Fresh Cut, Inc. v. Fazli

• Decision Date: 24 May 1995
• Docket Number: No. 49S02-9505-CV-596,49S02-9505-CV-596
• Citation: 650 N.E.2d 1126
• Parties: FRESH CUT, INC., Appellant, v. Bert FAZLI, Appellee.
• Court: Indiana Supreme Court

Page 1126

650 N.E.2d 1126

FRESH CUT, INC., Appellant, v. Bert FAZLI, Appellee.

No. 49S02-9505-CV-596.

Supreme Court of Indiana.

May 24, 1995.

Michael V. Gooch, John S. Beeman, Ronald W. Frazier, Harrison & Moberly, and Karl L. Mulvaney and Tammy J. Meyer, Bingham Summers Welsh & Spilman, Indianapolis, for appellant Fresh Cut, Inc.

Timothy E. Hollingsworth, Henderson, Daily, Withrow, DeVoe and James P. Cavanaugh, III, Indianapolis, for appellee Bert Fazli.

ON PETITION TO TRANSFER

SULLIVAN, Justice.

This case grows out of a dispute between a warehouse's owner and tenant over responsibility for maintaining the fire protection sprinkler system. Where a municipal ordinance requires an owner of commercial property to maintain a fire protection sprinkler system, can the owner shift this responsibility to a tenant by written agreement? If so, did the lease at issue here shift this responsibility to the tenant? The Court of Appeals answered both these questions in the affirmative. Fresh Cut, Inc. v. Fazli (1994), Ind.App., 630 N.E.2d 575, reh'g denied. We agree with the Court of Appeals as to the first question but conclude that genuine issues of material fact remain as to the second.

Facts

On or about August 27, 1986, tenant Fresh Cut, Inc., leased part of a warehouse in Indianapolis from owner Bert Fazli pursuant to the terms of a written lease. Paragraphs five and six of the lease provide:

5. Lessee [tenant] shall not use the Leased Premises or fail to maintain them in any manner constituting a violation of any ordinance, statute, regulations, or order of any governmental authority.... The Lessee covenants and agrees that the Lessee will use, maintain and occupy the Leased Premises in a careful, safe, and proper manner and will not commit waste thereon....

6. During the term of this Lease the Lessee shall, at his own cost and expense, maintain in good condition and repair the Leased Premises, including but not limited to the electrical systems, heating and air conditioning systems, ¹ and structural frame of the building of which such Leased Premises are a part. Lessee shall also maintain in good repair all interior walls and floors....

In effect at the time and applicable to the property was the following municipal ordinance:

A sprinkler system installed under this standard shall be properly maintained for efficient service. The owner is responsible for the condition of the sprinkler system and shall use due diligence in keeping the system in good operating condition.

Indianapolis and Marion Co., IN, Code § 12-4 (1987) (incorporating by reference N.F.P.A. 13, Standard for the Installation of Sprinkler Systems (National Fire Prevention Ass'n 1987)).

On August 5, 1989, the portion of the warehouse occupied by tenant burned. Tenant recovered from its property insurance carrier, State Farm Fire & Casualty Company (State Farm), for damage to personal property and costs of business interruption and re-establishing its business operations at another location.

In January of 1990, tenant and State Farm sued owner alleging that the damages suffered by tenant as a result of the fire would have been greatly reduced if owner had not negligently failed to maintain the building's fire protection sprinkler system in operating condition. In June of 1990, owner filed a counterclaim asserting that under paragraphs 5 and 6 of the lease, he was not responsible for ensuring that the sprinkler system functioned properly and that that responsibility had been assumed by tenant.

On February 18, 1992, tenant filed a Motion for Summary Judgment against owner's counterclaim alleging that: (1) owner had a nondelegable duty in accordance with state regulation and municipal ordinance to maintain the fire protection sprinkler system in operating condition, which duty could not be shifted to tenant per the lease contract provisions or otherwise; and (2) even if owner's duty to maintain the sprinkler system may be shifted, tenant did not agree to accept this duty when it signed the lease contract. On September 1, 1992, the trial court denied tenant's summary judgment motion without opinion. Tenant appealed.

The Court of Appeals affirmed the trial court's denial of tenant's summary judgment motion, holding that: (1) owner could validly shift responsibility for maintaining the fire protection sprinkler system to tenant without violating public policy; and (2) the lease contract unambiguously placed responsibility for maintenance of the fire protection sprinkler system on tenant. Fresh Cut, Inc., 630 N.E.2d at 580. Tenant seeks transfer.

