P.J. SMITH ELECTRICAL CONTRACTORS, INC., Plaintiff–Respondent, v. NORTH PLAINFIELD BOARD OF EDUCATION, Defendant–Appellant,
NORTH PLAINFIELD BOARD OF EDUCATION, Defendant–Appellant, v. AMERICAN MOTORISTS INSURANCE COMPANY, Third–Party Defendant.
DOCKET NO. A–1853–11T1
-- September 25, 2013
Robert C. Epstein argued the cause for appellant (Greenberg Traurig, L.L.P., attorneys; Mr. Epstein, on the brief).Mark L. Fleder argued the cause for respondent (Connell Foley, L.L.P., attorneys; Thomas J. O'Leary, on the brief).John F. Casey argued the cause for third-party defendant (Wolff & Samson, P.C., attorneys; Mr. Casey and Darren Grzyb, on the brief).
Defendant, North Plainfield Board of Education (the Board), undertook a $32.5 million project to renovate and expand five of its schools (the project). In lieu of hiring a general contractor, the Board elected to solicit bids and award prime contracts for each major trade; it also hired Vitetta Group, Inc. (Vitetta) as project architect and Bovis Lend Lease, Inc. (Bovis) as construction manager.
In June 2001, the Board awarded plaintiff, P.J. Smith Electrical Contractors, Inc. (Smith), a $3.1 million contract to complete the electrical work on the project. The Board also awarded D & D Associates, Inc. (D & D) three separate contracts to complete the construction work. American Motorists Insurance Company (AMIC) posted performance and payment bonds for each of D & D's contracts.
All of the contracts were governed by a project manual, a set of general conditions and project specifications. The manual established milestone events and dates for the project, and stated those dates “shall be part of the construction schedule.” The manual also provided:
[D & D] has the responsibility for being the supervisor, manager, overseer, coordinator and expediter of all of the Contractors and of the total construction process and all of its parts․
All other contractors shall rely upon the organization, management, skill, cooperation and efficiency of [D & D] to supervise, direct, control and manage [the project] ․ so as to deliver the intended project conforming to the Contract Documents and within the scheduled time.
The project was to be completed by September 2002. Due to numerous delays, however, the project required thirty-six months to complete, nearly two years longer than originally planned.
Alleging various deficiencies, the Board declared D & D in default on October 19, 2001. Based on D & D's continued assurances that it would improve its performance, the default letter was withdrawn. Spurred on by subsequent declarations of default by the Board, D & D maintained a pattern of sporadic progress through June 2002. D & D's failure to finalize a project schedule adversely impacted the planning and staging of the various prime contractors.
On January 17, 2003, D & D attributed its performance problems to difficulties with its subcontractors. In February, both Vitetta and Bovis recommended that the Board terminate D & D's contract at one of the schools, which the Board formally did on March 4, 2003. D & D subsequently stopped working at all the school sites, and the Board terminated D & D's contract on July 23, 2003. Shortly thereafter, D & D filed for bankruptcy.
On May 15, 2003, and May 19, 2004, the Board entered into two takeover agreements with AMIC (the takeover agreements). Pursuant thereto, and per the terms contained in the bonds, AMIC agreed to assume the obligations and liabilities of D & D.
The project documents included a claim resolution process, which, in general, required the various parties to submit their disputes to Vitetta for resolution. Between April 2002 and January 2003, Smith submitted several claims seeking increased compensation and extensions of time to complete its work. The Board urged Vitetta to delay consideration of Smith's claims while the situation remained fluid. Ultimately, on November 23, 2004, Vitetta rejected all of Smith's claims.
In January 2005, Smith filed a three-count complaint against the Board, asserting that the project's delays caused it to incur $800,000 in costs and expenses. In count one, Smith alleged the Board breached its contractual obligation by failing to enforce the agreements it had with D & D and by actively interfering with Smith's ability to perform. In count two, Smith alleged that the Board breached the implied covenant of good faith and fair dealing. Lastly, in count three, Smith sought recovery in quantum meruit.
