Bethlehem Steel Corp. v. G.C. Zarnas & Co.

498 A.2d 605, 304 Md. 183, 1985 Md. LEXIS 904

• Court: Court of Appeals of Maryland
• Decided: October 7, 1985
• Docket: 103, September Term, 1984
• Status: Published

Opinions

ELDRIDGE, Judge.

This case presents a conflict of laws question, namely whether a provision of a construction contract executed in Pennsylvania, whereby the promisor agreed to indemnify the promisee against liability for damages resulting from the sole negligence of the promisee, is so contrary to Maryland public policy that it is unenforceable in a Maryland Court.

On February 14, 1977, G.C. Zarnas and Co., Inc. and Bethlehem Steel Corporation entered into a contract in Bethlehem, Pennsylvania. Zarnas is a Maryland corporation with its principal place of business in Pennsylvania. Bethlehem is a Delaware corporation also having its principal place of business in Pennsylvania. Under the contract, Zarnas was to perform painting services at Bethlehem’s Sparrows Point, Maryland, plant during 1977, 1978 and 1979. The seventh paragraph of the contract, headed “RESPONSIBILITY AND INSURANCE,” provided in part as follows:

“The Contractor shall indemnify and save harmless each of the Bethlehem Companies from and against all loss or liability for or on account of any injury (including death) or damages received or sustained by the Contractor or any of its subcontractors or any employee, agent or invitee of the Contractor or any of its subcontractors by reason of any act or omission, whether negligent or otherwise, on the part of any of the Bethlehem Companies or any employee, agent or invitee thereof on the condition of the Site or other property of any of the Bethlehem Companies or otherwise. The Contractor shall further indemnify and save harmless each of the Bethlehem Companies from and against all loss or liability for or on account of any injury (including death) or damages received or sustained by any person or persons by reason of any act or neglect on the part of the Contractor or any of its subcontractors or any employee, agent or invitee of the Contractor or any of its subcontractors, including any breach or alleged breach of any statutory duty which is to be performed by the Contractor hereunder but which is or may be the duty of any of the Bethlehem Companies under applicable provisions of law. For the purpose of this Agreement, the term ‘Bethlehem Companies’ shall include Bethlehem Steel Corporation, a Delaware corporation, its successors and assigns, and any and all companies and corporations directly or indirectly subsidiary to said Bethlehem Steel Corporation and the successors and assigns of any of them.”

On November 5, 1978, George Karavas, a Zarnas employee, was performing services under the contract at the Sparrows Point plant. He was injured when he came in contact with high voltage electricity at the plant. Karavas subsequently filed a negligence action against Bethlehem in the United States District Court for the District of Maryland. While this suit was pending, Bethlehem instituted the present declaratory judgment action against Zarnas in the Circuit Court for Baltimore County.¹ Bethlehem sought a declaration of rights under the indemnity provision of the contract, contending that under Maryland choice of law rules the validity of the terms of the contract should be determined by Pennsylvania law. Bethlehem further argued that the indemnity provision was valid under the law of Pennsylvania. In response, Zarnas contended that the indemnity provision in the contract was unenforceable because it provided for indemnification for Bethlehem’s sole negligence. Zarnas argued that this State’s public policy required the application of Maryland law, making the provision void and unenforceable.

The circuit court concluded that the agreement, insofar as it required Zarnas to indemnify Bethlehem for Bethlehem’s sole negligence, is against Maryland’s “strong public policy” and, therefore, is not enforceable. The court relied upon Maryland Code (1974, 1984 Repl.Vol.), § 5-305 of the Courts and Judicial Proceedings Article, which provides as follows:

“A covenant, promise, agreement or understanding in, or in connection with or collateral to, a contract or agreement relating to the construction, alteration, repair, or maintenance of a building, structure, appurtenance or appliance, including moving, demolition and excavating connected with it, purporting to indemnify the promisee against liability for damages arising out of bodily injury to any person or damage to property caused by or resulting from the sole negligence of the promisee or indemnity, his agents or employees, is against public policy and is void and unenforceable. This section does not affect the validity of any insurance contract, workmen’s compensation, or any other agreement issued by an insurer.” (Emphasis added.)

