Bernotas v. Super Fresh Food Markets, Inc.

863 A.2d 478, 581 Pa. 12, 2004 Pa. LEXIS 3238

• Court: Supreme Court of Pennsylvania
• Decided: December 22, 2004
• Docket: 96 MAP 2003
• Status: Published

Opinions

OPINION

Justice EAKIN.

In 1992, Barbara Bernotas, a patron of the Super Fresh Food Market, sustained serious injuries when she fell into a hole in the floor at a construction area inside the store. The general contractor, Acciavatti Associates, hired subcontractor Goldsmith Associates to perform electrical work in accordance with the plans and specifications of the general contract, Contract MV-1219, between Acciavatti and Super Fresh’s parent company, A & P. Dated May 5, 1983, Contract MV-1219 covered all work commencing on that date until further notice at all A & P locations, whether owned or leased.

Bernotas sued Super Fresh for her injuries. The store filed a cross-claim joining Acciavatti and Goldsmith, claiming contractual entitlement to complete indemnification. In 1998, Bernotas settled for $200,000, with each defendant contributing one-third of the amount. Super Fresh then sought indemnification under the terms of Contract MV-1219, Article XII, which required “[t]he Contractor ... [to] assume entire responsibility and liability for any and all damage or injury of any kind ... caused by ... the execution of the work provided for in this Contract ...,” provided Super Fresh was not solely negligent. A bench trial was held in 2001, to determine whether Acciavatti was required to indemnify Super Fresh under Contract MV-1219, and whether Goldsmith was required to indemnify Acciavatti under the subcontract.

The trial court did not make a factual finding of the exact cause of the injury. Instead, it found Super Fresh was not solely negligent, as both Acciavatti and Goldsmith failed to provide a safe work area. Thus, Acciavatti’s obligation to indemnify Super Fresh under the general contract was triggered. Acciavatti was required to pay two-thirds of the damages (its own one-third as well as the one-third attributed to Super Fresh because of its contractual obligation to indemnify Super Fresh), while Goldsmith was required to pay the remaining one-third. Acciavatti appealed, claiming Goldsmith had agreed to indemnify Acciavatti pursuant to an incorporation clause in the subcontract, and was therefore responsible for the entire settlement.

The Superior Court reversed the trial court’s decision requiring Goldsmith to pay only one-third of the award, concluding Goldsmith was obligated to indemnify Acciavatti. Bernotas v. Super Fresh Food Markets, Inc. v. Goldsmith Assoc. and Acciavatti Assoc., 816 A.2d 225, 234 (Pa.Super.2002). The parties had agreed the indemnification provision in Article XII was sufficiently specific to require Super Fresh to be indemnified unless it was solely negligent. Accordingly, the only remaining dispute was whether the subcontract clause incorporating the terms of Contract MV-1219 required Goldsmith to indemnify Acciavatti for acts which were not solely the result of either Acciavatti’s or Super Fresh’s negligence.

The Superior Court decided this question affirmatively. It determined the subcontract, by incorporating the terms of Contract MV-1219, created a pass-through indemnification provision which transferred to Goldsmith the contractual obligations Acciavatti owed to Super Fresh. The subcontract included an incorporation clause noting the “[prime] Contract Documents form a part of this Subcontract, and are as fully a part of this Subcontract as if attached to this agreement and as if herein set forth at length.” Acciavatti’s Answer, Exhibit A. The Superior Court ruled this clause “created a conduit through which the obligations embodied in the prime contract flowed from that contract to the one between [Acciavatti] and Goldsmith to the extent that the obligations were within the ambit of the subcontract.” Bemotas, at 231. Acknowledging the absence of express “agree to be bound” language that usually signals an intent to bind subcontractors to the terms of the prime contract, the Superior Court also discussed additional paragraphs (Paragraphs 11 and 13) of the subcontract agreement which, it concluded, showed Goldsmith agreed to perform in accordance with the terms of the prime contract. Id., at 229-230. Paragraph 11 states “[Goldsmith] agrees to fully perform and to assume all obligations and liabilities of [Acciavatti] under the General Contract for the work, or as may be imposed [thereafter] by law, including but not limited to all warranties and guarantees.” Paragraph 13 contains the following provision:

