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City of Dillingham v. CH2M Hill Northwest, Inc. (4/29/94), 873 P 2d 1271
<![CDATA[
NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers
are requested to bring errors to the attention of the
Clerk of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501.
THE SUPREME COURT OF THE STATE OF ALASKA
CITY OF DILLINGHAM, an Alaska )
Municipal Corporation, ) Supreme Court No. S-5230
)
Petitioner, ) Superior Court No.
) 3AN-88-11488/89-2828 CI
v. )
) O P I N I O N
CH2M HILL NORTHWEST, INC., )
) [No. 4077 - May 6, 1994]
Respondent. )
______________________________)
Petition for Review from the Superior
Court of the State of Alaska, Third Judicial
District, Anchorage, Beverly W. Cutler,
Judge.
Appearances: Brian Carter Boyd and
Jeffrey S. Moeller, Hicks, Boyd, Chandler &
Falconer, Anchorage, for Petitioner. D.K.
"Kirby"Wright and William L. Hintze, Hintze,
Herrig & Wright, Seattle, Washington, for
Respondent. Bruce E. Davison, Davison &
Davison, Anchorage, and Jan T. Chilton and
Michael B. Murphy, Severson & Werson, San
Francisco, California, for Amici Curiae
American Consulting Engineers Council, ASFE:
The Association of Engineering Firms
Practicing in the Geosciences, California
Geotechnical Engineers Association, Hazardous
Waste Action Coalition, and National Society
of Professional Engineers. Michael C.
Geraghty, Staley, DeLisio, Cook & Sherry,
Inc., Anchorage, and William J. Bender and
Laura Kleisle, Skellenger Bender Mathias
Bender & Gould, Seattle, Washington, for
Amicus Curiae The Consulting Engineers
Council of Alaska.
Before: Moore, Chief Justice,
Rabinowitz, Matthews and Compton, Justices.
RABINOWITZ, Justice.
I. INTRODUCTION
This matter is before the court on a petition for
review filed by the City of Dillingham (City). At issue are the
concepts of limited liability and indemnification, and the
interpretation of AS 45.45.900.
II. FACTS AND PROCEEDINGS
In February 1981, the City solicited proposals from
engineering firms to prepare a U.S. Environmental Protection
Agency Facility Plan related to the City's sewage treatment
system. CH2M Hill Northwest, Inc. (CH2M Hill) submitted a
proposal and was selected by the City.
In October 1985, CH2M Hill prepared a proposed
Agreement for Engineering Services (Agreement) and submitted it
to the City for review. The Agreement contained the following
Limitation of Liability Clause (Clause):
That, the OWNER agrees to limit the
ENGINEER'S liability to the OWNER and to all
construction Contractors, Subcontractors,
material suppliers, and all others associated
with the PROJECT, due to the ENGINEER'S sole
negligent acts, errors, or omissions, such
that the total aggregate liability of the
ENGINEER to all those named shall not exceed
Fifty Thousand Dollars ($50,000) or the
ENGINEER'S total compensation for services
rendered on the portion(s) of the PROJECT
resulting in the negligent acts, errors, or
omissions, whichever is greater.
The City executed the Agreement on November 21, 1985. The City
did not obtain counsel for the contract negotiations.
After signing the Agreement with CH2M Hill, the City
awarded a contract for construction of the sewage treatment
facility to Neal & Company, Inc. (Neal). Alleging that during
construction it had discovered differing site conditions, Neal
subsequently commenced an action against the City for increased
costs. The City in turn filed a third-party complaint against
CH2M Hill for breach of contract, breach of duty of care, and
breach of fiduciary duty.
CH2M Hill moved for partial summary judgment against
the City based on the Clause. At this time none of the parties
had filed a claim for indemnification. The superior court
granted partial summary judgment for CH2M Hill on two of the five
issues raised in its motion.1 First, the court ruled that the
Clause applied to breaches of contract and breaches of fiduciary
duty. Second, the court held that AS 45.45.900 did not apply to
the Clause, and that the Clause was valid:
[W]hat we have here is not, even if it
is an indemnity agreement, an indemnity
agreement that indemnifies the promisee. We
have an indemnity agreement that indemnifies
the promisor.
