Principal Mutual Life Insurance v. Racal-Datacom Inc.

• Citation: 233 F.3d 1,2000 WL 1716483
• Decision Date: 06 September 2000
• Docket Number: CROSS-APPELLANT,INC,CROSS-APPELLE,No. 99-2035,RACAL-DATACO,V,N,99-2035
• Parties: (1st Cir. 2000) PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, PLAINTIFF, APPELLANT/, DEFENDANT, APPELLEE/o. 99-2197. . Heard
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

Page 1

233 F.3d 1 (1st Cir. 2000)

PRINCIPAL MUTUAL LIFE INSURANCE COMPANY, PLAINTIFF, APPELLANT/CROSS-APPELLEE,

V.

RACAL-DATACOM, INC., DEFENDANT, APPELLEE/CROSS-APPELLANT.

No. 99-2035, No. 99-2197.

United States Court of Appeals, First Circuit.

Heard Sept. 6, 2000.

Decided November 22, 2000.

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS.

Hon. William G. Young, U.S. District Judge.

Leonard H. Friedman with whom Paul M. Climino and Golulston & Storrs, P. C. were on brief for plaintiff.

Matthew A. Porter with whom Timothy C. Blank snd Dechert Price & Rhoads were on brief for defendant.

Before Boudin, Circuit Judge, Bownes, Senior Circuit Judge, and Lynch, Circuit Judge.

Boudin, Circuit Judge.

This difficult case presents the question whether the landlord or the tenant should bear the cost of replacing a failed heating, ventilation and air conditioning ("HVAC") system in a commercial building located in Boxborough, Massachusetts. The landlord is Principal Mutual Life Insurance Company, and the tenant is Racal-Datacom, Incorporated. ¹ The building is a manufacturing and office building called Boxborough Technology Park Building I, which Principal's contractor had "built to suit" Racal. The present dispute involves two separate leases for the building.

On April 30, 1984, Principal and Racal executed the first lease (the "1984 Lease") to commence February 1, 1985, and to run for five years. The lease provided for a two-year period within which Principal was required to "repair or replace all faulty materials and workmanship . . . including all latent defects" timely identified by Racal. Otherwise--in terms more fully described below--the 1984 Lease obligated Racal to maintain the building (including its HVAC system), to keep and to surrender the premises "in good condition," and to pay Principal's taxes on the property. The lease also gave Racal an option to extend the lease for two successive five-year periods.

Racal moved into the building on February 1, 1985, and almost immediately began to encounter difficulties with the HVAC system. The problems included clogged and leaking pipes and unacceptably high pressure in the heat pumps. The causes appear to have been misdesign, poor construction, and faulty maintenance; the parties dispute just how much each of these causes contributed and who is responsible. What is agreed to is that during the 1984 Lease term, the HVAC system suffered a massive structural failure and that it was not in proper working order at the close of the term.

Despite these problems, and without explicitly addressing them, the parties executed a new five-year lease on January 25, 1989 (the "1989 Lease"), which began to run on February 1, 1990. Formally, this was a new lease rather than an extension of the 1984 Lease pursuant to its option provisions. However, the important terms of the 1984 Lease concerning Racal's upkeep and surrender obligations were retained, except that the new lease did not include the original's two-year warranty obligation of Principal. During the second five-year term, the HVAC system continued to present problems, forcing Racal to replace approximately 20 percent of the system's piping.

After the 1989 Lease expired in 1995, Racal moved out and Principal conducted an engineering study of the HVAC system which revealed that damage was so severe that the system had to be replaced at a cost to Principal of over $700,000. On March 10, 1998, Principal sued Racal in Massachusetts state court for breach of contract on the 1989 Lease, claiming that Racal had failed to maintain the HVAC system and surrender the premises in good condition in 1995. Racal removed the case to federal district court on diversity grounds and counterclaimed under the 1984 and 1989 Leases on several theories relating to the failed HVAC system.

On motion by Racal for partial summary judgment, the district court ruled, on October 1, 1998, that the phrase "good condition" in the 1989 Lease meant "as good condition as it was at the commencement of the lease term, reasonable wear and tear excepted." Principal countered by amending its complaint to assert claims against Racal under the 1984 Lease. Racal responded with a new motion for partial summary judgment, asserting that a provision in the 1989 Lease waived all of Principal's and Racal's potential claims against one another under the 1984 Lease. The district court declined to make that ruling on the bare language of the 1989 Lease, and the case proceeded to trial in June 1999.

