Southland Corp. v. Ashland Oil, Inc.

No. 88-0700 (D.N.J. November 23, 1988)

The court holds that a claim by the purchaser of a chemical manufacturing plant that the seller is liable for hazardous waste cleanup costs under the indemnity provision of the agreement of sale is not time-barred, and the agreement of sale does not bar the purchaser from seeking indemnification. In a prior decision, 19 ELR 20733, the court held that the seller's obligations under the indemnity provision terminated two years after the closing date under the terms of the agreement. The court refused to consider the buyer's claim that it filed a notice of claim within this two-year period, concluding that any cause of action based on breach of the indemnity provision accrued in 1980 when the seller failed to respond to the buyer's claim and is thus barred by New Jersey's six-year statute of limitations. The court grants the buyer's motion for reconsideration based on new evidence that the parties agreed to toll the running of the statute of limitations. The court holds that the agreement's "as is" clause does not supersede the indemnification clause. To the extent the clauses are inconsistent, the more specific indemnification clause controls over the general disclaimer of warranty in the indemnification clause. The court holds that a provision of the agreement of sale requiring the seller to remove any waste material for which the cost of removal exceeds $ 5,000 upon notice from the buyer applies only to above-ground waste drums, not to excavation of underground waste material or correction of groundwater contamination. The court holds that the letter that the buyer sent to the seller within the two-year contractual period constitutes a timely notice of a legitimate claim. The buyer's notification to the seller of the New Jersey Department of Environmental Protection's (NJDEP's) demand for groundwater monitoring at the plant was valid notice of a claim against the buyer. Even if the contract limits indemnification to third-party claims, the NJDEP qualifies as a third party. The language of the indemnification clause does not limit the seller's obligation to claims arising out of formal lawsuits or governmental proceedings.

[A previous decision in this litigation is published at 19 ELR 20733.]

Counsel are listed at 19 ELR 20733.

[19 ELR 20738]

Fisher, J.:

Plaintiff, the Southland Corporation ("Southland"), moves this court for an order granting reargument and reconsideration of that portion of the court's October 6, 1988, opinion and order which granted summary judgment to defendant, Ashland Oil, Inc. ("Ashland"), on Count Four of Southland's complaint. Assuming reargument is granted, Southland seeks an order denying Ashland summary judgment on Count Four of the Complaint. For the reasons set forth below, both requests are granted.

On October 3, 1988, oral argument was heard on the parties' cross-motions for summary judgment. Shortly thereafter, the court issued an opinion and order, dated October 6, 1988, which granted summary judgment to Southland on Counts One, Two and Fourteen of its Complaint and summary judgment to Ashland on Count Four of the Complaint. Counts One, Two and Fourteen are based on a statutory cause of action created by §§ 107(a) and 113(f) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). The Court found that Ashland was statutorily liable to Southland, under CERCLA, for that part of the past and future response costs incurred by Southland in connection with the cleanup of the Great Meadows chemical plant necessitated by the dumping of hazardous and toxic wastes by Ashland during its prior ownership.

In Count Four of its Complaint, however, Southland alleges that Ashland had a separate contractual obligation to indemnify Southland "from and against any and all . . . costs, expenses, damages, losses, obligations, lawsuits, claims, liabilities . . . resulting from [Ashland's] ownership, use . . . or maintenance . . . of the Business . . . prior to the Closing," imposed by section 9.01 of the Agreement of Purchase and Sale (the "Agreement"). In its earlier cross-motion, Ashland sought a determination that the Agreement bars any recovery by Southland for breach of contract based on the indemnification provision in the contract. Southland's current motion addresses that part of the court's opinion which granted summary judgment to Ashland, dismissing Count Four of the Complaint.

As noted in the court's previous opinion, section 11.03 of the Agreement placed a two-year limitation, following the Closing Date, on Ashland's affirmative promise to indemnify Southland pursuant to section 9.01.¹ The Closing on the purchase and sale of the Great Meadows facility occurred on May 1, 1978. Any claim which arose more than two years after this date was plainly barred by the terms of the Agreement. Southland maintains, however, that it filed a timely notice of claim with Ashland by letter on April 25, 1980. Believing that any cause of action based on a breach of the contract's indemnity provision accrued in 1980, when Ashland rejected Southland's "claim," and was thus time barred under New Jersey's six-year statute of limitation for claims based on contract, N.J. Stat. Ann. § 2A:14-1 (West 1987), the court granted Ashland's motion for partial summary judgment, dismissing Count Four of the complaint. As a result, the court never reached the issue of whether Southland's April 25, 1980, letter constituted proper notice of a claim encompassed by section 9.01 of the Agreement.