The promisor is clearly the
engineering firm here who's promising to do
certain things for the City. The City is the
beneficiary or the promisee of the contract,
and 45.45.900 by its very language implies
[sic] not to those circumstances. It applies
clearly to the reverse circumstances and
obviously the public policy behind this
statute is exactly why it was worded as it
was worded.
The idea behind the statute is to
not allow owners, who are often governmental
entities, from inducing people to contract
with them to provide construction services
and then have to sign away their right to go
after the owner -- usually the government --
for negligence of that party. Obviously,
it's to protect the contractors, it's not to
protect the owners of the buildings or
projects that are being built.
We granted the City's petition for review to consider
four questions:
1. Does AS 45.45.900 ban indemnity agreements only
when a state or local government is the project owner and
indemnitee? 2. Should a standardized contractual
provision exculpating a party from its own "negligent acts,
errors or omissions"be broadly construed to apply to knowing
breaches of contract and breaches of fiduciary duty?
3. Does AS 45.45.900 apply to reasonable limitation of
liability clauses?
4. Does AS 45.45.900 apply only when the party
invoking a particular clause is seeking indemnity?
A. Does AS 45.45.900 Ban Indemnity Agreements Only
When a State or Local Government Is the Project Owner
and Indemnitee?2
Alaska Statute 45.45.900 states:
A provision, clause, covenant, or
agreement contained in, collateral to, or
affecting a construction contract that
purports to indemnify the promisee against
liability for damages for (1) death or bodily
injury to persons, (2) injury to property,
(3) design defects or (4) other loss, damage
or expense arising under (1), (2), or (3) of
this section from the sole negligence or
wilful misconduct of the promisee or the
promisee's agents, servants or independent
contractors who are directly responsible to
the promisee, is against public policy and is
void and unenforceable; however, this
provision does not affect the validity of an
insurance contract, workers' compensation, or
agreement issued by an insurer subject to the
provisions of AS 21, or a provision, clause,
covenant, or agreement of indemnification
respecting the handling, containment or
cleanup of oil or hazardous substances as
defined in AS 46.3
CH2M Hill has not argued, nor did the superior court
rule, that the statute applies only to governmental indemnitees.
The City's claim that "[the superior court determined] that the
ban applies only to governmental project owners as indemnitees"
appears to be based on a misinterpretation of the superior
court's ruling. Although the superior court speculated that the
legislature intended to protect contractors from being forced to
enter unconscionable contracts concerning projects owned or
operated by public sector owners, these comments were dicta.
Instead, it is apparent that the superior court based its
conclusion that the Clause was not within the scope of AS
45.45.900 on a mistaken assumption that CH2M Hill was the
promisor and the City was the promisee, and that therefore the
statute was inapplicable.4
There is no indication in the text of AS 45.45.900
itself that would indicate that the statute is intended to ban
only indemnification clauses that would benefit a public promisee
at the expense of a private promisor. The term "promisee"is not
qualified in any way. While there is no legislative history
discussing the purposes of Senate Conference Substitute Bill for
House Bill 105, which was adopted and codified as AS 45.45.900,
the legislative history of House Bill 105, a prior related
omnibus bill, indicates that the legislature's general goal was
to provide remedies for "all wronged persons."5
B. Should a Standardized Contractual Provision
Exculpating a Party from Its Own "Negligent Acts,
Errors or Omissions"Be Broadly Construed to Apply to
Knowing Breaches of Contract and Breaches of Fiduciary
Duty?
The superior court held:
[The Clause] clearly applies to both
what you might think of as horn book law
negligence, such as a driving accident,
failure to perceive a risk on the road and
getting involved in an accident thereby as
well as to breaches of the contract between
these two parties here, because the language
clearly was negligence, errors and omissions,
and thus would cover the engineer's
performance of his duties to [the City] under
the contract.