At the close of the five-day trial to the court, the district judge made extensive findings from the bench. Most important to this appeal were two: first, that the 1989 Lease extinguished all clraims based on the 1984 Lease; and, second, that because the HVAC system was "fatally injured" at the beginning of the 1989 Lease period, Racal had returned the premises in 1995 in the same condition as they were at the start and had not violated the maintenance or surrender provisions of the 1989 Lease. Principal now appeals, contending that it did not waive its claims under the 1984 Lease and that, in any event, it had a valid claim under the 1989 Lease.

Contract interpretation is often said to be "a question of law" for the trial judge and, accordingly, subject to de novo review by the appellate court. Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 388 (1st Cir. 1993). A pertinent qualification is that when the factfinder turns to extrinsic evidence to resolve disputes of fact relating to the construction of contract terms, those findings are subject to deference on review, United States Liab. Ins. Co. v. Selman, 70 F.3d 684, 687 (1st Cir. 1995); in the case of a bench trial, such findings are reviewed only for clear error. Johnson v. Watts Regulator Co., 63 F.3d 1129, 1138 (1st Cir. 1995); Fed. R. Civ. P. 52(a).

We start with Principal's assertion that, contrary to the district court's ruling, Principal retained whatever claims it had under the 1984 Lease, despite the 1989 Lease language that Racal says relinquishes such claims. That language (section 8.5) provides that:

[o]ther than contemporaneous instruments executed and delivered of even date, if any, this Lease contains all of the agreements between Landlord and Tenant relating in any way to the premises and supersedes all prior agreements and dealings between them.

Racal, stressing the term "supersedes" and the double reference to "all," says that the language waives all claims under the 1984 Lease. Principal says that it is merely a "garden-variety contractual integration clause" designed to assure that the 1989 Lease alone (and no other prior side agreement) governs Racal's occupancy of the premises from February 1, 1990. ²

We think the bare language suggests one outcome but does not rule out the other. Principal says that if this is so, it wins because Massachusetts law requires that a "waiver" of claims must be evidenced by "clear, decisive and unequivocal conduct." Paterson-Leitch Co. v. Massachusetts Mun. Wholesale Elec. Co., 840 F.2d 985, 992 (1st Cir. 1988) (citing Glynn v. City of Gloucester, 401 N.E.2d 886, 892 (Mass. App. Ct. 1980)) (internal quotation marks omitted). But Principal's reliance on Paterson-Leitch is misplaced: the immediate issue is not "waiver by conduct" but construing contractual language that explicitly bars certain claims; the only question is which claims.

We agree with the district court that the quoted provision is ambiguous enough to permit the consideration of pertinent extrinsic evidence, see Den Norske Bank AS v. First Nat'l Bank, 75 F.3d 49, 52-53 (1st Cir. 1996), which the district court deemed to support Racal's interpretation. In substance, the district court found that as they moved toward the new 1989 Lease, the parties were principally animated by a desire to get on with their relationship and "not to press claims that they may have had against one another" under the original lease. Although Principal admits that such findings of fact are reviewed under the clearly erroneous standard, Uno v. City of Holyoke, 72 F.3d 973, 978 (1st Cir. 1995), it says that there is no evidence whatever to support the district court's finding.

We have reviewed the record with some care and believe that it supports the following inference (but no more): that Principal, knowing that the HVAC system was causing problems for which Racal might be held liable, made no effort prior to the 1989 Lease to press such claims because it desired to maintain good relations with a tenant who was paying rent and likely to sign a new lease. To this extent the evidence adequately supports the district court's finding; but so read, the finding falls short of proving a subjective intent by the two parties to make the 1989 Lease a deliberate waiver of possible claims under the 1984 Lease.

Of course, imputing to the parties a general desire to let sleeping dogs lie does mean that wiping out claims under the 1984 Lease could have been a reasonable objective of the parties. See Restatement (Second) of Contracts §§ 202(a) (Supp. 1981); cf. New England Structures, Inc. v. Loranger, 234 N.E.2d 888, 892-93 (Mass. 1968). Still, there is no direct evidence that the parties adopted section 8.5 for this purpose; indeed, section 8.5 also appeared in the 1984 Lease, drafted at a time when there was no formal prior lease. The reality is that parties often adopt contract language without...