supra, 477 U.S. at 252, 106 S.Ct. at 2512, 91 L.Ed. 2d at 214).

If no genuine issue of material fact has been presented, this court will determine whether the lower court's ruling on the law was correct. Prudential Prop. & Cas. Ins., supra, 307 N.J. Super. at 167. With regard to an appellate court's review of a trial court's interpretation of the law, no special deference is to be applied. Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995). However, a trial court's factual determinations should not be disturbed by this court unless necessary to avoid an injustice. Rova Farms Resort, Inc. v. Investors Ins. Co. of Am., 65 N.J. 474, 484 (1974).

On appeal, Carlson contends that "the waiver of subrogation in the construction contract does not apply to [its] deductible." Carlson argues that the judge erred when he found that Carlson did not have a cognizable cause of action to recover the $500,000 deductible, representing the amount of its uninsured losses from the fire.

There are no New Jersey cases which answer the question of whether a waiver of subrogation provision serves to bar the recovery of uninsured losses. Other jurisdictions, however, have been presented with this issue and have held unanimously that uninsured losses are recoverable when the contract only speaks to a bar for insured losses covered by property insurance.

For example, in Gap, Inc. v. Red Apple Cos., Inc., 725 N.Y.S.2d 312 (App. Div. 2001), a Supreme Court of New York, Appellate Division case, the court held that where a party is seeking to recover a loss not covered by property insurance, i.e., uninsured losses, "this uninsured segment of loss falls outside the ambit of 'risk insured against' for purposes of inclusion in the waiver of subrogation clause." Id. at 315. In that case, two tenants, the Gap and Rite-Aid, initiated an action to recover uninsured property losses resulting from a fire, which they alleged were not encompassed by the waiver of subrogation provision in their individual leases that precluded recovery for covered losses. Ibid. The court found such action cognizable since each lessee was entitled to recover that portion of the fire loss equal to their individual deductibles. Id. at 316. As the court stated:

While the parties to a commercial transaction are free to allocate the risk of liability to third parties through insurance and deployment of a waiver of subrogation clause, under the leases at issue the tenants were free to undertake the uninsured risk they did by assuming a substantial deductible. Having done so, there is no legal impediment to the tenants' seeking recourse for their uninsured loss from the landlord, assuming they can show liability therefor. [Ibid. (internal citations omitted).]

Unlike in Gap, Inc., the terms included in Carlson's contract with Designline set a specific deductible amount to be maintained on the property during the restaurant's construction and through the tender of final payment. The terms only specify that the $25,000 deductible be maintained through construction and up until final payment is made. There is no mention of any future mandatory obligation that Carlson maintain fire insurance or any level of deductible, although the contract does specify that a waiver of subrogation clause be included in all future insurance policies. That said, the difference between a requirement to carry property insurance of a specified amount, which is present in this case, and the absence of a similar requirement in Gap, Inc., does not remove from the realm of possibility that Carlson is entitled to recover the amount of its deductible. The bottom line principle still applies - deductibles are recoverable.

Similarly, in Stop & Shop Supermarket Co. v. ABCO Refrigeration Supply Corp., 842 A.2d 1194 (Conn. Super. Ct. 2003), a case which involved a waiver of subrogation provision in a construction contract, the Superior Court of Connecticut held that a deductible is not covered by a waiver of subrogation provision. Id. at 1200. In that case, a fire broke out during the construction of a superstore owned by Stop & Shop, causing extensive property damage and an interruption of business resulting in financial losses. Id. at 1195. Stop & Shop's insurer brought a subrogation action to recover the $6,382,682 it paid out directly to its insured and Stop & Shop brought a direct claim to recover the amount of its deductible, which was $250,000. Id. at 1195-96.

Although not involving a construction contract, the case of Federal Ins. Co. v. Honeywell, Inc., 663 N.Y.S.2d 247 (App. Div. 1997) is also helpful to our analysis. In that case, the Supreme Court of New York, Appellate Division, held that a waiver of subrogation provision did not serve as a bar to the recovery of a deductible not covered by the governing insurance policy. Id. at 248. This was true, despite the fact that the waiver of subrogation provision barred the recovery of insured losses. Ibid.

