Principal Mutual Life Insurance v. Racal-Datacom, Inc.

United States Court of Appeals
For the First Circuit

No. 99-2035
No. 99-2197

PRINCIPAL MUTUAL LIFE INSURANCE COMPANY,

Plaintiff, Appellant/Cross-Appellee,

v.

RACAL-DATACOM, INC.,

Defendant, Appellee/Cross-Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

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

Before

Boudin, Circuit Judge,

Bownes, Senior Circuit Judge,

and Lynch, Circuit Judge.

Leonard H. Freiman with whom Paul M. Cimino and Goulston &
Storrs, P.C. were on brief for plaintiff.
Matthew A. Porter with whom Timothy C. Blank and Dechert
Price & Rhoads were on brief for defendant.
November 22, 2000
 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

1
Principal is the successor in interest to the building's
initial owner and landlord, Botech I, L.P.; and Racal is the
successor in interest to the original tenant, Interlan, Inc.
For simplicity, we refer solely to Principal and Racal
throughout.

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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

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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

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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 claims 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.

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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

2
A standard integration clause can easily be more narrowly
framed, e.g., Kobayashi v. Orion Ventures, Inc., 678 N.E.2d 180,
184 & n.6 (Mass. App. Ct. 1997) ("This lease contains the entire
and only agreement between the parties. . . ."); Lemelman, 26
Massachusetts Practice-UCC Forms Annotated 151-52 (1984) ("It is
mutually understood and agreed that this writing is a final,
complete and exclusive integration, setting out the entire
intention of the parties. . . ."), but language somewhat akin to
section 8.5 has sometimes been used for this purpose, e.g.,
Amerada Hess Corp. v. Garabedian, 617 N.E.2d 630, 634 (Mass.
1993) ("This lease merges and supersedes all prior negotiations,
representations and agreements . . . .").

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 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.

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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

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parties often adopt contract language without having in mind all

of the contexts to which it might be applied. See Farnsworth,

Contracts § 7.9, at 510 (2d ed. 1990).

Although the parties' full subjectively intended

meaning of the provision is unclear, the literal language of

section 8.5 is not. Other considerations being inconclusive, it

seems to us fair in this extremely close case to let matters

turn on the literal language used by the parties even though a

less literal reading is also quite plausible. Here, section 8.5

literally read wipes out "all prior agreements" between the

parties "relating to the premises"--and so covers the 1984

Lease, removing the bases for any claims for its breach. It is

worth adding that Principal did not rely on the 1984 Lease when

it first brought this case.

An alternative default rule--that uncertain language

be construed against the drafter--is also invoked by Racal

because Principal drafted the 1989 Lease. But the doctrine has

been described as one of "last resort" in Massachusetts, Aldrich

v. Bay State Constr. Co., 72 N.E. 53, 54 (Mass. 1904), and it

may be especially weak when the parties are sophisticated

businesses, RCI Northeast Servs. Div. v. Boston Edison Co., 822

F.2d 199, 203 n.3 (1st Cir. 1987). We find it unnecessary to

rely upon the doctrine here.

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 Let us turn now to the equally difficult question

whether the 1989 Lease imposed the HVAC loss on Principal or on

Racal. There are three directly pertinent and interrelated

provisions, all of which are contained in section 5 of the 1989

Lease:

!Section 5.1.2 required that Racal
"maintain, repair, replace, clean" and
secure all parts of the building including
its HVAC system and ensure that the premises
are "in compliance with all governmental
requirements.";

!Section 5.1.2 also required Racal to
"keep[] the Premises in good condition,
reasonable wear and damage by insured
casualty and taking excepted"; and

!Section 5.1.9 required that Racal
"restor[e] the Premises to a fully
functional and tenantable condition" and
surrender the premises at the end of the
lease term "in good condition, reasonable
wear and damage . . . excepted."

Although Principal relies upon all of these provisions, the last

is arguably the most helpful to it: on a literal reading, an

office building with a "fatally injured" HVAC system could

fairly be said not to be in "good condition" and surely not in

a "fully functional and tenantable condition."