The Board filed an answer and counterclaim seeking to dismiss the complaint on the ground that the claims had already been rejected in arbitration. The Board also sent a letter to Vitetta, with a copy to counsel for AMIC, indicating its intention to seek indemnification from AMIC for legal fees incurred in connection with plaintiff's claims. The Board subsequently filed a third-party complaint seeking indemnification from D & D and AMIC.1
AMIC filed a separate suit against the Board alleging breach of the takeover agreements (the AMIC action). The Board answered and filed a counterclaim, alleging, among other things, that AMIC had breached its duty to indemnify the Board.2
A series of motions and cross-motions for summary judgment ensued. We discuss the orders that resulted in the context of the legal issues now raised on appeal. It suffices to say for the moment that the Board's third-party complaint was dismissed, its counterclaim in the AMIC action was dismissed and its motion for summary judgment against Smith was denied. The case proceeded to a non-jury trial.
In a comprehensive written opinion that followed, the judge dismissed Smith's claims and denied the Board's counterclaims and request for attorneys' fees. The judge found the Board was free from fault. He concluded “the clear evidence establishe[d] that D & D's poor performance ․ [was] the root cause for the absence of an approved baseline” for completion of the project, thereby precipitating the delays on which Smith's claims were based.
The judge also denied the Board's claim that Smith had violated a covenant not to sue contained in its contract with the Board. In this regard, the judge concluded that the Board never asserted a counterclaim for breach of contract in its pleadings.
The Board moved pursuant to Rule 4:50 to vacate the pre-trial order that dismissed its third-party complaint against AMIC. It also sought partial reconsideration of an order entered in the AMIC action that had dismissed its counterclaims for defense costs. The trial judge denied both applications, and on December 16, 2011, he entered an order of final judgment. This appeal followed.
The Board argues that the Law Division erred in failing to enforce AMIC's obligation to defend and indemnify the Board against Smith's claims. The Board asserted this argument on multiple occasions, which we need not explicate in detail because, at each point, the issues presented were purely legal in nature. As such we conduct our review de novo. See Sipko v. Koger, 214 N.J. 364, 379 (2013) (“The trial court's legal determinations ․ are reviewed de novo.”) (citing Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).
The Board first contends that it was entitled to defense and indemnification from AMIC under provisions of its contract with D & D, which AMIC assumed pursuant to the takeover agreements. Article 3.18.1 of the contract provided:
To the fullest extent permitted by law, [D & D] shall indemnify and hold harmless the [Board] ․ from and against claims, damages, losses and expenses, including but not limited to attorneys' fees, arising out of or resulting from performance of the Work, provided that such claim, damage loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property ․, but only to the extent caused in whole or in part by negligent acts or omissions of [D & D] ․, regardless of whether or not such claim, damage, loss or expense is caused in part by [the Board]․
Article 3.18.4 provided:
[D & D's] indemnity obligations ․ shall also specifically include, without limitation, all fines, penalties, damages, liability, costs, expenses (including without limitation reasonable attorneys' fees) and punitive damages (if any) arising out of, or in connection with, any (i) ․ (ii) means, methods, procedures, techniques, or sequences of execution or performance of the Work ․
[ (Emphasis added).]
Lastly, Article 3.18.5 provided:
[D & D] shall indemnify and hold harmless the [Board] ․ from and against any costs and expenses (including reasonable attorneys' fees) incurred by [the Board] ․ in enforcing any of [D & D's] defense, indemnity and hold-harmless obligations under this Contract.
The Board argues that pursuant to Article 3.18.4, AMIC was required to defend and indemnify the Board whenever a claim arose out of any “means, methods, procedures, techniques or sequences of execution or performance of” D & D's work, and that Smith's complaint was, at its core, about D & D's failure to properly perform under its contract with the Board. The Board contends that, to trigger the contractual indemnification, it only need demonstrate a “substantial nexus” between Smith's claim and D & D's conduct. See, e.g., Leitao v. Damon G. Douglas Co., 301 N.J.Super. 187, 193 (App.Div.1997) (construing an indemnification agreement using the terms “arising out of or resulting from the performance of the subcontractor[ ]'s work,” “as requiring only a substantial nexus between the claim and the subject matter of the subcontractor's work duties”) (alteration in original), certif. denied, 151 N.J. 466 (1997)).