The City argues that the language of the Clause does
not cover causes of action other than negligence. The City notes
that in Kissick v. Schmierer, 816 P.2d 188 (Alaska 1991), this
court cited favorably to California case-law requiring that the
language of indemnity clauses be clear and explicit:
[T]o be effective, an agreement which
purports to release, indemnify or exculpate
the party who prepared it from liability for
that party's own negligence or tortious
conduct must be clear, explicit and
comprehensible in each of its essential
details. Such an agreement, read as a whole,
must clearly notify the prospective releasor
or indemnitor of the effect of signing the
agreement.
Id. at 191 (quoting Ferrell v. Southern Nev. Off-Road
Enthusiasts, Inc., 195 Cal. Rptr. 90, 95 (Cal. App. 1983))
(alteration in original).
The City notes that other jurisdictions similarly have
read release language narrowly. For example, the Supreme Court
of Arkansas held that while a similar clause that limited the
liability of an engineer for "professional negligent acts, errors
or omissions" was enforceable, it did not limit liability for
breaches of contract. W. William Graham, Inc. v. City of Cave
City, 709 S.W.2d 94, 95-96 (Ark. 1986).
Additionally, the City states that "CH2M Hill's clause
should also be construed in light of [a] general rule of
construction of this type of clause [that] [t]he more egregious
the conduct, the less likely the courts are to allow it to be
covered by indemnification or release language." The City cites
6A Arthur L. Corbin, Corbin on Contracts 1472, at 596-97
(1962), for the proposition that a release of liability for
negligence does not encompass a release of liability for
intentional wrongdoing. Since CH2M Hill's alleged knowing
breaches of contract and fiduciary duty are egregious, the City
argues, they should be similarly distinguished from simple
negligence, and accordingly found to be outside the scope of the
release.
In contrast, CH2M Hill argues that the contractual duty
of care as defined by the Agreement is the same as the duty of
care enunciated by this court in the context of third-party tort
actions. See Moloso v. State, 644 P.2d 205, 217 (Alaska 1982).
Accordingly, CH2M Hill concludes, any claims by the City that
CH2M Hill has breached its duty of care, whether sounding in
contract or in tort, are within the scope of the Clause. CH2M
Hill does not distinguish between "knowing"and innocent breaches
in its analysis.
We conclude that an exculpatory clause that limits
liability for a party's "negligent acts, errors, or omissions"
should be construed to limit liability for "negligent acts,
errors, or omissions" only. Since negligent acts, negligent
errors, or negligent omissions when committed in the context of
contract performance may be contract breaches, we conclude that
the superior court was correct in ruling that the clause applies
to breaches of contract and fiduciary duty, but only insofar as
the breaches are negligent.
Liability for "knowing,"or "bad faith"breaches can
never be limited. Corbin notes that a party may contract to
limit liability for damages resulting from breach of contract,
but adds that "such a provision is not effective in case he acts
fraudulently or in bad faith." 6A A. Corbin, supra, 1472, at
606.6
C. Does AS 45.45.900 Apply to Reasonable Limitation
of Liability Clauses?
The City contends that the scope of the statutory
prohibition on indemnification agreements encompasses limitation
of liability clauses such as the one in question. According to
the City, the legislature intended a broad reading of AS
45.45.900 to prohibit limitation of liability clauses.
CH2M Hill disagrees, contending that indemnity and
limitation of liability are not synonymous terms:
Each has a different purpose and is
operative under different facts. Indemnity
provides protection against third-party
claims, i.e. claims by strangers to the
contract. Limitations of liability allow
contracting parties to allocate risks, define
remedies, and limit liabilities between
themselves.
CH2M Hill cites a leading treatise for the proposition that
courts have generally upheld reasonable limitations of liability.
