Board of Education, Union Free School District No. 3, Town of Brookhaven, Appellant, v. Valden Associates, Inc., et al., Respondents, et al., Defendants; Board of Education, Union Free School District No. 3, Town of Brookhaven, Appellant, v. Aldoro Electric Corp., Respondent, et al., Defendants
Court of Appeals of New York
46 N.Y.2d 653; 389 N.E.2d 798; 416 N.Y.S.2d 202; 1979 N.Y. LEXIS 1901
February 5, 1979, Argued
March 22, 1979, Decided
PRIOR HISTORY: Appeal, by permission of the Court of Appeals, from an order of the Appellate Division of the Supreme Court in the Second Judicial Department, entered December 19, 1977, which unanimously affirmed an order of the Supreme Court at Special Term (Leon D. Lazer, J.), entered in Suffolk County, granting defendants' motion for summary judgment and dismissing the complaint.
A construction contract required the owner to provide fire and other liability insurance upon the entire structure on which the work of the contract was to be done and provided that the owner, contractor and all subcontractors waived all rights against each other for damages caused by the perils covered by the insurance provided for, except such rights as they might have to the proceeds of insurance. The owner procured the required insurance, and during the course of the project a fire broke out, allegedly due to the negligence of the contractor or the subcontractors, causing damage to the building. The insurer paid the owner its damages pursuant to the policy, and an action was commenced against the contractor and subcontractors, in which the owner was the named plaintiff but the actual plaintiff in interest was the insurer as a subrogee.
The Court of Appeals affirmed the order of the Appellate Division, holding, in a Per Curiam opinion, that section 5-323 of the General Obligations Law did not prohibit the provision in the construction contract since there is a distinction between contractual provisions seeking to exempt a party from liability to those who have been injured or whose property has been damaged and provisions which simply require one of the parties to provide insurance for all of the parties, and there was no indication of overreaching or unconscionability.
Board of Educ. v Valden Assoc., 60 AD2d 617. Board of Educ. v Valden Assoc., 46 NY2d .
DISPOSITION: Order affirmed.
OVERVIEW: The contractors and the owner of a property entered into a construction contract which required the owner to provide insurance upon the entire structure on which the work of the contract was to be done and provided that all parties waived all rights against each other for damages caused by the perils covered by the insurance. After a claim was paid, the insurer brought an action against the contractors. The trial court granted the contractors' motion for summary judgment. The insurer challenged the contract clause as a violation of N.Y. Gen. Oblig. Law § 5-323. On review, the court found that insofar as damages for injuries were compensable under an insurance policy mandated by contract, the provision waiving all rights to recover for those same injuries other than from the proceeds of the insurance policy did not constitute a violation of § 5-323. The court drew a distinction between contractual provisions that sought to exempt a party from all liabilities and contractual provisions that simply required one of the parties to the contract to provide insurance for all of the parties. Such provisions did not violate § 5-323 or any other public policy.
OUTCOME: The court affirmed the judgment of the appellate court.
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Contracts -- Waiver of Subrogation Rights
Section 5-323 of the General Obligations Law, which provides that every agreement in connection with any contract affecting real property whereby a contractor exempts himself from liability for injuries caused by his negligence or negligence of his agents or employees as a result of work performed in connection with the construction of real property shall be deemed void as against public policy and unenforceable, does not prohibit a provision in a construction contract requiring the owner to provide certain types of liability insurance upon the structure on which the work of the contract is to be done and that the owner, contractor and subcontractor waive all rights against each other for damages, except such rights as they may have to the proceeds of the insurance, since there is a distinction between contractual provisions seeking to exempt a party from liability to those who have been injured or whose property has been damaged and provisions which simply require one of the parties to provide insurance for all of the parties, and absent any indication of overreaching or unconscionability such provisions violate neither section 5-323 nor any other public policy; accordingly, an insurer, as subrogee of an owner who insured real property pursuant to such a construction contract, may not recover damages paid pursuant to the policy from a contractor and subcontractors who allegedly negligently caused a fire to break out causing damage to the building.
COUNSEL: Milton B. Pfeffer for appellant. I. Section 5-323 of the General Obligations Law is applicable to construction contracts. II. The legislative history of section 5-323 of the General Obligations Law shows a strong legislative concern with safety. III. Defendants' contention that plaintiff waived its right to proceed against defendants is invalid, in light of section 5-323 of the General Obligations Law, which renders void and unenforceable any agreement whereby a contractor attempts to exculpate himself from liability to others arising from his negligence in the construction of real property. ( Cullen v Naples, 31 NY2d 818.) IV. Even if section 5-323 of the General Obligations Law did not exist, the exculpatory clause would be void because it does not explicitly include negligent conduct. ( Ciofalo v Vic Tanney Gyms, 10 NY2d 294; Van Dyke Prods. v Eastman Kodak Co., 12 NY2d 301.)
