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.
-3-
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
-4-
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
-5-
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.
-6-
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 . . . .").
-7-
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.
-8-
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
-9-
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.
-10-
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.
-11-
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
-12-
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
-13-
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
-14-
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.
-15-