I

The principal point of contention in this case is the extent to which the public policy at issue here--an owner's statutory duty to maintain a fire protection sprinkler system in good operating condition--restricts the freedom of parties to contract. Tenant argues in this interlocutory appeal that, regardless of what might be in the lease, owner had a statutory duty to maintain the fire protection sprinkler system in proper operating condition. Because statutory duties are nondelegable, tenant reasons, public policy requires that any contract that attempts to shift owner's duty in this regard is invalid. And if the contract is invalid, tenant concludes, owner could not recover on his breach of contract counterclaim, and tenant should have been granted summary judgment.

A

We adopt the analysis used by the Court of Appeals in analyzing this question. Indiana courts recognize the freedom of parties to enter into contracts and, indeed, presume that contracts represent the freely bargained agreement of the parties. Weaver v. American Oil Co. (1971), 257 Ind. 458, 463, 276 N.E.2d 144, 147. This reflects the principle that it is in the best interest of the public not to restrict unnecessarily persons' freedom of contract. Raymundo v. Hammond Clinic Ass'n (1983), Ind., 449 N.E.2d 276, 279 (quoting Hodnick v. Fidelity Trust Co. (1932), 96 Ind.App. 342, 350, 183 N.E. 488, 491); see also Ind. Const. art. I, § 24. A real estate lease is subject to these same principles of contract. Whiteco Indus., Inc. v. Nickolick (1991), Ind.App., 571 N.E.2d 1337, 1339, trans. denied. While questions frequently arise which question the ability of a party to a contract to shift its liability to a third party, ² no such question is present in this case and the ability of parties knowingly and willingly to allocate risk by contract is firmly established. Weaver, 257 Ind. at 465, 276 N.E.2d at 148. Except in certain circumstances, ³ this ability of parties to allocate risk by contract extends so far as to permit indemnification for one's own negligence. Indianapolis Power & Light Co. v. Brad Snodgrass, Inc. (1991), Ind., 578 N.E.2d 669, 670.

Despite this very strong presumption of enforceability, courts have refused to enforce private agreements that contravene statute, clearly tend to injure the public in some way, or are otherwise contrary to the declared public policy of Indiana. This principle is illustrated by recent decisions of both our court and the Court of Appeals. See Straub v. B.M.T. by Todd (1994), Ind., 645 N.E.2d 597 (invalidating an agreement pursuant to which a man agreed to impregnate a woman in return for a promise not to assert any child support obligation); Pigman v. Ameritech Publishing, Inc. (1994), Ind.App., 641 N.E.2d 1026 (invalidating an exculpatory clause in a Yellow Pages advertising contract), reh'g denied (1995), 650 N.E.2d 67.

We agree with the factors identified by the Court of Appeals to be considered in determining whether a contract not prohibited by statute or clearly tending to injure the public but nevertheless alleged to contravene public policy should be enforced: (i) the nature of the subject matter of the contract, e.g., Straub, 645 N.E.2d at 599; (ii) the strength of the public policy underlying the statute, e.g., id.; (iii) the likelihood that refusal to enforce the bargain or term will further that policy, e.g., Noble v. Alis (1985), Ind.App., 474 N.E.2d 109, trans. denied; (iv) how serious or deserved would be the forfeiture suffered by the party attempting to enforce the bargain, e.g., Tolliver v. Mathas (1989), Ind.App., 538 N.E.2d 971, 975, reh'g denied, trans. denied; and (v) the parties' relative bargaining power and freedom to contract, Pigman, 641 N.E.2d at 1026.

B

Nothing in the municipal ordinance at issue here restricts the ability of an owner to delegate responsibility for sprinkler systems. See Code of Indianapolis § 12-4, supra. And, given the nature of the subject matter and the parties' relative bargaining power and freedom to contract, we have little difficulty agreeing with the Court of Appeals that, on these facts, a contract shifting responsibility for sprinkler systems from owner to tenant is not void as against public policy. The subject matter of this contract is the lease of commercial real estate. Commercial real estate leases commonly allocate obligations and risks between owner and tenant. See, e.g., Mark A. Senn, Commercial Real Estate Leases: Preparation and Negotiation 378-379 (2d ed. 1990). For example, Indiana Code § 6-1.1-2-4 (1993) imposes liability on the owner of real property for property taxes, but the tenant is customarily required to pay its share of real estate taxes on leased commercial property. Report, A Practical Guide to Reviewing a Commercial Lease, 19 Real Prop., Prob. & Tr. J. 891, 907 (1984) (reprinted in Milton R. Friedman, Commercial Real Estate Leases 859 (1994)). We also agree that there is no evidence of inequality of bargaining power or of impingement on freedom to contract here. Compare, e.g., Weaver, 257 Ind. at 463, 276 N.E.2d at 147 (invalidating exculpatory clause in service station lease), with Allstate Ins. Co. v. Boles, (1985), Ind., 481 N.E.2d 1096, 1101 (enforcing household exclusion clause in insurance contract). We hold that on this record, there was no public policy impediment to the parties agreeing that...