PLANTERS GIN COMPANY v. FEDERAL COMPRESS & WAREHOUSE COMPANY, INC., ET AL.

PLANTERS GIN COMPANY v. FEDERAL COMPRESS & WAREHOUSE COMPANY, INC., ET AL.

SUPREME COURT OF TENNESSEE, AT JACKSON- 78 S.W.3d 885; 2002 Tenn. LEXIS 310-
July 9, 2002, Filed

PRIOR HISTORY: [**1] Tenn R. App. P. 11, Appeal as of Right; Judgment of
the Court of Appeals Reversed. Appeal from the Court of Appeals, Western
Section. Circuit Court for Shelby County. No. 88907-5. T.D. Kay S. Robilio,
Judge.

Planters Gin Co. v. Federal Compress & Warehouse Co., 2000 Tenn. App. LEXIS
571 (Tenn. Ct. App. Aug. 15, 2000)

DISPOSITION: Judgment of the Court of Appeals Reversed.

CASE SUMMARY

PROCEDURAL POSTURE: The Tennessee Court of Appeals, Western Section,
reversed the trial court's order of summary judgment in favor of appellant
warehouse corporation in a contract dispute between the corporation and
appellee gin company. The corporation appealed.

OVERVIEW: At issue was whether an indemnity clause holding the corporation
harmless for any liability or loss arising out of the use of the premises
and requiring the gin company to carry insurance on the contents stored in
the warehouse barred recovery against the corporation for damages caused by
negligence occurring in an adjacent storage compartment. The court of
appeals held that the indemnity clause did not bar the action. The supreme
court found, however, no ambiguity in the contract. The language provided
that the gin company agreed to hold harmless the corporation for any
liability or loss arising out of use of the premises. Nothing in the
contract limited the allocation of risk or suggested that the allocation of
risk was contingent on the location of the corporation's alleged act of
negligence. The indemnity provision was not contrary to any rule of law or
public policy. Even broad transfers of liability, where unambiguous, should
have been honored.


OUTCOME: The judgment was reversed.

COUNSEL: Michael B. Neal and Daniel W. Van Horn, Memphis, Tennessee, for the
appellant, Federal Compress & Warehouse Company, Inc.
Allan B. Thorp, Memphis, Tennessee, for the appellee, Planters Gin Company.

JUDGES: ADOLPHO A. BIRCH, JR., J., delivered the opinion of the court, in
which Frank F. Drowota, III, C.J., E. Riley Anderson, Janice M. Holder, and
WILLIAM M. BARKER, JJ. joined.

OPINIONBY: ADOLPHO A. BIRCH, JR.

OPINION: [*887]

This appeal from a denial of summary judgment arises from a contract dispute
between Planters Gin Company and Federal Compress & Warehouse Company, Inc.
Federal Compress & Warehouse Company, Inc. leased warehouse space to
Planters Gin Company. At issue is whether an indemnity clause holding
Federal Compress & Warehouse Company, Inc. harmless for "any liability or
loss" arising out of the "use of the premises" and requiring Planters Gin
Company to carry insurance on the contents stored in the warehouse bars
recovery against [**2] Federal Compress & Warehouse Company, Inc. for
damages caused by negligence occurring in an adjacent storage compartment.
We find the contract unambiguous and valid. Accordingly, we hold that the
indemnity provision limiting Federal Compress & Warehouse Company, Inc.'s
liability is enforceable and bars recovery under the facts of this case. The
Court of Appeals's judgment against Federal Compress & Warehouse Company,
Inc. is reversed, and [*888] the judgment of the trial court is
reinstated.

I. Facts and Procedural History

Federal Compress & Warehouse Company, Inc. (Federal Compress) is in the
business of warehousing cotton; it stores this cotton for cotton gins and
cotton farmers under bailment contracts. Additionally, a small portion of
its business is from leasing warehouse space to tenants. Federal Compress
has warehouse facilities in five different states, one of them being the
Bodley Plant in Memphis, Tennessee.

The Bodley Plant consists of a 228,000 square foot warehouse built in the
1920s. It is divided into seven interconnected compartments. Though
initially referred to as "sheds," the company began referring to the
individual compartments as "buildings." Each compartment shares [**3]
common walls with at least one other unit. The walls between the units are
firewalls; internal doors connect the compartments. The plant is serviced by
one parking lot, one loading dock, and one rail spur.