See 15 Samuel Williston & Walter H.E. Jaeger, Williston on
Contracts 1750A (3d ed. 1972).7
Relying in part on Kodiak Electric Ass'n v. DeLaval
Turbine, Inc., 694 P.2d 150 (Alaska 1984), CH2M Hill additionally
contends that Alaska case law restricts the operation of an
indemnity clause to the context of third-party claims. The
dispute in DeLaval Turbine arose from the failure of a rebuilt
electric generator, which the defendant had sold to the plaintiff
after obtaining repairs from a non-party firm. Id. at 152. The
plaintiff sought damages from the defendant under a contractual
indemnity clause, on the ground that the defendant had failed to
hold the plaintiff harmless against losses resulting from the
non-party's negligence. We rejected this claim because the
plaintiff was not seeking to recover damages that it had paid to
a third party. See id. at 154.8
However, our task here is not to construe the term
"indemnity" as courts would when adjudicating claims, but to
determine the meaning that the legislature intended when using
the term in AS 45.45.900. See generally 5 C. Allen Foster et
al., Construction and Design Law 36.4c.6c (1991) (discussing
statutes that prohibit indemnity agreements holding a party
harmless for its own negligence, and that thus depart from the
common-law rule allowing hold harmless agreements). The
objective of statutory construction is to give effect to the
intent of the legislature, with due regard for the meaning that
the statutory language conveys to others. Saunders Properties v.
Municipality of Anchorage, 846 P.2d 135, 138 n.4 (Alaska 1993).
Though we give unambiguous statutory language its ordinary and
common meaning, we have rejected the "plain meaning"rule as an
exclusionary rule, and we may look to legislative history as a
guide to construing a statute's words. North Slope Borough v.
Sohio Petroleum Corp., 585 P.2d 534, 540 & n.7 (Alaska 1978).
The plainer the meaning of the statute, the more persuasive any
legislative history to the contrary must be. Peninsula Mktg.
Ass'n v. State, 817 P.2d 917, 922 (Alaska 1991).
Early drafts of the proposed legislation indicate an
intent to prohibit not only indemnity clauses but also limitation
of liability clauses. These early drafts included a broad
statement that the purpose of the proposed chapter was, among
other things, to "promote the public policy that all wronged
persons should have a remedy for injury suffered by [sic] a
result of another person's negligence,"and to "void agreements
negating responsibility for a person's own negligence." In
addition, the legislature considered, and rejected, an amendment
that would have explicitly allowed limitation of liability
clauses as an exemption to the prohibition against
indemnification for liability resulting from the promisee's sole
negligence.9
CH2M Hill asserts that the value of the legislative
history is questionable, because early drafts of the provision
were both extremely broad and never enacted. The firm argues
that the final language of AS 45.45.900 limiting its scope to ban
certain indemnity clauses was quite clear, and accordingly there
was no reason to list exemptions for subjects that the statute
did not cover, such as limitation of liability. CH2M Hill also
relies on Markborough California, Inc. v. Superior Court, 277
Cal. Rptr. 919 (Cal. App. 1991), in which a California appellate
court distinguished "indemnity"from "limitation of liability,"
and determined that the California legislature intended to
broadly exclude limitation of liability clauses from a statutory
prohibition on indemnity clauses. See id. at 923-26.
We reject CH2M Hill's characterization of the Alaska
legislature's intent. The absence in AS 45.45.900 of an
exemption for limitation of liability clauses indicates that the
legislature did not intend to allow an exemption. See 2A Norman
J. Singer, Sutherland Statutory Construction 48.18 (5th ed.
1992). Furthermore, Markborough is not helpful, because there
the court construed a statutory provision that expressly
permitted limitation of liability clauses, rather than a general
prohibition on indemnity clauses with no express exemption.10 See
277 Cal. Rptr. at 922. In contrast, a Georgia appellate court,
construing a statutory bar on indemnity clauses with no
exemptions,11 concluded that a similar "limitation of liability"
clause was a void "indemnity"clause. See Bicknell v. Richard M.
Hearn Roofing & Remodeling, Inc., 318 S.E.2d 729, 731-32 (Ga.
App. 1984).
Similarly, we read the word "indemnify"as used in AS
45.45.900 to mean "exempt,"and thus construe AS 45.45.900 to
prohibit limitation of liability clauses. Absent legislative
action to the contrary, such an interpretation best fulfills the
legislature's express intent to prevent a party to a construction
contract from bargaining away liability for his or her own
negligent acts.12 Therefore, the limitation of liability clause
in the contract between CH2M Hill and the City is void under AS
45.45.900.
D. Does AS 45.45.900 Apply Only when the Party
Invoking the Particular Clause in Question Is Seeking
Indemnity?