Rule 12I of the General Rules of the United States District Court for the District of New Jersey states, in pertinent part, that the party moving for reconsideration shall submit "a memorandum setting forth concisely the matters or controlling decision which counsel believes the court has overlooked." In support of its motion, Southland has submitted sequential Tolling Agreements entered into by the parties which evidence the parties agreement to toll the running applicable statutes of limitations so that settlement negotiations would be facilitated without prejudice to plaintiff's claims. Ashland does not dispute either the existence of these agreements or their legal effect. In light of the new evidence before the court, it now appears that the court's earlier conclusion that the breach-of-contract claim embodied in Count Four of Southland's Complaint was time barred under New Jersey's six-year statute of limitation was erroneous. Southland's motion for reconsideration is thus granted, and the court will now address the merits of Ashland's previous cross-motion for summary judgment on Count Four.

In its motion to dismiss Count Four by way of summary judgment, Ashland presented three separate arguments to the court in support of its contention that the agreement entered into by the parties barred recovery by Southland on its breach-of-contract claim. Ashland argues that (1) the "as is, where is" clause (section 6.06) in the Agreement supersedes section 9.01 and controls the issue of whether Ashland is obligated to indemnify Southland for these costs, (2) any claim Southland had for cleanup costs fell under the waste-removal provision (section 11.15), which required that any claims for such costs be made before the Settlement Date, and (3) even assuming that section 9.01 provides Southland with a remedy of indemnification for investigation and subsequent cleanup costs, Southland did not make a legitimate claim before the Agreement's cutoff date for indemnification claims. Southland, in opposition, asserts that Ashland's construction of the contract is unsupported by the plain language of the Agreement.

The issues raised by Ashland's motion can be resolved through simple contract interpretation.² As noted in the court's October 6, 1988, opinion, New Jersey courts have determined that contract interpretation is a question of law for the court. First Jersey Nat'l Bank v. Dome Petroleum Ltd., 723 F.2d 335, 339 (3d Cir. 1983), quoting Trucking Employees of North Jersey Welfare Fund v. Vrablick, 177 N.J. Super. 142, 148 (App. Div. 1980) ("The construction of a written agreement is ordinarily a matter for the court . . ."). The court concerns itself only with the objective intent of the parties as manifested in the language of the agreement, in light of the surrounding circumstances. Dome Petroleum Ltd. v. Employers Mut. Liability Ins. Co., 767 F.2d 43, 47 (3d Cir. 1985). If the contractual language is clear and unambiguous, summary judgment may be entered "despite the parties' differing views as to what consequences flow from those clauses." United States v. Bills, 639 F. Supp. 825, 829 (D.N.J. 1986), modified on other grounds, 822 F.2d 373 (3d Cir. 1987).

Ashland's first contention, that the "as is, where is" clause [19 ELR 20739] contained in section 6.06 of the Agreement supersedes section 9.01's indemnification provision, is clearly without merit. Ashland argues that, pursuant to section 6.06³ Southland purchased the Great Meadows facility on an "as is, where is" basis and that this included risks for third-party liability arising out of the operation of the plant prior to Closing. To reach this conclusion, however, the court would have to completely ignore (as Ashland undoubtedly must) the fact that Ashland undertook an affirmative obligation to indemnify Southland for this liability in section 9.01 of the Agreement. To construe a writing properly, however, the writing must be interpreted as a whole, and its individual terms must be construed in conjunction with the other parts of that writing. Barco Urban Renewal Corp. v. Housing Auth., 674 F.2d 1001, 1009 (3d Cir. 1981); Krosnowski v. Krosnowski, 22 N.J. 376, 387 (1956). Acceptance of Ashland's interpretation would require the court to reach a result inconsistent with the remaining terms of the Agreement.

Ashland also argues that, to the extent that section 6.06 appears inconsistent with section 9.01, the "as is, where is" clause is the more specific of the two and thus controls this issue. The court notes that sections 6.06 and 9.01 are not necessarily inconsistent with each other; however, to the extent that they can be read as such, well-settled contract law principles require that where there is an inconsistency between a general provision and a more specific provision, the more specific clause will qualify and control the more general clause. Standard Oil Dev. Co. Employees Union v. Esso Research & Eng'g Co., 38 N.J. Super. 106, 117, sustained on reh'g, 38 N.J. Super. 293 (App. Div. 1955); Maryland Casualty Co. v. Hansen-Jensen, Inc., 15 N.J. Super. 20, 26 (App. Div. 1951). While Ashland is correct in its statement of the law, its application of the law to the Agreement in issue is faulty. Of the two provisions, the indemnification clause is the more specific and will control over the general disclaimer of warranty found in section 6.06.