In Honeywell, a check cashing store was burglarized after its alarm system had been improperly installed, maintained and repaired by the alarm company. Ibid. Again, defendant argued that the claim was barred by the waiver of subrogation provision included in the terms of the parties' contract. Ibid. The court dismissed plaintiff's claim as to any damage covered by insurance, but found that it did not similarly bar the return of the $55,000 deductible not covered by the insurance policy. Ibid.

Here, Carlson acted as a self-insurer for the first $500,000 of their losses resulting from the kitchen fire at the TGI Friday's restaurant. This $500,000 was not covered by Carlson's insurance policy with Lexington. It was also not expressly included in the waiver of subrogation provision, which sought to bar Carlson from recovering insured losses against defendants. To the contrary, the waiver of subrogation is limited "to the extent covered by property insurance."

Therefore, it is clear that the judge was mistaken in ruling that the deductible was per se unrecoverable.

Looking at the terms of the contract, Paragraph 11.3.1.3 of the construction contract calls for Carlson to carry a property insurance policy with a maximum deductible of $25,000 through the construction period and up until final payment is made. Notwithstanding this provisional requirement, under 11.3.1:

Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance in the amount of the initial Contract Sum as well as subsequent modifications thereto for the entire Work at the site on a replacement cost. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing buy [sic] all persons and entities who are beneficiaries of such insurance, until final payment has been made . . . or until no person or entity other than the Owner has an insurable interest in the property . . ., whichever is earlier.

Additionally, Designline, as general contractor, was obligated under the contract to purchase and maintain insurance to guard against claims against itself or any of its subcontractors.

Carlson argues that the requirement to maintain a $25,000 deductible terminated simultaneously when the parties' mutual obligations regarding property insurance expired. Thus, the continuing obligation regarding property insurance terminated upon the receipt of final payment at the end of the construction period. As stated in 11.1.2 of the contract, Designline "shall . . . maintain[] [insurance] without interruption from [the] date of commencement of the Work until [the] date of final payment and termination of any coverage required to be maintained after final payment." Here, it is undisputed that final payment has been made by Carlson. Accordingly, Carlson argues that it was allowed to alter the deductible amount thereafter without notification or permission from Designline once it tendered final payment. Because this fire occurred many years after the completion of construction, Carlson contends that there is no basis to find that it was required to still carry a $25,000 deductible on the property.

As for Designline's argument that a waiver of subrogation should have been included in Carlson's insurance policy, this issue bears no relevance to any argument raised on appeal. The issue Carlson brings to this Court's attention is whether it has a cognizable claim to recover the uninsured deductible amount, not damages covered by property insurance. The finding by the judge that Carlson is barred from suing to recover any amount of monetary damages covered under its Lexington insurance policy is not being challenged and the enforceability of such provision is not at issue. With respect to Designline's alternative argument that the $25,000 deductible would continue after final payment was received, one must analyze the contractual language of the agreement.

It is well settled that contract language must be given its clear, rational meaning "in keeping with the express general purpose" which drove contract formation between the parties. Tessmar v. Grosner, 23 N.J. 193, 201 (1957). If a genuine ambiguity exists, such ambiguity will be weighed against the drafter. Botti v. CNA Ins. Co., 361 N.J. Super. 217, 225 (App. Div. 2003). With respect to a waiver of subrogation provision, there is a general move by all jurisdictions to enforce such clauses to the fullest extent possible. See Sch. Alliance Ins. Fund v. Fama Constr. Co., 353 N.J. Super. 131 (Law Div. 2001), aff'd, 353 N.J. Super. 1 (App. Div. 2002); Town of Silverton v. Phoenix Heat Source Sys., Inc., 948 P.2d 9 (Colo. App. 1997); Colonial Props. Realty Ltd. P'ship v. Lowder Constr. Co., Inc., 567 S.E.2d 389 (Ga. App. 2002).

Thus, the judge correctly ruled that the waiver of subrogation in the construction contract survives final payment. There is no ambiguity in the contract with respect to the waiver of subrogation provision. It is limited to the extent covered by property insurance. According to the plain terms of the contract, Carlson is barred from recovering insured property losses. The judge, however, misinterpreted the breadth of the waiver.