The circuit court determined, however, that Maryland public policy did not prohibit agreements providing for indemnification for a claim arising out of the concurrent negligence of Bethlehem and Zarnas or the sole negligence of Zarnas. Furthermore, the court held that the indemnification clause covered the concurrent negligence of the parties as well as the sole negligence of either party. Thus, according to the court, if Bethlehem established that Zarnas was either concurrently or solely negligent in connection with the injury to Karavas, Bethlehem could recover from Zarnas under the indemnification provision of the contract.

Both parties appealed to the Court of Special Appeals. Prior to argument in the intermediate appellate court, the parties filed in this Court a joint petition for a writ of certiorari which we granted. In its appeal, Bethlehem challenges the trial court’s decision that Maryland public policy renders unenforceable the provision indemnifying Bethlehem against its sole negligence. Zarnas, in its cross-appeal, disagrees with the trial court’s decision that Bethlehem would be entitled to indemnification if Bethlehem and Zarnas were concurrently negligent.

(1)

In deciding questions of the validity and construction of contracts, a Maryland court ordinarily looks to the law of the place of making of the contract (lex loci contractus). Traylor v. Grafton, 273 Md. 649, 660, 332 A.2d 651 (1975), and cases there cited. The contract before us was made in Pennsylvania, and, under Pennsylvania case law, the indemnification clause in question is valid and enforceable. See Westinghouse Electric Co. v. Murphy, Inc., 425 Pa. 166, 173 note 5, 228 A.2d 656 (1967).

The lex loci contractus principle will not be applied, however, in some circumstances. Long ago, in Trasher v. Everhart, 3 G. & J. 234, 244 (1831), our predecessors stated:

“It is a universal principle, governing the judicial tribunals of all civilized nations, ... that the lex loci contractus controls the nature, construction, and validity of the contract. Courts will always look to the lex loci, to give construction to an instrument, and will impart to it validity, according to those laws, unless it would be dangerous, against public policy, or of immoral tendency to enforce it here.” (Emphasis added.)

The conflict of laws rule, that lex loci contractus does not apply to a contract provision which is against Maryland public policy, has been consistently recognized by this Court. See, e.g., Traylor v. Grafton, supra, 273 Md. at 660, 332 A.2d 651; Henderson v. Henderson, 199 Md. 449, 458-459, 87 A.2d 403 (1952); Credit Co. v. Marks, 164 Md. 130, 141-146, 163 A. 810 (1933); Pleasanton v. Johnson, 91 Md. 673, 675, 47 A. 1025 (1900); Moore v. Title and Trust Co., 82 Md. 288, 290, 33 A. 641 (1896); Baltimore and Ohio Rail Road Company, et al. v. Glenn, et al., 28 Md. 287, 321-322 (1868); De Sobry v. De Laistre, 2 H. & J. 191, 228-230 (1806).

Bethlehem argues, however, that the lex loci contractus rule should be deemed inapplicable on public policy grounds “only when the application of that [foreign] law violates a strong public policy of this State.” (Brief, p. 8.) Bethlehem points out “that a mere difference between the policies of the jurisdictions involved would not justify a refusal to follow the [foreign] ... law,” as otherwise “[t]he public policy exception to choice of law principles would thus swallow the choice of law analysis____” (Id. at pp. 13, 17.) This Court’s opinions which Bethlehem relies upon are Texaco v. Vanden Bosche, 242 Md. 334, 340, 219 A.2d 80 (1966), and Harford Mutual v. Bruchey, 248 Md. 669, 674, 238 A.2d 115 (1968).