Next, Ashland asserts that the claim made by Southland for investigation and future cleanup costs fell exclusively under section 11.15 of the Agreement, which provides for removal of wastes from the facility.⁴ This argument is equally untenable. The documents submitted evidence that it has always been Ashland's position that section 11.15 covered only the removal of above-ground drums of waste and did not encompass removal of underground waste material by excavation or correction of groundwater contamination. See Lyon Affidavit PP8-10, Attachments 2, 3. In light of the Lyon Affidavit and the documents submitted in support thereof, the court finds Ashland's new position to the contrary to be one of convenience and remains unpersuaded by it.

Finally, Ashland contends that even if it assumed an independent contractual obligation to indemnify Southland for third-party claims, Southlands' failure to submit a claim covered by section 9.01 during the two-year period following the Closing Date precludes Southland from recovering under a breach-of-contract claim. Southland first contests the application of the two-year survival clause (section 11.03) to Ashland's contractual obligation, under 9.01, to indemnify Southland, but argues, in the alternative, that even if the promise to indemnify expired two years after Closing, Southland submitted a timely notice of claim pursuant to section 9.01 and 9.03 of the Agreement on April 25, 1980.

Because the court has already determined that the two-year limitation imposed in section 11.03 applied to claims for indemnification under section 9.01, the only issue which remains to be decided is whether Southland's April 25, 1980, letter to Ashland constitutes a timely notice of a legitimate claim.

In pertinent part, section 9.01 provides:

Seller shall protect, defend . . . indemnify, and save and hold harmless Buyer . . . from and against any and all . . . costs, expenses, damages, losses, obligations, lawsuits, claims, liabilities, fines or penalties . . . resulting from Seller's acts, alleged acts, omissions, and alleged omissions before the Closing Date, including in each instance, but not limited to, all costs and expenses of investigating and defending any claim at any time arising and any final judgments, compromises, settlements and court costs and attorney's fees, whether foreseen or not foreseen incurred by Buyer in connection with, arising out of, resulting from, relating to, or incident to: (4) the ownership, use, maintenance, or operation of the Assets or the Great Meadows Business, and any action taken or omitted to be taken in connection with or relating thereto, which occurred or arose during or relates to, any period prior to the Closing.

Ashland maintains that the above clause was only intended to cover legal demands againt Southland by some "third party" within two years of Closing and argues that the April 25, 1980, letter did not qualify as a claim based on a "legal demand," as it was no more than a notice of speculative injury to Southland based on Southland's belief that the NJDEP might possibly require something more of Southland in the future.

Ashland finds the April 25, 1980, letter defective in two respects. First, Ashland states that it is not notice of a "third-party" claim as required by the terms of the Agreement. Second, Ashland maintains that the "claim" against Southland does not qualify as a "legal demand" necessary to trigger indemnification. The court disagrees. Southland's notification to Ashland of the New Jersey Department of Environmental Protection's ("NJDEP") demand that a program of well monitoring be instituted at the plant to begin correction of an existing groundwater-contamination problem constituted valid notice of a claim against Southland which fell within the scope of sections 9.01 and 9.03.⁵ As such it is sufficient to defeat Ashland's motion for summary judgment.

In reaching this result, it is unnecessary for the court to determine whether the scope of the indemnification clause is broad enough to encompass other than "third-party" claims. Even if, as Ashland contends, section 9.01 limits indemnification to "third-party" claims, certainly the NJDEP, as a separate government agency, qualifies for the status of a third party. Therefore, Ashland's construction of the Agreement with regard to this issue does little to advance its argument.

The question of whether the indemnification clause required that formal "legal demand" be made before the right to indemnification arises is more troublesome. Ashland cites two cases as authority in support of its contention that it does. Both, however, are easily distinguishable. In Ultramar America Ltd. v. Dwelle, No. 87-5731 (9th Cir. May 20, 1988), the court based its findings that the indemnitee was not entitled to indemnification for certain environmental claims on a much narrower indemnification provision.⁶ The clause in Ultramar specified that the types of third-party claims for indemnity that may arise under the Agreement were those "arising out of any suit, action, claim or legal, administrative, arbitration or other proceeding or governmental investigation." Slip op. at 3.

