General Contractors Take Note: Massachusetts Appeals Court Decision May Lead Owners to Modify Waiver of Subrogation Clause in Your General Contract

The Massachusetts Appeals Court
recently clarified whether the failure by a general contractor to obtain a
waiver of subrogation from one of its subcontractors rendered the waiver of
subrogation clause in its general contract with the project owner unenforceable
and invalid.

In North American Specialty Insurance Company v. Payton
Construction Corporation
, 80 Mass. App. Ct. 367 (2011) the insurer
(North American) paid $1.2 million on an all risk policy issued to the project
owner (owner) whose guest house burned down during construction.Acting as the
owner’s subrogee, North American brought one lawsuit against the general
contractor, Payton Construction Corporation (Payton) and its subcontractor D.J.
Plumbing (DJ), and a separate lawsuit against Payton’s electrical subcontractor
Nardone Electrical Corporation (Nardone) seeking to recover the monies it paid
out to the owner on the claim. The Superior Court dismissed both lawsuits at
summary judgment and North American appealed.

The general contract between
Payton and the owner was the AIA A101-1997 Edition Standard Form of Agreement
Between Owner and Contractor which incorporated by reference the A201-1997
General Conditions of the Contract for Construction (the General Conditions).
Section 11.4.7 of the General Conditions contained a waiver of subrogation
provision pursuant to which the owner and Payton waived all rights against each
other and any of their subcontractors, agents, and employees for damages caused
by fire or other causes of loss to the extent said losses were covered by
property insurance applicable to Payton’s work. This provision also required
Payton to ensure that its subcontractors execute similar waivers of subrogation
and further provided that the waiver was "effective as to a person or
entity even though that person or entity would otherwise have a duty of
indemnification contractual or otherwise and did not pay the insurance
premium."When Payton entered into subcontracts with Nardone and DJ,
Nardone’s subcontract contained the waiver of subrogation language, but DJ’s
did not. 

North American attempted to
leverage Payton’s omission by arguing that because Payton did not get a waiver
of subrogation from DJ, that Payton had materially breached its contractual
obligations with the owner and therefore, none of the defendants could use the
general contract’s waiver-of-subrogation provision as a defense to North
American’s claim.  

The Appeals Court disagreed,
relying on decisions from Vermont and Connecticut, and ruled that the AIA
contract did not make Payton’s obtaining subrogation waivers from its
subcontractors a condition precedent to the application of the
waiver-of-subrogation provisions contained in the General Conditions.
Additionally, relying on the express language contained in Section 11.4.7 of
the General Conditions, the Appeals Court concluded that Payton’s failure to
obtain such a waiver from one of its subcontractors (DJ) was not a material breach
of its contract with the owner.

While this decision confirms
the enforceability of subrogation waivers in construction contacts, the outcome
of this case means that general contractors should now be on the lookout for
owner revisions to the AIA or other contract documents which make the
applicability of your general contract’s waiver of subrogation provisions
expressly contingent on your obtaining subrogation waivers from each
subcontractor on your project.

Based on the North American decision,
your failure to meet such a condition precedent in this circumstance, could
render your waiver of subrogation agreement with the owner unenforceable. 

If you have any questions about
this decision, or any aspect of construction law, please contact Hugh
J. Gorman, III
, the author of this alert. Hugh is chair of Prince
Lobel’s Construction
Law Practice Group
. He can be reached at 617 456 8093 or hgorman@princelobel.com.