We fully agree that merely because Maryland law is dissimilar to the law of another jurisdiction does not render the latter contrary to Maryland public policy and thus unenforceable in our courts. Rather, for another state’s law to be unenforceable, there must be “a strong public policy against its enforcement in Maryland,” Texaco v. Vanden Bosche, supra, 242 Md. at 340-341, 219 A.2d 80, or “a public policy sufficient to require the application of law other than the law of the place of the [contract],” Harford Mutual v. Bruchey, supra, 248 Md. at 676, 238 A.2d 115. In our view, however, the circuit court correctly held that Maryland public policy is sufficiently strong to preclude an application of Pennsylvania law under the circumstances of this case.

This is not a situation where Maryland law is simply different from the law of another jurisdiction. Here, the General Assembly of Maryland has specifically addressed clauses in construction contracts providing for indemnity against the results of one’s sole negligence, and has unequivocally told the Maryland judiciary that such a clause “is void and unenforceable.” § 5-305 of the Courts and Judicial Proceedings Article. Moreover, in the same sentence of the statute, the General Assembly expressly stated that such indemnity provision “is against public policy.” ² Unless there is a contrary indication elsewhere, and absent constitutional considerations, the General Assembly’s explicit determination of public policy is sufficient in a case like this to override the lex loci contractus principle.³

Our conclusion, that § 5-305 of the Courts and Judicial Proceedings Article reflects a public policy sufficient to override the application of Pennsylvania law under the circumstances of this case, is entirely consistent with Texaco v. Vanden Bosche, supra, 242 Md. 334, 219 A.2d 80, and Harford Mutual v. Bruchey, supra, 248 Md. 669, 238 A.2d 115, upon which Bethlehem relies. Both Texaco and Harford Mutual were suits in Maryland based on alleged wrongs occurring in Virginia. An issue in both cases concerned the enforcement of Virginia statutes. No Maryland statutes were involved. In each case, the Court took the position that there was no Maryland public policy sufficiently strong to prevent the application of the Virginia statutes.

In the present case, however, the parties contracted in Pennsylvania to do something which Pennsylvania common law merely tolerates.⁴ No Pennsylvania statute expressly creates a right of the parties to so contract.⁵ On the other hand, a Maryland statute specifically forbids, on public policy grounds, the enforcement of a contractual agreement such as that involved here. Under these circumstances, this Court’s opinions in Texaco and Harford Mutual do not require the application of Pennsylvania law.

More pertinent to this case is Credit Co. v. Marks, supra, 164 Md. 130, 163 A. 810. Marks involved a priority dispute over an automobile, between the assignee of the seller’s interest under a New York conditional sale contract and a garageman claiming a lien under a Maryland statute for repairs made to the vehicle in Maryland after it had been conditionally sold. Although the Court initially held that the plaintiff had failed to prove that New York law gave him priority as a conditional seller over the garageman, the court alternatively resolved the choice of law issue “[i]n the event the statutory law of New York had been shown to be different from the statutory law of Maryland.” 164 Md. at 143, 163 A. 810. The Court observed (id. at 141-142, 163 A. 810):

“In a contract of conditional sale, the law of where it was made and where it is to be performed, as a rule, governs its construction and operation in all states, but the validity of the contract will not be sustained in another state should it contravene the settled policy of the foreign state. In the case at bar this rule would protect and enforce the rights and interests of the seller or his assignee while the subject-matter of the contract was in transit within this state, in the possession of-its buyer, a nonresident of the State of Maryland, provided the giving effect to the laws of the foreign state are not in contravention of the settled law or policy of this state.” (Emphasis added.)