The City argues that since a limitation of liability
clause and an indemnification clause are synonymous, and
therefore void under AS 45.45.900, the statute applies regardless
of whether or not indemnity is sought.
CH2M Hill contends that AS 45.45.900 does not apply to
these proceedings under the principle of DeLaval Turbine, 694
P.2d at 154, since the City is not seeking to recover money that
it has paid to a third party for damages.
We conclude that AS 45.45.900 applies to a clause that
is questioned under this statute regardless of whether
indemnification has been sought. The statute states that an
indemnification clause that limits liability for a promisee's
sole negligence "is void and unenforceable." Had the legislature
stated only that such a clause is "unenforceable," then the
statute would apply only when a party attempted to use the
clause, as opposed to interpreting it. Since the statute also
states that such a clause is void, we find the statute applicable
when presented in a hypothetical context such as this petition.
Accordingly, that portion of the Clause that addresses the
responsibility for damages of third parties is void.
III. CONCLUSION
The superior court's holding that AS 45.45.900 does not
apply to the Clause is REVERSED.
_______________________________
1 The other three issues are: whether the Clause is an
indemnity clause prohibited by public policy because CH2M Hill
owed a duty to the public at large; whether the Clause is void
because the contract between CH2M Hill and the City is "affected
with the public interest,"and whether the Clause is void because
it is unconscionable. The superior court deferred ruling on
these issues because the City had requested additional time to
conduct discovery.
2 The interpretation of AS 45.45.900 and related
questions of interpretation of the Clause present questions of
law, which this court reviews de novo. Guin v. Ha, 591 P.2d
1281, 1284 n.6 (Alaska 1979).
3 The language beginning with "or a provision"at the end
of this section was added in 1986. Ch. 59, 6, SLA 1986. The
effective date of the amended language was June 1, 1986. See id.
20.
4 As a general proposition, the superior court's
observation that "[t]he City is the beneficiary or the promisee
of the contract"is correct. With regard to the Clause, however,
the City was the promisor, as it was promising to limit CH2M
Hill's liability. As the City notes, CH2M Hill was the promisee,
or the beneficiary, of the Clause.
5 The legislative history of House Bill 105 states that
the purposes of the bill were to
(1) simplify and clarify the law
concerning the enforceability of hold
harmless agreements;
(2) promote equitable contractual
relationships between persons;
(3) facilitate the administration
and enforcement of the negligence laws of the
state;
(4) promote the public policy that
all wronged persons should have a remedy for
injury suffered as a result of another
person's negligence;
(5) void agreements negating
responsibility for a person's own negligence.
Our one prior interpretation of AS 45.45.900 couched
its holding in terms of the state as indemnitee and a private
contractor as indemnitor. Rogers & Babler, a Division of MAPCO
Alaska, Inc. v. State, 713 P.2d 795 (Alaska 1986). This holding
was a result of the facts of the case, rather than an expression
of any intent to interpret the statute as only applying in the
context of a public sector indemnitee.
In that case, we interpreted the relationship between
AS 45.45.900 and the State's Standard Specifications for Highway
Construction, which provided for indemnification of the state by
any contractor who undertook a state highway construction
project. We held that "AS 45.45.900 [should invalidate an
indemnification clause] only when it is determined, as between
the state and the contractors, that the state is solely
negligent." Id. at 798.
6 While Corbin does not discuss limits on liability for
bad faith breaches of fiduciary duty, we believe any such limits
would be barred under the same logic.
7 In its current form, AS 45.45.900 exempts
indemnification agreements "respecting the handling, containment,
or cleanup of oil or hazardous substances as defined in AS 46."
CH2M Hill argues that the exemption applies here, even if this
court finds limitation of liability to be synonymous with
indemnification.
We reject this argument. The referenced exemption was
made effective as of June 1, 1986, see ch. 59, 6, 20, SLA
1986, and the Agreement was executed in November of 1985. The
enforceability of contract provisions is to be determined by the
statutes in effect at the time the contract is executed. Stephan
& Sons, Inc. v. Municipality of Anchorage, 629 P.2d 71, 78 & n.19
(Alaska 1981).