Furthermore, the court found that the assessment costs incurred by the indemnitee in Ultramar were part of a state-wide program which required that an environmental assessment be performed at all dump sites in California. The record in Ultramar did not indicate that a particular problem existed at the facility in question, and the court found an absence of evidence that the government agency indicated that the indemnitee would be responsible for the investigation costs incurred by the agency or any subsequent cleanup cost. Slip op. at 3-4.

Similarly, in Jones v. Sun Carriers, the only event which occurred before the cutoff date for indemnification claims in the parties' agreement was the notification by the Environmental Protection Agency ("EPA") to the indemnitee that its terminal might be dioxin contaminated.⁷ 856 F.2d 1091, 1093 (8th Cir. 1988). The indemnitee [19 ELR 20740] was not required to incur investigation costs, and the EPA did not confirm that a problem did exist requiring corrective action by the indemnitee until after the cutoff date in the contract. Id. At no time prior to the deadline was a demand made by the EPA that the indemnitee conduct an investigation or that the indemnitee would be responsible for any necessary cleanup costs.

In contrast, the language of the indemnification clause in the instant case is far broader. It does not limit Ashland's obligation to indemnify Southland to claims arising out of lawsuits, acts or other governmental proceedings. Instead, under the terms of section 9.01, Ashland is obligated to indemnify Southland "from and against any and all direct or indirect costs, expenses, damages, losses, obligations, lawsuits, claims, liabilities, fines, or penalties . . . including, but not limited to all costs and expenses of investigating and defending any claim at any time arising and any final judgment, compromises, settlements and court costs." The language of section 9.01 clearly does not restrict Ashland's indemnification obligation toclaims arising out of formal lawsuits or governmental proceedings. Moreover, the NJDEP's mandate that Southland begin drilling wells to monitor groundwater contamination qualifies as a "legal" demand.

There is nothing in the record which indicates that the investigation which the NJDEP required Southland to make was part of a routine state-wide program. Instead, the letter from the NJDEP to Ashland, dated October 19, 1977, just months before the sale of the plant, supports Southland's position that the well monitoring was required by the NJDEP because of a particular groundwater-contamination problem known to exist at the Great Meadows facility. See Plaintiffs Exh. 44. This liability for investigation costs incurred by Southland because of Ashland's "ownership, use, maintenance, or operation of . . . the Great Meadows Business" is sufficient evidence of a third-party claim necessary to defeat Ashland's motion to dismiss Count Four in its entirety by way of summary judgment.⁸

Accordingly, for the reasons set forth above, Southland's motion for reargument is granted and, upon reconsideration, Ashland's motion for summary judgment dismissing Count Four is denied. An order accompanies this opinion. No costs. November 21, 1988.

1. Section 11.03 states:

All of the representations, warranties, promises and agreements shall survive the Closing for a period of two (2) years . . . regardless of what investigations the parties may have made before the Closing.

2. A contract for indemnity is interpreted in accordance with the rules governing the construction of contracts. Ramos v. Browning Ferris Indus., Inc., 103 N.J. 177, 191 (1986).

3. Section 6.06 provides:

THE ASSETS ARE SOLD ON AN "AS IS, WHERE IS" BASIS WITHOUT WARRANTY OR GUARANTEE AS TO QUALITY, CHARACTER, PERFORMANCE OR CONDITION, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OR GUARANTEE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

4. Section 11.15 provides:

On or before the Settlement Date, Buyer shall notify Seller of any waste material which, by bid from an independent third party shall cost $ 5000, or more to remove from the Premises, and Seller, within a reasonable time thereafter, shall remove same from the Premises at Seller's expense.

5. Section 9.03, in part, requires that:

Promptly after any claim shall arise, or after any party has actual knowledge of the facts constituting the basis for any claim, for which either party shall be entitled to indemnification hereunder, such party shall notify the other party. Such notice shall specify all facts giving rise to such indemnification and the amount or estimate of the liability therefrom.

6. The court notes that the Ultramar opinion, relied on by Ashland in this regard, is an unpublished decision, which does not have precedential value.

7. In fact, the letter from the EPA stated "To date, we have not investigated your property and therefore have no indication that any problem in fact exists there." In the present suit, the NJDEP was acting on a specific contamination problem at the Great Meadows plant the existence of which they already had established through prior sampling.

8. The court notes, however, that there is insufficient evidence in the record to support a factual finding that the NJDEP made a claim against Southland for the costs of any remedial action required by the investigation, during the two-year period following the Closing Date. If Southland is to prevail at trial on a theory of contractual liability for these cleanup costs, some factual showing must be made that the NJDEP informed Southland, prior to the expiration of the indemnification period, that it would be held responsible for these costs.