This Court then stated that the Maryland statute “was the expression of a public policy.” Id. at 143, 163 A. 810. The Marks opinion took the position that, if the New York statute had given priority to the plaintiff, the Maryland statute would nevertheless have prevailed. The Court said that such result “is not violative of established principles of comity, but a refusal to abrogate a statute enacted in the formulation and declaration of the settled policy of this sovereignty.” Id. at 145, 163 A. 810. The Court concluded its opinion as follows (id. at 146, 163 A. 810):

“As is said in Cooley, Const. Lim. (8th Ed.), vol. 1, pp. 250, 251: ‘The extent to which comity will be extended is very much a matter of judicial policy to be determined within reasonable limitations by each State for itself. In the making of contracts, the local law enters into and forms a part of the obligation; and if the contract is valid in the State where it is made, any other State will give remedies for its enforcement, unless, according to the standard of such latter State, it is bad for immorality, or is opposed in its provisions to some accepted principle of public policy, or unless its enforcement would be prejudicial to the State or its people, or would violate its constitution or statutes.’ Pleasanton v. Johnson, 91 Md. 673, 675-677, 47 A. 1025; Balto. & O.R. Co. v. Glenn, 28 Md. 287, 322.” Id. at 146, 163 A. 810.

Applying the teaching of Marks to the case at bar compels the conclusion that Maryland public policy is sufficient to override the lex loci rule here.

This case is a declaratory judgment action created by Maryland law, involving a tort cause of action under Maryland law. The specific issue concerns a contractually created defense, not arising under or governed by any Pennsylvania statute, which the Maryland General Assembly has barred on express public policy grounds. Under these circumstances, Maryland conflict of laws principles require the application of § 5-305 of the Courts and Judicial Proceedings Article insofar as the indemnity clause provided that Bethlehem would be indemnified for damages resulting from its sole negligence.

(2)

As previously mentioned, the trial court also held that the parties, in the indemnity provision, intended that Bethlehem would be indemnified for damages resulting from the concurrent negligence of Bethlehem and Zarnas or the sole negligence of Zarnas. The court further held that an agreement providing for indemnification of Bethlehem, if it were concurrently negligent, was not covered by § 5-305 of the Courts and Judicial Proceedings Article and was not otherwise contrary to Maryland public policy.⁶

On appeal, Zarnas does not challenge the trial court’s holding that an agreement to indemnify a party for damages resulting from its concurrent negligence is not violative of § 5-305 or of Maryland public policy. Furthermore, Zarnas does not dispute the trial court’s conclusion that the language of the first sentence of the indemnity provision encompasses Bethlehem’s concurrent negligence as well as its sole negligence.⁷ Therefore we need not, and do not, express any opinion on these issues.

What Zarnas argues, however, is that the trial court improperly relied upon the first sentence of the indemnity clause in determining the parties’ intent with regard to concurrent negligence. Zarnas maintains that, because the first sentence of the clause provides for indemnification of Bethlehem if Bethlehem were solely negligent, and because § 5-305 of the Courts and Judicial Proceedings Article states that such a clause is “void,” the statute has the effect of “excising the illegal provision as though it never existed.” (Brief, p. 6.) Thus, according to Zarnas, “there should have been no further consideration of the provision by the Court” in determining the intent of the parties with respect to indemnification in a concurrent negligence situation {ibid.). Zarnas concludes that, absent the first sentence, there is no “unequivocal” language in the contract providing for indemnification for Bethlehem from claims attributable to its concurrent negligence. Citing Perry v. Payne, 217 Pa. 252, 66 A. 553 (1907), and Crockett v. Crothers, 264 Md. 222, 285 A.2d 612 (1972), Zarnas argues that, under both Pennsylvania and Maryland law, such unequivocal language is necessary for contractual indemnification of a party when that party is concurrently negligent.

There are, perhaps, several answers to Zarnas’s argument. It is sufficient for present purposes, however, to point out that Zarnas misconceives the effect of § 5-305 of the Courts and Judicial Proceedings Article. The statute does not purport to void or excise an entire contract provision. Rather, it renders void and unenforceable a “covenant, promise, agreement or understanding” which purports to indemnify the promisee against liability for damages caused by the promisee’s sole negligence. It is the agreement to this effect, and not the entire provision of the contract, which the statute invalidates. Consequently, if a particular contract provision or sentence can properly be construed as reflecting two agreements, one providing for indemnity if the promisee is solely negligent and one providing for indemnity if the promisee and promisor are concurrently negligent, only the former agreement is voided by the statute. In other words, under the circuit court’s unchallenged construction of § 5-305, the statute renders unenforceable a contract provision only insofar as it embodies an agreement providing for indemnity to the promisee when the promisee is solely negligent. To the extent that the same contract provision reflects the parties’ intent concerning concurrent negligence, the statute is inapplicable. Cf., Mountain Fuel Supply Co. v. Emerson, 578 P.2d 1351, 1356 (Wyo.1978).