“The interpretation of a contract is subject to de novo review by an appellate court.” Kieffer v. Best Buy, 205 N.J. 213, 222 (2011) (citation omitted). “The objective in construing a contractual indemnity provision is the same as in construing any other part of a contract — it is to determine the intent of the parties.” Id. at 223 (citing Mantilla v. NC Mall Assocs., 167 N.J. 262, 272 (2001)). “If an indemnity provision is unambiguous, then the words presumably will reflect the parties' expectations.” Id. at 223. (citation omitted). But, unlike interpretive rules applicable to other contracts, “[i]f the meaning of an indemnity provision is ambiguous, the provision is ‘strictly construed against the indemnitee.’ ” Ibid. (quoting Mantilla, supra, 167 N.J. at 272 (in turn quoting Ramos v. Browning Ferris Indus. of S. Jersey, Inc., 103 N.J. 177, 191 (1986))).
The strict-construction approach is taken for two apparent reasons․ One is that a party ordinarily is responsible for its own negligence, and shifting liability to an indemnitor must be accomplished only through express and unequivocal language․ Another is that, under the American Rule, absent statutory or judicial authority or express contractual language to the contrary, each party is responsible for its own attorney's fees.
[Id. at 224 (citations omitted).]
In Mantilla, supra, the Court held “that absent explicit contractual language to the contrary, an indemnitee who has been found to be at least partially at fault may not recover the costs of its defense from an indemnitor.” 167 N.J. at 264. When the indemnification provision of a contract fails to expressly provide indemnification against allegations of the indemnitee's own fault, the “default rule,” set forth in Central Motor Parts Corp. v. E.I. duPont deNemours & Co. Inc., 251 N.J.Super. 5 (App.Div.1991), “applies and fills the gap that the parties left open in their contract.” Mantilla, supra, 167 N.J. at 273. That “default rule” “expresses the common-law principle that ‘an indemnitee who has defended against allegations of its independent fault may not recover its [defense] costs.’ ” Id. at 272 (quoting Central Motors, supra, 251 N.J.Super. at 10).
Thus, contrary to the Board's argument, the lack of any express provision in Article 3.18.4 obligating D & D to defend and indemnify the Board against allegations of the Board's own fault means the “default rule” applied to supply the contract's missing terms. That is, the Board may not recover defense costs incurred in defending allegations of its own independent fault.
The Board's assertion that, pursuant to the contract documents, it could not be vicariously liable for failing to adequately supervise D & D's coordination of the project is clear from the record. See Broadway Maint. Corp. v. Rutgers, The State Univ., 90 N.J. 253 (1982).3 The Board urged such a result when it first moved for summary judgment and then again before the trial judge. Even though Smith opposed the applications, arguing that Broadway Maintenance had been statutorily abrogated by N.J.S.A. 18A:18A–41, the trial court rejected Smith's argument and the Board prevailed. Thus, the trial proceeded on Smith's claims that the Board was independently liable based upon alleged breaches of Smith's contract with the Board.4
In sum, we agree entirely with the Law Division judges who considered this argument at various stages of the litigation. The Board was not entitled to indemnification under Article 3.18.4 for claims based upon the Board's independent liability.
Alternatively, the Board claims that Mantilla does not control because the holding is limited to, and has only been applied to, personal injury actions where recovery was based upon negligence. The argument lacks sufficient merit to warrant discussion. R. 2:11–3(e)(1)(e). We add only the following brief comments.
As noted above, the Court in Mantilla did not expressly limit its holding to negligence claims; relying upon concepts of the common law expressed in Central Motors, the Court broadly stated that “an indemnitee who has been found to be at least partially at fault may not recover the costs of its defense from an indemnitor.” Mantilla, supra, 167 N.J. at 264 (emphasis added).
