Philco Corp. v. " AUTOMATIC" SPRINKLER CORP. OF AMERICA

• Decision Date: 02 November 1964
• Docket Number: No. 14451.,14451.
• Citation: 337 F.2d 405
• Parties: PHILCO CORPORATION, Rex Manufacturing Company, Inc., Manufacturers Mutual Fire Insurance Company, Aetna Insurance Company, Liverpool & London & Globe Insurance Co. Limited, Plaintiff-Appellants, v. The "AUTOMATIC" SPRINKLER CORPORATION OF AMERICA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

337 F.2d 405 (1964)

PHILCO CORPORATION, Rex Manufacturing Company, Inc., Manufacturers Mutual Fire Insurance Company, Aetna Insurance Company, Liverpool & London & Globe Insurance Co. Limited, Plaintiff-Appellants, v. The "AUTOMATIC" SPRINKLER CORPORATION OF AMERICA, Defendant-Appellee.

No. 14451.

United States Court of Appeals Seventh Circuit.

October 1, 1964.

Rehearing Denied November 2, 1964.

Erle A. Kightlinger, Indianapolis, Ind., Harry A. Wilson, Jr., Howard J. DeTrude, Jr., Indianapolis, Ind., Armstrong, Gause, Hudson & Kightlinger, Indianapolis, Ind., of counsel, for appellants.

Hugh E. Reynolds, Jr., Indianapolis, Ind., Hugh E. Reynolds, Indianapolis, Ind., Locke, Reynolds, Boyd & Weisell, Indianapolis, Ind., of counsel, for appellee.

Before SCHNACKENBERG, KNOCH, and SWYGERT, Circuit Judges.

SWYGERT, Circuit Judge.

The question we have to determine is whether the district court correctly construed a construction contract so as to deny damages which plaintiffs otherwise would have been entitled to recover in this action. Specifically, the question relates to certain provisions in the contract which according to the district judge limited the time within which plaintiffs could assert a claim for faulty materials and workmanship. The following is a summary of the facts.

Plaintiff Rex Manufacturing Company, Inc., a subsidiary of Philco Corporation, operates a factory at Connersville, Indiana, where it manufactures refrigerators, air conditioners, and freezers which are sold by Philco.

In 1953 Rex engaged an engineering and architectural firm, Giffels and Vallet, Inc., to design an additional facility for its Connersville plant. Following the preparation of plans, specifications, and drawings by the architectural firm, Rex contracted with Freyn Bros., Inc., the principal contractor, for the construction of the new facility. In turn, Freyn Bros. contracted with "Automatic" Sprinkler Corporation of America for Automatic to install a fire protection system in the new structure. In performing the subcontract, Automatic placed under ground a ten inch cast iron water pipe. The district court found that a section of the pipe was defective because it had been "scored," that is partially cut, by an employee of Automatic. During the installation of the sprinkler system this weakened piece of pipe was covered by five feet of earth. In April, 1954, installation of the sprinkler system was completed, and the work accepted and paid for by Rex.

In 1957 the defective pipe ruptured and water poured into Rex's building causing damages to merchandise in its warehouse and to its buildings in the amount of $173,714.19.

Rex was reimbursed for its damage by three insurance companies, plaintiffs Manufacturers Mutual Fire Insurance Company, Aetna Insurance Company, and Liverpool & London & Globe Insurance Co. Limited. These insurers, along with Philco and Rex, alleged the proper diversity requirements and brought the instant action to recover for damages caused by the defective pipe. They sought recovery in two counts, one in tort and the second for breach of contract.

Following a trial, the district court determined that Automatic was negligent in the installation of the pipe and that such negligence was the proximate cause of plaintiffs' damage. The court also determined that Automatic breached its contract in that it had supplied faulty material and workmanship. Recovery was denied, however, for the reason that no claim was made within a year following the final payment and acceptance by Rex of the work performed by Automatic.

Although noting only that the contract "construed as a whole" limits the time of liability, it would appear that the district judge based his decision on three clauses contained in the contract between Freyn and Rex, to which terms Automatic was bound by its subcontract with Freyn. These clauses are Articles 45, 47, and 53¹ which, read together, prevent recovery by plaintiffs either for Automatic's negligence or its breach of contract.

Notwithstanding a finding of negligence, which we think the evidence supports, the district judge found that the liability for such negligence had been relieved according to the terms of the contract. Although the first paragraph of Article 47 imposes a responsibility for "any wrongful act or neglect," the second paragraph limits the period for making claims under the article to a reasonable time from the first observation of the damage and not later than the time of final payment, "except as expressly stipulated otherwise in the case of faulty work or materials." The exception is covered in Article 45 which treats of the "responsibility for negligence or faulty materials or workmanship" and limits this responsibility to a period of one year after the date of acceptance and final payment for the work. Thus, Rex specifically limited the period during which it could recover damages resulting from any negligence on the part of the contractors or subcontractors. Such contractual limitations on available remedies are permissible under Indiana law and are not considered contrary to public policy. Indemnity Insurance Co. v. Koontz-Wagner Electric Co., Inc., 233 F.2d 380 (7th Cir. 1956); Niederhaus v. Jackson, 79 Ind.App. 551, 137 N.E. 623 (1922).

In addition to relieving Automatic of liability for negligence if no claims are made within one year after acceptance of the work, the...