[Goldsmith] hereby releases [Acciavatti] and [Super Fresh] from any and all claims ... for personal injury ... arising out of any matter occurring at location of the Work ... and further, [Goldsmith] agrees to indemnify and to hold harmless [Acciavatti] and [Super Fresh] ... from and against any claim, loss, damage, liability or expense ... occurring to any property or for personal injury ... as ... may result from or arise from the performance, lack of performance or improper performance of the Work whether such matter may arise or occur on the location of the Work....

Id. at 233 (citing Subcontract Agreement ¶ 13); Acciavatti’s Answer, Exhibit A.

The Superior Court also held Paragraph 11 of the subcontract incorporated all provisions of the prime contract, including assumption of liabilities for the work, and that Goldsmith therefore stepped into the shoes of Acciavatti and assumed the risk of all liability except when caused solely by Super Fresh. Id., at 231. The Superior Court interpreted Paragraph 13 of the subcontract, which “releases” both Acciavatti and Super Fresh from liability “arising out of any matter occurring at [the] location of the Work” and “indemnifies] and to hold[s] harmless [the Acciavatti contractor] and owner ... from and against any ... liability ... for personal injury ... from the performance, lack of performance, or improper performance of the Work ...,” to mean any incident occurring at the location of the work site would fall under the purview of this clause and trigger indemnification by Goldsmith. Id., at 233.

Accordingly, the court remanded the case to the trial court for entry of an order directing Goldsmith to pay the entire $200,000 judgment.

We granted review to decide whether the conduit or pass-through indemnification theory employed by the Superior Court is consistent with this Court’s holdings requiring negligence indemnification provisions to be expressly and unequivocally stated in a contract between two parties.

The pass-through theory is novel in Pennsylvania but has been examined in other jurisdictions. The Alaska Supreme Court has recognized the operation of a conduit clause in a subcontract agreement, holding that a delay damages provision passes through a prime contract to the subcontract. Indus. Indem. Co. v. Wick Constr. Co., 680 P.2d 1100, 1106 (Alaska 1984). The Alaska Court rejected the contractor’s argument that the conduit clause incorporated only the substantive aspects relating to work specifications and not the remedial provisions, because no support existed for the contention that obligations but not the rights and remedies passed through the conduit clause. Id. Similarly, in Sime Constr. Co. v. Washington Pub. Power Supply Sys., 28 Wash. App. 10, 621 P.2d 1299, 1302 (1980), the Washington Courts of Appeals rejected plaintiffs’ claim that the notice procedures of a delay damages provision were not incorporated by reference in the subcontract because the incorporation was intended only to define the scope and specifications of the work. Rather, the Court held the incorporation clause, which was general and unlimited, incorporated both the contract specifications and procedural provisions of the prime contract. Id., at 1303.

A clause requiring arbitration to settle disputes in a prime contract was also held to be incorporated by reference into a subcontract through a “flow down” clause, particularly because the disputes would always arise from “the work to be performed,” according to the language of the flow down clause. Turner Constr. Co. v. Midwest Curtainwalls, Inc., 187 Ill.App.3d 417, 135 Ill.Dec. 14, 543 N.E.2d 249, 250-52 (1989). Without referring to any conduit language, a New York court held a subcontractor was required to fulfill a work performance provision contained in the prime contract when the subcontract required the subcontractor to perform the work in accordance with the prime contract. J & J Structures, Inc. v. Callanan Indus., Inc., 215 A.D.2d 890, 626 N.Y.S.2d 891 (1995).