The compartments are numbered one through seven. n1 Compartments one through
three, being in somewhat of a triangular arrangement, all share common walls
and a common sprinkler system. It is these three compartments, referred to
in the contract documents as "buildings," that are at issue in this case.

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n1 Compartment four did not exist at the time of this suit, having been torn
down for a parking lot.


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On August 22, 1994, Planters Gin Company (Planters Gin) entered into a
contract leasing compartments one and two (approximately 61,000 square feet)
from Federal Compress and used these units to store cotton. The adjoining
compartment three was neither leased nor used to store cotton at the time in
issue. As in all of Federal Compress's leasing agreements, Planters Gin, the
tenant, was responsible for insuring [**4] the contents warehoused at the
plant. The lease also required that this insurance coverage contain a waiver
of subrogation clause as to Federal Compress. n2 Planters Gin maintained an
insurance policy on its stored cotton; n3 the insurance on the building's
physical structure was maintained by Federal Compress. Under the leasing
agreement, the maintenance of the water sprinkler system was also the
obligation of Federal Compress.

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n2 As mentioned previously, most of the cotton warehoused with Federal
Compress was held under a bailment contract; Federal Compress was
responsible for insuring the cotton it held as bailee. The analysis of this
opinion does not affect the law controlling bailment relationships; we
address the liability issue before us solely in the context of a leasehold
contract.


n3 The "marine open cotton policy" obtained by Planters Gin is the usual
policy by which cotton merchants or others in the cotton industry insure
cotton which they own. Such policies insure cotton while in warehouses, in
compress yards, on wharves, on levees, or elsewhere on the land. Though this
particular policy allowed the insurer to void the insurance if any agreement
by Planters Gin impaired the insurer's rights to seek recovery for loss from
a third party, under an optional provision, the insurer chose to cover the
losses and pursue recovery against the named defendants.


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Between 8 p.m. and 9 p.m. on Sunday, October 27, 1996, heavy rainfall from a
storm caused the roof to collapse over compartment three. The weight of the
collapsed roof caused a water pipe in the sprinkler system to break. Water
from the pipe and rainwater poured onto the floor of compartment three and
seeped through the wall and doors into compartments one and two. Though
Federal Compress had contracted with Wells Fargo [*889] Alarm Services,
Inc. (Wells Fargo) to immediately notify the company of any water released
through the sprinkler pipe system, no notification call was made by Wells
Fargo. Consequently, the broken pipe and the resulting flooding of the
affected compartments was not discovered until the next morning at
approximately 6 a.m. By that time, the stacks of Planters Gin's cotton in
compartments one and two had absorbed the water and were damaged in the
alleged amount of $ 250,000.

Planters Gin, acting on behalf of its insurance carrier, filed a complaint
grounded on negligence against both Federal Compress and Wells Fargo.
Planters Gin alleged that Federal Compress was negligent in both the
maintenance of the roof over compartment three and in monitoring its
sprinkler system. [**6] Both defendants denied liability for the damage to
the cotton and filed motions for summary judgment. The trial court found
that the contract between Federal Compress and Wells Fargo created no duty
to Planters Gin on the part of Wells Fargo. It also found that the indemnity
clause in the leasing contract between Federal Compress and Planters Gin
prevented recovery against Federal Compress for damage to the cotton.
Accordingly, both defendants were granted summary judgment.

On appeal to the Court of Appeals, the summary judgment granted to Wells
Fargo was upheld. However, after holding that the indemnity clause in the
lease between Federal Compress and Planters Gin limited only that liability
associated with the lease of compartments one and two, the Court of Appeals
found that the damages arose out of Federal Compress's maintenance of
compartment three. Consequently, it reversed the summary judgment granted to
Federal Compress. Both Planters Gin and Federal Compress requested
permission to appeal. This Court granted Federal Compress permission to
appeal; because Planters Gin's application was denied, Wells Fargo is no
longer a party to this case.

II. Standard of Review

The issues [**7] accepted for review by this Court are limited to the legal
effect of the contractual provisions allocating risk between Federal
Compress and Planters Gin. This case comes to the Court on a motion for
summary judgment, a procedure utilized in cases where a just and speedy
determination may be reached without the expense of trial. See Evco Corp. v.
Ross, 528 S.W.2d 20, 24-25 (Tenn. 1975). Summary judgment is appropriate,
however, only if the moving party demonstrates that there are no genuine
issues of material fact and that the party is entitled to judgment as a
matter of law. Tenn. R. Civ. P. 56.04; Webber v. State Farm Mut. Auto. Ins.
Co., 49 S.W.3d 265, 269 (Tenn. 2001); Byrd v. Hall, 847 S.W.2d 208, 210-11
(Tenn. 1993). Because summary judgment involves only questions of law or the
application of the law to certain facts, the trial court's grant of summary
judgment in this case is given a de novo review without any presumption that
the trial court's conclusions were correct. Cowden v. Sovran Bank/Central
South, 816 S.W.2d 741, 744 (Tenn. 1991).