We also reject the Board's other argument as to why Mantilla is inapplicable, which is based upon N.J.S.A. 2A:40A–1. That statute provides “an indemnification agreement in a construction contract purporting to hold harmless the indemnitee for losses or damages resulting from its ‘sole negligence’ is a violation of public policy.” Leitao, supra, 301 N.J.Super. at 191–92. The statute is clearly limited to negligence claims. Berg Chilling Sys., Inc. v. Hull Corp., 435 F.3d 455, 471 (3d. Cir.2006).
The Board seemingly contends that the Legislature's failure to include claims other than those sounding in negligence means Mantilla 's rules of construction do not apply to non-negligence claims. However, the Board cites no authority for this contention. Moreover, considering that the statute predated Mantilla by more than a decade, we fail to see its relevance to this case.
Next, the Board argues that, because it was adjudicated free of fault at trial, AMIC must reimburse its defense costs under the “after the fact” approach enunciated in Central Motors and approved by the Court in Mantilla, supra, 167 N.J. at 273. In his written opinion that followed the Board's post-trial motion, the trial judge rejected the argument. He reasoned that “[t]he after-the-fact approach was crafted to be utilized in circumstances where a plaintiff brought claims against an indemnitee sounding in both vicarious liability and independent fault.” Since the Board could not be vicariously liable for D & D's fault and Smith's claims were solely based upon allegations of the Board's fault, the judge concluded the “after-the-fact” approach did not apply. Alternatively, the judge concluded that the Board could not recover because it never tendered its defense to AMIC at the start of the litigation.
Pursuant to the “after-the-fact” approach, a court must look beyond the “[a]llegations in the pleadings;” “the actual facts developed during trial ․ control.” Central Motors, supra, 251 N.J.Super. at 11. “[A]n indemnitee who defends exclusively against the acts of the indemnitor may recoup from the indemnitor the reasonable costs of its defense.” Id. at 10. “Costs incurred by [an indemnitee] in defense of its own active negligence or independent warranties are not recoverable, but those costs incurred on defending claims on which the [indemnitee] is found only derivatively or vicariously liable are recoverable.” Id. at 11. We agree with the trial judge that under the circumstances of this case, the Board was not entitled to indemnification pursuant to the principles set forth in Central Motors.5
In light of our conclusion, we need not address the Board's other argument that the trial judge erred in concluding the Board was not entitled to indemnification because it failed to tender its defense to AMIC.
In sum, we affirm the orders under review that, at various points and in various ways, denied the Board indemnification from AMIC. We need not address, therefore, the Board's argument raised in a separate point that, under Article 3.18.5, it was entitled to recover the costs associated with enforcing its indemnification rights.
We turn to the other aspects of the Board's appeal directed toward Smith. The Board contends that the judge erred in denying its request for attorney's fees and costs under the frivolous litigation statute, N.J.S.A. 2A:15–59.1, and Rule 1:4–8. The trial judge concluded: “I do find that ․ Smith has made a good faith argument and had a reasonable basis to assert their claims against the Board. So [its] request for attorney's fees on the Frivolous Claims Act is denied.”
“Rule 1:4–8 permits an attorney to be sanctioned for asserting frivolous claims on behalf of a client.” United Hearts, L.L.C. v. Zahabian, 407 N.J.Super. 379, 389 (App.Div.), certif. denied, 200 N.J. 367 (2009). “For purposes of imposing sanctions under Rule 1:4–8, an assertion is deemed ‘frivolous' when ‘no rational argument can be advanced in its support, or it is not supported by any credible evidence, or it is completely untenable’.” Ibid. (quoting First Atl. Fed. Credit Union v. Perez, 391 N.J.Super. 419, 432 (App.Div.2007)).
“Rule 1:4–8 supplements N.J.S.A. 2A:15–59.1, which is the frivolous claim statute.” Masone v. Levine, 382 N.J.Super. 181, 192 (App.Div.2005). Under the statute,
[o]nly a party “who prevails in a civil action” is entitled to ․ relief. N.J.S.A. 2A:15–59.1(a)(1). And, “imposition of sanctions under the statute [is confined] to parties.” McKeown–Brand v. Trump Castle Hotel & Casino, 132 N.J. 546, 560 (1993); see id. at 549. Any responsibility for frivolous litigation must be assigned to attorneys pursuant to Rule 1:4–8.