JUDGMENT OF THE CIRCUIT COURT FOR BALTIMORE COUNTY AFFIRMED. COSTS TO BE EQUALLY DIVIDED.

RODOWSKY, J., dissents in which MURPHY, C.J., concurs.

1 . Bethlehem subsequently settled the suit with Karavas and, after doing so, amended its declaratory judgment action against Zarnas, seeking costs and expenses of the settlement. The trial court dismissed without prejudice this part of Bethlehem’s suit, and the dismissal is not challenged on appeal.

2 . As this Court noted in Jones v. Malinowski, 299 Md. 257, 273 n. 4, 473 A.2d 429 (1984), "[d]eclaration of the public policy of the State is normally the function of the legislative branch of government; in discerning that policy, courts consider, as a primary source, statutory ... provisions.”

3 . But cf. Jarvis v. Ashland Oil, Inc., 17 Ohio St.3d 189, 478 N.E.2d 786 (1985), involving somewhat different circumstances from those in the instant case but similar Ohio statutory language. Also, in that case, the contracting parties had agreed that the law of Kentucky should control, and thus no issue of lex loci contractus was presented. The Supreme Court of Ohio stated in Jarvis that the indemnity provision was "repugnant to and in violation of the public policy of this state" but, nevertheless, "the law of Ohio will only be applied when it can be shown that this state has a materially greater interest than the chosen state in the determination of the particular issue.” 478 N.E.2d at 789.

4 . See Westinghouse Electric Co. v. Murphy, Inc., 425 Pa. 166, 173 n. 5, 228 A.2d 656 (1967) ("A contract indemnifying one against his own negligence is not necessarily against public policy .... ”).

5 . That Pennsylvania has no strong interest in having the contract provision enforced here is suggested by the fact that, had suit on the indemnity agreement been brought in Pennsylvania, the Pennsylvania court would likely have decided the issue according to Maryland law. See Knauer v. Knauer, 323 Pa.Super. 206, 470 A.2d 553 (1983) (applying significant contacts analysis to choice of law issue in assumpsit). Zarnas is a Maryland corporation. The contract involved was to be performed entirely in Maryland. The injury occurred in Maryland at Bethlehem Steel’s Sparrows Point, Maryland, plant. In these circumstances, it would be ironic if, in balancing Maryland public policy against the lex loci rule, we were to hold that principles of comity require us to apply Pennsylvania law and ignore that state's conflict of law principles. See H. Goodrich and E. Scoles, Conflict of Laws § 10, at 11-14 (4th ed. 1964); E. Scoles and P. Hay, Conflict of Laws §§ 3.13 and 3.14, at 67-72 (1982); R. Weintraub, Commentary on the Conflict of Laws, § 7.4F, at 381-382 (2d ed. 1980).

6 . See, in this connection, Mason v. Callas Contractors, Inc., 494 F.Supp. 782, 785 (D.Md.1980).

7 . The first sentence reads as follows:

"The Contractor shall indemnify and save harmless each of the Bethlehem Companies from and against all loss or liability for or on account of any injury (including death) or damages received or sustained by the Contractor or any of its subcontractors or any employee, agent or invitee of the Contractor or any of its subcontractors by reason of any act or omission, whether negligent or otherwise, on the part of any of the Bethlehem Companies or any employee, agent or invitee thereof on the condition of the Site or other property of any of the Bethlehem Companies or otherwise.”