III. Contract Construction

The legal effect of the terms of a lease [**8] are governed by the general
rules of contract construction. Cf. Waddle v. Lucky Strike Oil Co., 551
S.W.2d 323, 326 (Tenn. 1977). Thus, the outcome of this case rests on a
contractual interpretation of the leasing agreement between Federal Compress
and Planters Gin. In "resolving disputes concerning contract interpretation,
our task is to ascertain the intention of the parties based upon the usual,
natural, [*890] and ordinary meaning of the contractual language."
Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999). This determination
of the intention of the parties is generally treated as a question of law
because the words of the contract are definite and undisputed, and in
deciding the legal effect of the words, there is no genuine factual issue
left for a jury to decide. 5 Joseph M. Perillo, Corbin on Contracts, § 24.30
(rev. ed. 1998); Doe v. HCA Health Services of Tenn., Inc., 46 S.W.3d 191,
196 (Tenn. 2001).

A court's initial task in construing a contract is to determine whether the
language of the contract is ambiguous. Once found to be ambiguous, a court
applies established rules of construction to determine the parties' [**9]
intent. "Only if ambiguity remains after the court applies the pertinent
rules of construction does [the legal meaning of the contract] become a
question of fact" appropriate for a jury. Smith v. Seaboard Coastline R.R.
Co., 639 F.2d 1235, 1239 (5th Cir. 1981). Finding no such ambiguity in the
contract between Federal Compress and Planters Gin, the issues presented to
this Court are suitable for determination by summary judgment.

IV. Analysis

The central tenet of contract construction is that the intent of the
contracting parties at the time of executing the agreement should govern.
Empress Health & Beauty Spa, Inc. v. Turner, 503 S.W.2d 188, 190 (Tenn.
1973). The intent of the parties is presumed to be that specifically
expressed in the body of the contract. "In other words, the object to be
attained in construing a contract is to ascertain the meaning and intent of
the parties as expressed in the language used and to give effect to such
intent if it does not conflict with any rule of law, good morals, or public
policy." 17 Am. Jur. 2d, Contracts, § 245, quoted in Turner, 503 S.W.2d at
190. If clear and unambiguous, the literal [**10] meaning of the language
controls the outcome of contract disputes.

Nonetheless, a contractual provision may be susceptible to more than one
reasonable interpretation, which renders the terms of the contract
ambiguous. Memphis Housing Auth. v. Thompson, 38 S.W.3d 504, 512 (Tenn.
2001), cert. denied, 151 L. Ed. 2d 27, U.S. , 122 S. Ct. 59 (2001).
"A contract is ambiguous only when it is of uncertain meaning and may fairly
be understood in more ways than one." Turner, 503 S.W.2d at 190-91. Where
the terms of the contract are ambiguous, the intention of the parties cannot
be determined by a literal interpretation of the language, and the courts
must resort to other rules of construction.

Here, the language at issue is found in paragraph 25 of the leasing
agreement. Captioned "Damages and Accidents," this paragraph requires
Planters Gin to insure the contents of the leased premises, to waive
subrogation of its rights to recoupment as to Federal Compress, n4 [*891]
and to indemnify Federal Compress against liability for loss:

Lessee agrees to hold harmless and indemnify Lessor from and against any
liability or loss, including [**11] counsel fees incurred in good faith by
the Lessor, arising out of any cause associated with Lessee's business or
use of the premises. In addition, Lessee agrees to provide public liability
insurance naming Lessor as additional insured to protect Lessor from risks
customarily covered by such insurance, in amounts not less than $ 250,000
per person and $ 500,000 per accident, and $ 100,000 for damage to property.
Lessee also shall carry contents coverage on its contents with a waiver of
subrogation clause as to Lessor.