[Ferolito v. Park Hill Ass'n., 408 N.J.Super. 401, 407 (App.Div.), certif. denied,
200 N.J. 502 (2009) (second alteration in original).]
Claims under the statute “must be pursued, to the extent practicable, in accordance with the procedural requirements of” Rule 1:4–8. Id. at 408.
“In reviewing the award [or denial] of sanctions pursuant to Rule 1:4–8, we apply an abuse of discretion standard.” United Hearts, supra, 407 N.J.Super. at 390 (citing Masone, supra, 382 N.J.Super. at 193). Similarly, “[t]he legislature intended that judicial discretion should be used in determining an award for fees pursuant to N.J.S.A. 2A:15–59.1.” Masone, supra, 382 N.J.Super. at 193; see also Ferolito, supra, 408 N.J.Super. at 407 (“A trial court's determinations on the availability and amount of fees and costs for frivolous litigation are reviewable for abuse of discretion.”) (internal quotation marks and citation omitted).
Under the statute, a claim is frivolous if it was “commenced, used or continued in bad faith, solely for the purpose of harassment, delay or malicious injury.” N.J.S.A. 2A:15–59.1(b)(1). Alternatively, pursuant to N.J.S.A. 2A:15–59.1(b)(2), the litigation may be deemed frivolous if the court finds that the losing party “knew, or should have known, that the complaint, counterclaim, cross-claim or defense was without any reasonable basis in law or equity and could not be supported by a good faith argument for an extension, modification or reversal of existing law.” To prevail under either subsection of the statute the “party seeking relief ․ must show the ill-intent of the non-prevailing party.” Throckmorton v. Twp. of Egg Harbor, 267 N.J.Super. 14, 19 (App.Div.1993).
We need not address the specific arguments made by the Board. It suffices to say that, like the trial judge, we cannot conclude from the entirety of the trial record that Smith acted in bad faith, and the judge did not mistakenly exercise his discretion in denying the Board's request.
Lastly, the Board contends that it should have been awarded litigation costs, including counsel fees, because Smith breached a covenant in the contract barring any suit for delay damages. In his written opinion that followed trial, the judge noted that the contract documents “contain[ed] two ‘no damages for delay’ clauses.” Article 8.3.6 of the General Conditions stated in pertinent part:
[A]n extension ․ shall be the sole remedy of the Contractor for any ․ [delays] whether or not such Delays are foreseeable, unless a Delay is caused by acts of the [Board] constituting active interference ․ and only to the extent such acts continue after the Contractor furnishes the [Board] with written notice of such interference. In no event shall the Contractor be entitled to any compensation or recovery of any damages in connection with any Delay, including without limitation, consequential damages, lost opportunity costs, impact damages, or other similar renumeration.
[ (Emphasis added).]
Paragraph 1.04(C)(6)(e) of the project specifications provided: 6
The [Board] shall make no payment, compensation or adjustment of any kind (other than extensions of time) to the Contractor for damages because of hindrances or delays being avoidable or unavoidable. The Contractor agrees that he will make no claim against the [Board] for payment, compensation, damages, litigation of damages, or adjustments of any kind and will accept such extensions of time [in] full satisfaction of any and all alleged claims against the [Board] for any or all such hindrances or delays.
The Board argued that these provisions were breached when Smith filed suit, and it was entitled to counsel fees and costs as a result.
The trial judge rejected the argument on two grounds. First, he concluded that the Board failed to assert this claim in its pleading. Second, the judge determined the project specification “d[id] not specifically state that ․ Smith cove[nant]ed [sic] not to sue the Board.
Before us, the Board contends that paragraph 1.04(C)(6)(e) clearly prohibited Smith from filing suit, and the judge erred in denying its claim because the Board failed to include a specific breach of contract claim in its pleadings. In this latter regard, the Board notes the provision “was squarely ․ in issue throughout the litigation,” noting the judge referred to the specification during the trial and in his opinion denying Smith's requested relief. The Board also argues that Smith was on notice of its claim and never asserted that the Board need file any amended pleading alleging a breach of the covenant.