None of these cases, however, applied the pass-through theory to a clause indemnifying one party for acts of another party’s negligence and, as such, are distinguishable from the present case. Several courts have directly rejected the pass-through or implied indemnity theory in the context of indemnification for negligence clauses. The Supreme Court of California held that without specific and unambiguous language in the subcontract, a subcontractor was not obligated to indemnify the contractor against its own negligence, even when the subcontract provided the subcontractor was bound “in the same manner and to the same extent as [contractor] is bound to Owner under the General Contract” and the prime contract contained an indemnification from negligence provision regardless of who was responsible. Goldman v. Ecco-Phoenix Electric Corp., 62 Cal.2d 40, 41 Cal.Rptr. 73, 396 P.2d 377 (1964). The court required an express undertaking in the document to protect the indemnitee from its own negligence. Id., at 379. Applying Goldman, the Court of Appeals of Arizona rejected the argument that an indemnification clause in the prime contract required the subcontractor to indemnify the contractor for acts of the contractor’s negligence even when the prime contract was incorporated by reference in the subcontract. Allison Steel Manufacturing Co. v. Superior Court of Arizona, 22 Ariz.App. 76, 523 P.2d 803 (1974). The court expressed support for the rule that a contract for indemnity will not be construed to cover the contractor’s liability for its own negligence unless this intention is expressed in clear and unequivocal terms. Id., at 806. The court noted the general contractor drafted the agreement and the terms of the agreement were not arrived at by negotiations between the parties, and nothing prevented the contractor from including a specific provision in the subcontract. Id., at 807. Similarly, the prime contract in General Electric v. Hatzel & Buehler, Inc., 19 A.D.2d 40, 240 N.Y.S.2d 636 (1963), included an indemnification provision for losses for personal injuries resulting from performance of the work. Id., at 638. Despite finding the subcontract plainly indicated the subcontractor would comply with “all provisions, terms, specifications, and requirements” of the general contract, the court held the subcontractor did not undertake to assume the absolute liability imposed in the general contract because the indemnity clause in the subcontract was not broad enough to cover such liability. Id. The separate indemnification provision contained in the subcontract governed because it simply carved out a smaller portion of the large area of liability imposed by the prime contract. Id., at 638-39.

Various jurisdictions consider clauses providing indemnification from a subcontractor for negligence not caused by the subcontractor a violation of public policy. See Vey v. Port Authority of New York, 79 A.D.2d 920, 434 N.Y.S.2d 412, 414 (1981) (subcontract evidenced no intent by parties to be bound by indemnification arising out of separate contract between different parties, but only against claims arising out of work covered by subcontract); Ghilardi v. Natl. Riverside Co., 1995 WL 808924, 1995 Mass.Super. LEXIS 729 (1995) (indemnity provisions contained in construction contracts void when subcontractor is obligated to indemnify any party for injury not caused by the subcontractor); IU North Am. v. The Gage Co., 2002 WL 1277327 at *5, 2002 U.S. Dist. LEXIS 10275 at *14 (E.D.Pa.2002) (applying Pennsylvania law narrowly construing indemnity provisions to negligence and strict liability, no presumption indemnitor intended to assume contractual liability of indemnitee unless subcontract expressly stipulates).

It is well-settled in Pennsylvania that provisions to indemnify for another party’s negligence are to be narrowly construed, requiring a clear and unequivocal agreement before a party may transfer its liability to another party. Ruzzi v. Butler Petroleum Co., 527 Pa. 1, 588 A.2d 1, 7 (1991); Perry v. Payne, 217 Pa. 252, 66 A. 553 (1907). Accordingly, indemnification provisions are given effect only when clearly and explicitly stated in the contract between two parties. Greer v. City of Phila., et al., 568 Pa. 244, 795 A.2d 376, 380 (2002) (“[ujnless the language is clear and unambiguous ... we must opt for the interpretation that does not shoulder [subcontractor] with the fiscal responsibility for [contractor’s] and [owner’s] negligence.”). The Superior Court acknowledged the dearth of case law pertaining to its pass-through theory as applied to indemnification for negligent acts, but concluded pass-through provisions are an accepted means of transferring risk. However, the court did not cite cases recognizing pass-through indemnity for negligence via a general incorporation clause in a subcontract.