What is not so clear is whether Carlson agreed to maintain a $25,000 deductible on the restaurant in perpetuity after the construction was completed. The only provision addressing future responsibilities is found in 11.3.5., which requires all policies to have a waiver of subrogation only.

Using a plain language analysis of the construction contract yields a finding that paragraphs 11.3.1 and 11.3.1.3 should be read and interpreted together. Both of these paragraphs speak to Carlson's and Designline's respective responsibilities to maintain property insurance on the property for the duration of the construction period and through the tender of final payment.

With respect to the waiver of subrogation provision governing the issues in this case, paragraph 11.3.5 mandates that a waiver of subrogation provision is a necessary term to be included in all future property insurance policies taken out on this property post-construction. Yet, no language, in the form of mandatory or permissive directives, was drafted into the language of the contract obligating Carlson to maintain a certain level of deductible going forward. In paragraph 11.3.1.3, a specific deductible of $25,000 is mentioned, but this is only until final payment is made, which occurred before the fire.

The judge found that the $500,000 deductible was not recoverable, but he never completely addressed the issue, only making a side comment that it should be barred. Otherwise, the judge concentrated his analysis on whether the waiver of subrogation clause was enforceable to post-construction losses, answering in the affirmative and foreclosing Carlson's ability to recover insured losses.

Again, it is generally true that jurisdictions overwhelmingly agree that a waiver of subrogation provision, which allocates risks and costs among parties to a given contract, bars the recovery for insured losses. This construction promotes certainty as to the liability of the respective parties upon any loss. Where the contract is silent as to uninsured losses, including deductibles, courts have held that they are recoverable. We interpret the contract as not requiring insurance at the time of the fire, but if insurance were obtained, than there is a waiver of subrogation to the extent that losses were covered by property insurance. Therefore, Carlson may proceed to attempt to collect the $500,000 loss not covered by insurance.

Carlson also argues on appeal that the judge erred in finding that Restaurant Services can enjoy the protection of the waiver of subrogation provision in the construction contract, despite the fact that it was not a "subcontractor" and was a non-signatory to the contract. According to Paragraph 5.1.1, which defines the term "subcontractor" as used throughout the contract, "subcontractor" "is a person or entity who has a direct contract with [Designline] to perform a portion of the Work at the site."

Here, Restaurant Services' involvement with the construction of the restaurant was limited to its sale of several pieces of commercial kitchen equipment, including the broiler and broiler plate, to Carlson. Clearly, Restaurant Services is a contractor of Carlson and not a subcontractor of Designline. However, Article 6 of contract - "Construction by Owner or by Separate Contractors" provides that the owner can hire other contractors to work on the project. Paragraph 6.1.1 provides that the owner must operate under the same conditions as the contract at issue. Particularly, it provides that such contracts must be "identical or substantially similar to these including those portions related to insurance and waiver of subrogation."

Moreover, Paragraph 6.1.4 provides, "Owner shall be deemed to be subject to the same obligations and to have the same rights which apply to the Contractor under the Conditions of the Contract . . . ."

Here, it is undisputed that, Restaurant Services had a contract with Carlson. Thus, based on a separate contractual provision, Carlson was obligated to include similar subrogation and insurance terms in its agreement with Restaurant Services. It was the intent of the parties that the general contractor, and others covered by this contract, would not be dragged into related litigation by third-parties.

Therefore, we conclude that Restaurant Services is a third-party beneficiary and has the right to enforce the obligation of the owner in this case. This conclusion is buttressed by Paragraph 11.3.6, which states that "the Owner and Contractor waive all rights against . . . each other and any of their Subcontractors . . . ." Therefore, Carlson waived its subrogation rights against its own subcontractors.

Finally, Restaurant Services argues that Carlson's claim is barred by the applicable statute of limitations. We reject this argument, concluding that it is unpersuasive and irrelevant.

The summary judgment against Carlson and in favor of Designline and Restaurant Services is reversed and remanded to the Law Division, Camden County.

20090904

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