The Court of Appeals found this language ambiguous as to this incident. Had
the roof over compartments one or two collapsed, the Court of Appeals
apparently would have upheld the trial court's finding that this provision
barred recovery for damage to the cotton. Instead, the court found this
provision unclear as to the allocation of liability for damages caused by
negligence occurring outside of the specific area leased-in this case,
occurring in compartment three. Because it found the language of paragraph
25 susceptible to more than one reasonable interpretation, it considered the
provision ambiguous. Utilizing rules of construction and relying on the case
of [**12] Interested Underwriters at Lloyd's v. Ducors, Inc., n5 it found
that the limitation on liability provision was only applicable to damages
arising out of negligence relating to the maintenance of the two
compartments leased to Planters Gin. Accordingly, it held that the indemnity
clause did not bar this action.

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n4 The effect of the waiver of subrogation clause is that the insurer is not
allowed to seek reimbursement from Federal Compress for insurance proceeds
paid to Planters Gin.

Subrogation is defined as "the substitution of another person in the place
of a creditor, so that the person in whose favor it is exercised succeeds to
the rights of the creditor in relation to the debt." Castleman Constr. Co.
v. Pennington, 222 Tenn. 82, 432 S.W.2d 669, 674 (1968) (citation omitted).
In the context of insurance, subrogation allows the insurer to "stand in the
shoes" of the insured and assert the rights the insured had against a third
party.

York v. Sevier County Ambulance Auth., 8 S.W.3d 616, 618-19 (Tenn. 1999);
Blankenship v. Estate of Bain, 5 S.W.3d 647, 650 (Tenn. 1999); see also 11
John Alan Appleman and Jean Appleman, Insurance Law and Practice § 6501
(1981). [**13]



n5 103 A.D.2d 76, 478 N.Y.S.2d 285 (App. Div. 1984), aff'd, 481 N.E.2d 252
(N.Y. 1985).


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We, however, find no ambiguity in the contract at bar. The language provides
that Planters Gin "agrees to hold harmless" Federal Compress for "any
liability or loss . . . arising out of . . . use of the premises." The
meaning of this provision is inescapable, particularly given the language by
which Planters Gin agrees to provide insurance to cover the contents stored
in the warehouse with a waiver of subrogation rights as to claims against
Federal Compress. Nothing in the contract limits this allocation of risk or
suggests that this allocation of risk is contingent on the location of
Federal Compress's alleged act of negligence.

"If the language used by the parties is plain, complete, and unambiguous,
the intention of the parties must be gathered from that language, and from
that language alone . . . ." A strained construction may not be placed on
the language used to find ambiguity where none exists.

Turner, 503 S.W.2d at 190-91 (quoting 17 Am. Jur.2d Contracts § [**14]
245); see also Johnson v. Johnson, 37 S.W.3d 892, 896 (Tenn. 2001);
Farmers-Peoples Bank v. Clemmer, 519 S.W.2d 801, 805 (Tenn. 1975).

We are not convinced by the argument that the indemnity clause is not
applicable because the negligence occurred on property which was not the
subject of the lease. To support this argument, Planters Gin relies on
Ducors, 481 N.E.2d at 285. In Ducors, the defendant owned two adjoining
commercial buildings. In contrast to the case before us, they constituted
two distinct premises with two distinct street addresses. A fire originating
in the vacant building resulted in a loss [*892] to the tenant of the
adjoining building. Though there was an exculpatory provision waiving
recovery against the landlord, the court found the provision inapplicable
because the alleged negligence in the adjoining building was "completely
extraneous to any duty or obligation encompassed by the parties' agreement .
. . ." Ducors, 478 N.Y.S.2d at 286-87. It construed the lease to "limit the
risks to be allocated . . . to those which arise out of the landlord's
ownership and the tenant's use and occupancy of the [**15] demised
premises." Id. at 287. That court found the negligence to be "committed by a
third-party who happens to be the landlord." Id.; see also W. F. Zimmerman,
Inc. v. Daggett & Ramsdell, Inc., 34 N.J. Super. 81, 111 A.2d 448, 450 (N.J.
1955) ("negligence in the operation of the [landlord's unrelated] commercial
enterprise" was outside the limitation of liability anticipated by
exculpatory clause).