As the Third Circuit recently acknowledged, this Court has not addressed whether an indemnity provision in a subcontract extends to a contractor’s liability to indemnify a third party, where the obligation is not expressed in clear and unequivocal terms. Jacobs Constructors, Inc. v. NPS Energy Srvcs., Inc., 264 F.3d 365, 371 (3d Cir.2001). Applying substantive Pennsylvania law, the court reviewed the underlying policies of the Perry-Ruzzi rule and ultimately determined this Court would hold the Perry-R%izzi doctrine applies to indemnity claims for losses contractually assumed by the indemnitee. Id,, at 371-72. Citing Perry,1 the court noted, “[S]uch indemnification imposes an ‘unusual’ and ‘extraordinary’ obligation in the same manner as indemnification for one’s own negligence.” Id., at 372. Although the aforementioned authorities confirm pass-through clauses may be generally enforceable, as noted by the Third Circuit, upholding these provisions strictly in the case of indemnification clashes with our rule of law requiring indemnification language to be unequivocally stated in the contract.

The subcontract agreement between Acciavatti and Goldsmith does not clearly express the parties’ intentions regarding the issue of indemnification. The language in the subcontract (Paragraph 13) could be interpreted to mean Goldsmith would indemnify Acciavatti only in the event of negligence resulting from the performance of Goldsmith’s work. Goldsmith argues this provision specifically states it is not required to indemnify Acciavatti and/or Super Fresh for either’s negligent acts not arising from the performance of Goldsmith’s work. This interpretation is plausible when read in concert with the preceding language referring to a release of claims from any incidents occurring at the work site, which Goldsmith argues is distinct from its indemnification provision. Because the incident merely occurred at the work site, and was never found to have resulted solely from the performance of Goldsmith’s work, the indemnification provision is not triggered.

The subcontract also includes a clause incorporating the provisions of the general contract between Acciavatti and Super Fresh by reference. The general contract clearly states contractors will indemnify Super Fresh for any liability which is not solely the result of Super Fresh’s negligence. While the language of this contract is clear and unequivocal, allowing such indemnification to automatically pass through to the subcontract agreement through a standard incorporation clause, assigns more liability to the subcontractor than the subcontractor accepts via the subcontract alone. Furthermore, both the terms introduced by the incorporation clause and the terms of Paragraph 11 of the subcontract conflict with a plausible interpretation of Paragraph 13. The resultant ambiguity in the subcontract fails the rigidly respected specificity requirement for indemnification for negligence clauses.

We therefore hold, unless expressly stated, pass through indemnification clauses violate the long standing policy underlying the rule narrowly construing indemnification provisions. When the provision sought to be “passed through” involves indemnification for acts of another party’s negligence, the theory will not be applied, unless the contract language is clear and specific. Sound public policy requires an unequivocally stated intention to be included in the subcontract for this particular type of provision to pass through from the general contract. The general language of a standard incorporation clause cannot trump the specific language of the subcontract, when the former supports indemnification for negligent acts but the latter is ambiguous regarding the circumstances under which indemnification will occur.

The order of the Superior Court is reversed. Jurisdiction relinquished.

Justice SAYLOR files a dissenting opinion.

1 . "[A] contract of indemnity ... should not be construed to indemnify against the negligence of the indemnitee, unless it is so expressed in unequivocal terms. The liability on such indemnity is so hazardous, and the character of the indemnity so unusual and extraordinary, that there can be no presumption that the indemnitor intended to assume the responsibility unless the contract puts it beyond doubt by express stipulation.” Perry, at 557.