The district court rejected this literal reading on the

authority of several Massachusetts cases, most importantly,

Codman v. Hygrade Food Prods. Corp., 3 N.E.2d 759 (Mass. 1936).

Accord Guarente v. Waldorf Sys., Inc., 167 N.E.2d 617 (Mass.

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1960); Kaplan v. Flynn, 150 N.E. 872 (Mass. 1926). In these

cases, the Massachusetts courts construed essentially similar

language, requiring a tenant to return a premises in good

condition, or in tenantable condition as meaning--in Codman's

words--"the actual condition of the building . . . existing when

the term began . . . ." Codman, 3 N.E.2d at 761; accord

Guarente, 167 N.E.2d at 620; Kaplan, 150 N.E. at 873.

Such construction is not the most literal

interpretation of the words but it makes more practical sense

than the literal reading. Certainly in a non-commercial rental

of a house or an apartment, most tenants would be startled to

discover that bland, "good condition" language meant that the

tenants were responsible for defects on the premises that had

arisen prior to the lease and which might not even be apparent

or readily discoverable. Further, Codman itself applied this

common sense limitation to a commercial lease, although it also

recognized that the parties could choose to provide otherwise

and require the tenant to remedy conditions from use of the

building by earlier occupants. 3 N.E.2d at 761-62.

Codman went even further in Racal's direction by saying

that the parties could contract out of the default position

(i.e., no liability for harm caused during earlier tenancies)

"[b]y the use of clear and unmistakable language." 3 N.E.2d at

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761-62. If this were the law of Massachusetts, Principal would

necessarily lose. Taken as a whole, the language used in the

1989 Lease is more favorable to the landlord than the language

in the earlier Massachusetts cases such as Codman; but given

Codman's gloss on the concept of good or tenantable condition,

the 1989 Lease does not contain any language that "clear[ly] and

unmistakabl[y]" imposes liability on the tenant for defects that

occurred before the lease term began.

We are loathe to decide the case on this basis. The

"clear and unmistakable language" test, if test it was, appears

in a decision now over a half century old and was not repeated

in the Guarente decision rendered in 1960, see 167 N.E.2d at

618-20. Further, it is hard to see why in a complicated and

thoroughly negotiated commercial transaction (like ours) the

contract should not be given its best and most reasonable

interpretation without any special obligation to be notably more

clear on this point than on any other. What we take from Codman

and its successors is that, unless the lease indicates

otherwise, good or tenantable condition means "as of the start

of the lease."

Does the 1989 Lease, as a whole, indicate otherwise?

It is true that the lease shows, in the sum of its provisions,

an intent to treat the tenant as pretty close to an owner during

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the lease period. Although a tenant, Racal is explicitly

responsible for upkeep, repairs and even the owner's taxes on

the property. But such a tenant is at most a temporary owner

during the lease period; the "owner" label tells us very little

about the tenant's liability after the tenant's "ownership" has

ceased for defects that arose before his "ownership began."

Similar uncertainty inheres in provisions in the 1989

Lease that gave the tenant the right to inspect before

occupancy, treated occupancy as an "acknowledgment" that the

premises were in satisfactory condition, and left to the tenant

the cost of any further additions or improvements. Thus, Racal

was properly responsible for repairing the system during

occupancy if it wanted decent HVAC service. Yet all of these

provisions could be taken to mean no more than that the tenant

is not going to get any more work out of the landlord, nor be

able to avoid the lease, because of preexisting defects.

In sum, nothing in the 1989 Lease decisively warrants

a departure from the approach taken in Codman: Racal bears

responsibility regardless of fault for any harm or defects in

the HVAC system that occurred during the lease term; but

Principal cannot recover for defects or failings that existed

prior to the lease term. And, on this view, the district

court's outcome must be sustained. The HVAC system may have

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deteriorated further under Racal's second lease but, since the

district court found that the system was essentially beyond

repair at the start of that lease, replacement was necessary

from the start and nothing that happened afterwards increased a

loss that Principal must otherwise bear.

Affirmed.

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