Though it may be possible that some negligent acts by a landlord could be so
remote to the landlord/tenant relationship as to render the coverage of an
otherwise applicable indemnity clause ambiguous, the failure of a commercial
landlord to maintain the roof over the adjoining compartment in a cotton
warehouse does not fall within such an exception. As stated in Butler
Manufacturing Co. v. Americold Corp., "the plain language of the exculpatory
provisions focuses on the location of the property which is damaged, not on
the situs . . . of defendants' allegedly negligent conduct." 841 F. Supp.
1107, 1111 (D. Kan. 1993). If plain, it is the language of the contract that
will control the breadth of an indemnity clause. For example, [**16] in
Smith v. Seaboard Coast Line Railroad Co., 639 F.2d 1235, 1241 (5th Cir.
1981), the court found that damage to a tenant's building located on
property adjoining the leasehold was covered by an indemnity clause in the
lease. In Seaboard Coast Line, the tenant owned a building complex in which
one shed was located on property leased from the railroad. A fire started in
this shed and then spread to a building on the tenant's property. The court
held that the language in the lease indemnifying the landlord for "damage to
property caused by or in any way connected with . . . use of the leased
premises" barred recovery for damages to the building located on the
tenant's property. Id.

Nor is such an indemnity provision contrary to any rule of law or public
policy. Historically, the "freedom of contract" has insured "that parties to
an agreement have the right and power to construct their own bargains."
Blake D. Morant, Contracts Limiting Liability: A Paradox with Tacit
Solutions, 69 Tul. L. Rev. 715, 716 (1995). As with other types of
contracts, the "terms of a lease should be binding on the parties thereto
unless there is some overriding social [**17] policy that would be
undermined by their enforcement." Restatement (Second) of Property, § 5.6
(1977). This Court has consistently recognized that the right of parties to
allocate liability for future damages through indemnity clauses, generally,
is not contrary to public policy. See Crawford v. Buckner, 839 S.W.2d 754,
756 (Tenn. 1992); Houghland v. Security Alarms & Services, Inc., 755 S.W.2d
769, 773 (Tenn. 1988) (liability of burglar alarm service was limited by an
exculpatory clause); Turner, 503 S.W.2d at 191-92 (customer assumed the risk
of injury from negligence of a health spa); Chazen v. Trailmobile, Inc., 215
Tenn. 87, 384 S.W.2d 1 (Tenn. 1964) (commercial lease absolved both landlord
and tenant from liability for a loss resulting from fire); Moss v. Fortune,
207 Tenn. 426, 340 S.W.2d 902 (Tenn. 1960) (renter assumed the risk incident
to injury from the hiring and riding of a horse). Indeed, the allocation of
risk agreed to by parties with equivalent bargaining powers [*893] in a
commercial setting serves a particularly valid purpose where, as here, the
contract delineates the parties' duty to [**18] obtain and bear the cost of
insurance. See Evco Corp. v. Ross, 528 S.W.2d 20, 23 (Tenn. 1975); Kellogg
Co. v. Sanitors, Inc., 496 S.W.2d 472, 473 (Tenn. 1973). Thus, even broad
transfers of liability, where unambiguous, should be honored.

This freedom to limit liability by contract is subject to some exceptions.
By statute, indemnity agreements relative to construction contracts are
deemed void as against public policy, Tenn. Code Ann. § 62-6-123 (1997), and
residential rental agreements in certain counties may not limit the
liability of the landlord or indemnify the landlord for liability. Tenn.
Code Ann. § 66-28-203(a)(2)(1993). Our Court has also found indemnity or
exculpatory clauses violate public policy in certain distinct fact
situations. In Crawford, we held that an exculpatory clause in a residential
lease releasing a landlord from liability for future acts of negligence,
even when executed in a county not covered by Tenn. Code Ann. § 66-28-203,
is void as contrary to public policy. 839 S.W.2d at 760. And in Olson v.
Molzen, 558 S.W.2d 429, 431 (Tenn. 1977), [**19] we held an exculpatory
contract signed by a patient as a condition of receiving medical treatment
was contrary to public policy and void. Furthermore, we have found indemnity
clauses are invalid as to damages caused by gross negligence or willful
conduct on the part of the indemnified party. Adams v. Roark, 686 S.W.2d 73,
75-76 (Tenn. 1985); see William K. Jones, Private Revision of Public
Standards: Exculpatory Agreements in Leases, 63 N.Y.U.L. Rev. 717, 732
(1988). No such policy considerations are present in the case before us.

V. Conclusion

The contract before the Court is unambiguous and contravenes no statute or
principle of public policy. Accordingly, we hold that the indemnity
provision limiting Federal Compress's liability is enforceable and bars
recovery under the facts of this case. The Court of Appeals's judgment
against Federal Compress is reversed, and the judgment of the trial court is
reinstated. Costs of appeal are taxed to Planters Gin Company, for which
execution may issue if necessary.

ADOLPHO A. BIRCH, JR., JUSTICE