8 Amici Curiae make a similar argument. The Consulting
Engineers of Alaska argue that under this court's holdings,
"[i]ndemnity involves the recovery of money paid to a third
party; limitation of liability merely involves the contractual
allocation of risk between two parties in privity to a
predetermined sum."
9 The proposed exemption stated:
Nothing in this chapter shall
prevent a party to a construction contract
and the owner or other party for whose
account the construction contract is being
performed, from agreeing with respect to the
allocation or limitation as between the
parties, of any liability for design defects.
10 CH2M Hill reads Markborough to mean that even absent
statutory "exclusionary language"for clauses limiting liability,
the relevant California legislation would not bar such clauses.
In particular, CH2M relies on the Markborough court's summary of
a legislature report on amendments to the California statutory
provision in 1980. The court discussed the report's concern that
one could construe the broad statutory definition of indemnity to
encompass limitation of liability clauses, even though such
clauses were not commonly considered to be indemnity provisions.
Markborough, 277 Cal. Rptr. at 923. The Markborough court also
reiterated that limitation of liability clauses are valid in
California under the common law. See id. at 925, 926.
We reject CH2M Hill's interpretation of Markborough.
In Markborough, the court construed a 1980 amendment of the
statutory exception, see id. at 923-24, which stated that the bar
on indemnity clauses would not prevent parties from "negotiating
and expressly agreeing"to limitations of liability. Cal. Civ.
Code 2782.5 (West 1993). The appellant in Markborough urged a
narrow construction of the statutory exception to require
"negotiation,"so that a limitation of liability clause would be
invalid unless the parties actually discussed the clause and the
allocation of risks that it would impose. See id. at 923, 925.
Construing the legislature's purpose for the express statutory
exception and California common law, the Markborough court
rejected such a narrow construction, upholding limitation of
liability clauses as long as "each party had an opportunity to
accept, reject or modify"them. Id. at 926.
The issues in Markborough differ from the question we
must resolve here. We must determine whether Alaska's statutory
prohibition of indemnity provisions contains an implied exception
for limitation of liability clauses, not whether the language of
an express exception mandates a narrow construction. CH2M Hill
makes no showing of express legislative intent to exclude
limitations of liability from the general bar on indemnity
clauses.
11 See Ga. Code Ann. 13-8-2(b) (Michie 1993)
(prohibiting provisions in construction contracts "purporting to
indemnify or hold harmless the promisee against liability for
damages . . . caused by or resulting from the sole negligence of
the promisee, his agents or employees, or indemnitee").
12 Furthermore, though we do not reach the issue here, we
observe that many courts allow a third-party recovery in tort for
economic losses resulting from a design professional's negligent
acts, despite the absence of contractual privity between the
third party and the professional. See, e.g., United States ex
rel. Los Angeles Testing Lab. v. Rogers & Rogers, 161 F. Supp.
132 (S.D. Cal. 1958); Donnelly Constr. Co. v.
Oberg/Hunt/Gilleland, 677 P.2d 1292, 1295-97 (Ariz. 1984); Waldor
Pump & Equip. Co. v. Orr-Schelen-Mayeron & Assocs., Inc., 386
N.W.2d 375 (Minn. App. 1986). But see Widett v. United States
Fidelity & Guar. Co., 815 F.2d 885 (2d Cir. 1987) (refusing to
find design professionals liable to subcontractors under New York
law, absent privity of contract); Floor Craft Floor Covering,
Inc. v. Parma Community Gen. Hosp. Ass'n, 560 N.E.2d 206 (Ohio
1990) (concluding that privity doctrine holds parties to their
contracts). See generally Frank D. Wagner, Annotation, Tort
Liability of Project Architect for Economic Damages Suffered by
Contractor, 65 A.L.R.3d 249 (1975). Were we to allow third
parties a tort action against a design professional for economic
losses, a judicially created exemption to AS 45.45.900 for
limitation of liability clauses conceivably could create an
inequitable situation, in which a design professional's liability
for negligence could depend merely upon a plaintiff's fortuitous
choice of defendants.
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