John F. Mulholland for Valden Associates, Inc., respondent. I. Contractual waiver clauses entered into by parties of equal bargaining strength dealing with one another at arm's length must be given effect according to its terms. ( Cenven, Inc. v Bethlehem Steel Corp., 51 AD2d 955, 41 NY2d 842; Hogeland v Sibley, Lindsay & Curr Co., 51 AD2d 866, 42 NY2d 153; Ciofalo v Vic Tanney Gyms, 10 NY2d 294; Rinaldi & Sons v Wells Fargo Alarm Serv ., 39 NY2d 191; Levine v Shell Oil Co., 28 NY2d 205; Phibbs v Ray's Chevrolet Corp., 45 AD2d 897; St. Vincent's Med. Center of Richmond v Vincent E. Iorio, Inc., 78 Misc 2d 968; Russell v New York Tel. Co., 57 Misc 2d 227; Bayview Gen. Hosp. v Associated Hosp. Serv. of N. Y., 45 Misc 2d 218.) II. Section 5-323 of the General Obligations Law does not bar the waiver provision contained in the contract between the parties. ( Kirshembaum v General Outdoor Adv. Co., 258 NY 489.)
Francis P. McGowan for Aldoro Electric Corp., respondent. I. Section 5-323 of the General Obligations Law is not applicable to construction contracts entered into by parties of equal bargaining power at arm's length where the public interest is not affected. ( St. Vincent's Med. Center of Richmond v Vincent E. Iorio, Inc., 78 Misc 2d 968; Rogers v Dorchester Assoc., 32 NY2d 553; Rankin v Shanker, 23 NY2d 111; People ex rel. Carollo v Brophy, 263 App Div 238, 294 NY 540; Broderick v Weinsier, 253 App Div 213, 278 NY 419; Matter of Cherkis v Impellitteri, 307 NY 132; Matter of New York Post Corp. v Leibowitz, 2 NY2d 677.) II. The subject waiver clause was entered into by the parties at arm's length, did not contract away liability and did not violate public policy. ( Ciofalo v Vic Tanney Gyms, 10 NY2d 294; B.V.D. Co. v Marine Midland Bank -- N. Y., 46 AD2d 51; Levine v Shell Oil Co., 28 NY2d 205; Brentano's, Inc. v Charter Mgt. Corp., 46 AD2d 861; 614 Third Ave. Corp. v Grand Iron Works, 44 AD2d 531.)
JUDGES: Chief Judge Cooke and Judges Jasen, Gabrielli, Jones, Wachtler and Fuchsberg concur in Per Curiam opinion.
OPINION BY: PER CURIAM
[*655] [**798] [***202] OPINION OF THE COURT
This appeal concerns the validity of certain provisions contained in a construction contract which required the owner to provide "fire, extended coverage, vandalism and malicious mischief insurance upon the entire structure on which the [*656] work of the Contract is to be done and upon the materials, in or adjacent thereto and intended for use thereon, to One Hundred Percent of the insurable value thereof." It also provided that "[the] Owner, Contractor, and all subcontractors [***203] waive all rights, each against the others, for damages caused by fire or other perils covered by insurance provided [**799] for under the terms of the Contract Documents, except such rights as they may have to the proceeds of insurance." The owner did make provision for the required insurance, and during the course of the project a fire broke out, allegedly due to the negligence of the contractor or the subcontractors, causing damage to the building. The insurer paid the owner its damages pursuant to the policy, and then this action was commenced against the contractor and subcontractors, in which the owner is the named plaintiff but the actual plaintiff in interest is the insurer as a subrogee.
Defendants argue that the contractual provisions quoted above constitute a defense to this action. Plaintiff contends, however, that so viewed, those contractual provisions are unenforceable pursuant to section 5-323 of the General Obligations Law, which provides as follows: HN1
"Every covenant, agreement or understanding in or in connection with or collateral to any contract or agreement affecting real property made or entered into, whereby or whereunder a contractor exempts himself from liability for injuries to person or property caused by or resulting from the negligence of such contractor, his agent, servants or employees, as a result of work performed or services rendered in connection with the construction, maintenance and repair of real property or its appurtenances, shall be deemed to be void as against public policy and wholly unenforceable." In response, defendants contend first that this section is applicable only to building maintenance contracts, and alternatively, that even if it is applicable to contracts such as this, the General Obligations Law section does not speak to the provisions involved in this dispute. As to defendant's first argument, although it may not be without some support in the legislative history of the section, such arguments are inappropriate in the face of the clear, explicit, and unambiguous language of the statute, speaking as it does of "any contract or agreement affecting real property". However, we agree that the section does not prohibit contractual provisions of the type involved in this litigation.
Insofar as damages for injuries are in fact compensable [*657] under an insurance policy mandated by contract, a provision waiving all rights to recover for those same injuries other than from the proceeds of the insurance policy does not constitute a violation of the statute. A distinction must be drawn between contractual provisions which seek to exempt a party from liability to persons who have been injured or whose property has been damaged and contractual provisions, such as those involved in this suit, which in effect simply require one of the parties to the contract to provide insurance for all of the parties. Absent any indication of overreaching or unconscionability, such provisions violate neither section 5-323 of the General Obligations Law nor any other public policy (see Hogeland v Sibley, Lindsay & Curr Co., 42 NY2d 153).
Accordingly, the order of the Appellate Division should be affirmed, with costs.