Court of Appeals of Maryland Holds AIA A107-1997 Waivers of Subrogation Clause Ambiguous – Therefore Extrinsic Evidence Should Be Considered to Determine Whether the Parties Intended the Waiver to Apply to Claims Arising After Construction

John L. Mattingly Constr. Co. v. Hartford Underwriters Ins. Co.
2010 Md. LEXIS 327 (Md. July 27, 2010)

The Maryland Court of Appeals determined that the waivers of subrogation clause in AIA A107-1997 is ambiguous as to whether it encompasses losses sustained after completion of construction and final payment. As a result, the case was remanded to the Court of Special Appeals so that it could resolve the ambiguity by considering extrinsic evidence.

In 2002, K.B.K., Inc. and John L. Mattingly Construction Company, Inc. entered into AIA form contract number A107-1997 to build an Arby’s Restaurant. Section 16.4 of the Contract required K.B.K. to “purchase and maintain property insurance until final payment has been made” or until no person … other than K.B.K had an insurable interest.” Section 16.5 of the Contract stated that K.B.K. and Mattingly “waived all rights against … each other and any of their subcontractors for damages covered by property insurance … applicable to the Work.”

Mattingly hired Wilma L. Phoebus Electric Co. to perform the electrical work on the Project. Although Phoebus was not a party to the Contract, Section 10.3 of the Contract provided that subcontractors were entitled to the all the “rights, redress, and remedies afforded to Mattingly.

Construction was completed in October 2003, and the restaurant subsequently opened for business. K.B.K then made final payment to Mattingly and purchased a property insurance policy covering the restaurant from Hartford Underwriters Insurance Co. Sixteen months later, a fire broke out and K.B.K submitted a claim to Hartford. Hartford paid the claim and then filed a complaint against Mattingly and Phoebus asserting that the electrical wiring failure caused the fire.

Mattingly and Phoebus filed motions for summary judgment asserting that the waivers of subrogation clause in the Contract precluded Hartford’s claim. The Circuit Court agreed, and granted summary judgment in favor or Mattingly and Phoebus. The Court of Special Appeals reversed, finding that the clause was ambiguous when read in tandem with the definitions of “Work” in the Contract. The instant appeal followed.

Mattingly and Phoebus asserted that Section 16.5 clearly and unambiguously encompassed losses sustained after substantial completion and final payment. In support of their argument, Mattingly and Phoebus referred the Court to a number of decisions in other jurisdictions that recognize waivers of subrogation in AIA form contracts as encompassing losses sustained after completion of construction and final payment. The Court distinguished all of these decisions because the AIA contracts at issue in those cases had additional completed project insurance clauses.

Hartford countered that the contract is “vague and ambiguous” regarding whether the waivers remained in force after completion of the restaurant. Hartford pointed to a Missouri intermediate appellate court decision in which the court considered the temporal scope of a waivers of subrogation clause in an AIA form contract that was not interrelated with a completed project insurance clause. That court determined that the waivers of subrogation clause, when read in tandem with the definition of “the Work” and the final payment provision was ambiguous. To resolve the ambiguity, the court gave preference to specific provisions over general and reasoned that the final payment provision was more specific, and thus subrogation waiver terminated upon completion.

The Maryland Court of Appeals embraced the Missouri appellate court’s reasoning. It found that the waivers of subrogation clause in the Contract was ambiguous, and that the ambiguity could only be resolved by considering the parties’ intent. It remanded the case with specific instructions to consider extrinsic evidence that would shed light on the parties’ intentions when they entered into the Contract. Specifically, the Court of Appeals pointed out that ambiguities are often resolved against the draftsmen, and even though this was a form contract, the lower court should consider who proposed using this AIA version as a crucial part of it analysis.

This entry was posted in Negligence, Subcontract and tagged , , , . Bookmark the permalink.