Rule 4:5–2 provides that “a pleading which sets forth a claim for relief, whether an original claim, counterclaim, cross-claim or third-party claim, shall contain a statement of the facts on which the claim is based, showing that the pleader is entitled to relief, and a demand for judgment for the relief to which the pleader claims entitlement.” “Although ‘[a]ll pleadings shall be liberally construed in the interest of justice,’ ․ the fundament of a cause of action, however inartfully it may be stated, still must be discernable within the four corners of the [pleading].” Bauer v. Nesbitt, 198 N.J. 601, 610 (2009) (quoting R. 4:5–7).
However, we have said that “ ‘[a] complaint ․ is not required to spell out the legal theory upon which it is based.” Teilhaber v. Greene, 320 N.J.Super. 453, 464 (App.Div.1999) (citing Farese v. McGarry, 237 N.J.Super. 385, 390 (App.Div.1989)) (internal quotation marks omitted). “Because pleadings are primarily fact-based, the court may instruct the jury as to a legal theory not expressly alleged if all of the underlying facts have been pleaded and proved.” Ibid. (citations omitted).
To the extent the Board was alleging a breach of contract by Smith, its answer and counterclaim failed to satisfy these bare minimal requirements. The “no damages for delay” provisions were not asserted as affirmative defenses in the Board's answer to Smith's complaint. Its counterclaim asserted only one cause of action, i.e., that the court confirm Vitetta's arbitration award. There was no mention of the “no damages for delay” provisions. The ad damnum clause of the answer sought dismissal of the complaint and an award of “costs, attorney [']s fees and such other relief ․ deem[ed] proper[,]” while the counterclaim's ad damnum clause only sought “damages and such other relief ․ deem[ed] just and proper.” Even though the contract provisions were referenced during trial and by the judge, they were never pled, factually or legally, as a claim for which the Board was seeking affirmative relief.
Moreover, pursuant to Paragraph 1.04(C)(6)(e), Smith agreed it would make “no claim against the [Board] for payment, compensation, damages, litigation of damages, or adjustments of any kind and w[ould] accept ․ extensions of time in full satisfaction of any and all alleged claims,” but Article 8.3.6 of the General Conditions specifically limited Smith's remedy “unless a[d]elay [wa]s caused by acts of the [Board] constituting active interference.” As already noted, Smith claimed that the Board actively interfered with its work and dispute resolution rights. Notably, when, pre-trial, the Board sought summary judgment under Article 8.3.6, the motion was denied precisely for this reason.
In sum, we agree that the Board was not entitled to an award of counsel fees and costs as damages for Smith's alleged breach of contract.
1. FN1. On June 22, 2006, presumably because of the bankruptcy proceedings, the complaint against D & D was dismissed without prejudice for lack of prosecution.
2. FN2. It would appear that the AMIC action was never consolidated with the action Smith initiated.
3. FN3. In Broadway Maintenance, 90 N.J. at 265, the Court explained:In the absence of any compelling public policy, an owner has the privilege to eliminate a general contractor and enter into several prime contracts governing the construction project. In that event the owner could engage some third party or one of the contractors to perform all the coordinating functions. Where all the parties enter into such an arrangement the owner would have no supervisory function. The situation would be analogous to one where a general contractor had been engaged to construct the project on a turnkey basis. Surely the subcontractors would have no claim against the owner for failure to coordinate.
4. FN4. Smith's quantum meruit claim was dismissed before trial.
5. FN5. We reject the Board's argument that Smith's allegations were simply thinly-veiled attempts to hold the Board vicariously liable for D & D's failures. In doing so, the Board relies upon the trial judge's conclusions that D & D's actions and omissions were “the root” of Smith's claims. But, Smith's failure to prove independent wrongdoing by the Board simply does not equate to an assertion of vicarious liability on the part of the Board.
6. FN6. These specifications are not in the appellate record, but we reference the citation as contained in the trial judge's written opinion.