3-1-2-9 APPALACHIAN INSURANCE CO. ET AL., PLAINTIFFS AND APPELLANTS, V. MCDONNELL DOUGLAS CORPORATION ET AL., DEFENDANTS AND APPELLANTS (Super.Ct.No. 481712)

II The Contractual Provisions

The trial court here ruled provisions in the contract between Western Union and McDonnell Douglas unambiguously precluded Western Union from suing McDonnell Douglas, Morton Thiokol or Hitco.

The fundamental canon of contract interpretation is the ascertainment of the parties' intent. (Universal Sales Corp. v. Cal. etc. Mfg. Co. (1942) 20 Cal.2d 751, 761; Ticor Title Ins. Co. v. Rancho Santa Fe Assn. (1986) 177 Cal.App.3d 726, 730.) The language of the instrument must govern its interpretation if it is clear and explicit. (Civ. Code, § 1638.) Generally, the words of a contract are to be understood in their ordinary and popular sense (Salton Bay Marina, Inc. v. Imperial Irrigation Dist. (1985) 172 Cal.App.3d 914, 931; Civ. Code, § 1644; Code Civ. Proc., § 1861) unless a contrary intent is shown, such as a specialized meaning due to trade custom and practice or a prior course of dealing (see LaCount v. Hensel Phelps Constr. Co. (1978) 79 Cal.App.3d 754; Code Civ. Proc., § 1856, subd. (c)).

The interpretation of a written contract is solely a judicial function unless the interpretation turns on the credibility of extrinsic evidence. (Parsons v. Bristol Development Co. (1965) 62 Cal.2d 861, 865; Medical Operations Management, Inc. v. National Health Laboratories, Inc. (1986) 176 Cal.App.3d 886, 891.) Extrinsic evidence may be introduced when the terms of the contract are ambiguous. (Vega v. Western Employers Ins. Co. (1985) 170 Cal.App.3d 922, 927, disapproved on other grounds in Moradi-Shalal v. Fireman's Fund Ins. Companies (1988) 46 Cal.3d 287; Code Civ. Proc., § 1856.)

A court must view the language in light of the instrument as a whole and not use a "disjointed, single-paragraph, strict construction approach." (Ezer v. Fuchsloch (1979) 99 Cal.App.3d 849, 861.) If possible, the court should give effect to every provision. (Civ. Code, § 1641; White v. Dorfman (1981) 116 Cal.App.3d 892, 897.) An interpretation which renders part of the instrument to be surplusage should be avoided. (see Estate of Newmark (1977) 67 Cal.App.3d 350, 356; Thackaberry v. Pennington (1955) 131 Cal.App.2d 286, 297.)

The contract between Western Union and McDonnell Douglas, contains two provisions addressing liability and allocation of loss. Appalachian concedes the first of these provisions, article 7, if enforceable, protects McDonnell Douglas from liability but argues it does not similarly protect McDonnell Douglas's subcontractors, i.e., Morton Thiokol and Hitco.

Article 7 provides:

"7. Warranties and Indemnities. [McDonnell Douglas] extends no warranty of any kind, express or implied, including any implied warranty of merchantability or suitability for purpose with respect to the PAM or with respect to services provided by [McDonnell Douglas] hereunder. Except as provided in Article 13, 15, 16, and 17 of this Agreement, under no circumstances will [McDonnell Douglas] be liable to Purchaser under or in connection with this Agreement, under any tort, negligence, strict liability, contract or other legal or equitable theory, for incidental or consequential damages or for Purchaser's cost of effecting cover. Purchaser shall indemnify and hold harmless [McDonnell Douglas], its officers, agents and employees from and against any and all liabilities, damages and losses, including costs and expenses in connection therewith, for death of or injury to any persons whomsoever and for the loss of, damage to or destruction of any property whatsoever, caused by, arising out of or in any way connected with the launch or operation of the PAM, Spacecraft, or Launch Vehicle unless resulting from the sole negligence or willful misconduct of [McDonnell Douglas], its officers, agents and employees. Purchaser hereby expressly waives and releases any cause of action or right of recovery which Purchaser may have hereafter against [McDonnell Douglas] for any loss or damage to the PAM, Spacecraft or Launch Vehicle, caused by, arising out of or in any way connected with the launch or operation of the PAM, Spacecraft or launch vehicle. Purchaser shall obtain a waiver from any insurance carrier with which the Purchaser carries property insurance covering the PAM, Spacecraft and/or launch vehicle releasing its subrogation rights against [McDonnell Douglas]. Purchaser shall furnish [McDonnell Douglas] will certificates, satisfactory to [McDonnell Douglas], evidencing its compliance with its insurance obligations under this Article 7. The indemnification provisions of this Article 7 shall not apply to liabilities, damages or losses suffered under the conditions set forth in Article 14."

As Appalachian points out, article 7 does not expressly extend protection to subcontractors. Morton Thiokol acknowledges article 7 does not provide an explicit waiver applicable to subcontractors, but argues it was intended to benefit component suppliers: "Article 7 applies to the entire product, i.e., the PAM and its component parts. [Western Union] could have bargained for a warranty from [McDonnell Douglas] for the PAM and its component parts. Instead of paying an increased price, [Western Union] accepted a complete disclaimer." Morton Thiokol relies on the Ninth Circuit cases of Aeronaves de Mexico, S.A. v. McDonnell Douglas (9th Cir. 1982) 677 F.2d 771 and Airlift Intern., Inc. v. McDonnell Douglas Corp. (9th Cir. 1982) 685 F.2d 267. These cases are factually distinguishable and rest on the particular facts of the cases as the Ninth Circuit subsequently explained in Continental Airlines v. Goodyear Tire & Rubber Co. (9th Cir. 1987) 819 F.2d 1519.

As the Ninth Circuit explained in Continental Airlines v. Goodyear Tire & Rubber Co., supra, at page 1528:

"The reasoning in Aeronaves proceeded in this fashion. The court pointed out that the airline already had received from [McDonnell Douglas] over $400,000 worth of free servicing under its warranty provisions. To permit recovery by the airline from the parts suppliers for consequential damages would enable the parts suppliers thereafter to sue [McDonnell Douglas] for indemnity. The consequence would be that the airline would in effect circumvent the exculpatory clause and reap a 'windfall' of free repairs plus consequential damages. The crux of the matter, as Aeronaves saw it, was that the airline (by way of the exculpatory clause) had waived its consequential damage remedies in return for [McDonnell Douglas's] promise to provide valuable servicing of the component parts that allegedly caused the accident. The airline should not be permitted 'to have its cake and eat it too.' The situation in Airlift appears to have been the same.

"As Continental points out, however, the contractual provisions in this case differ in a significant respect. In Aeronaves, the warranty provisions . . . explicitly extend[ed] to components of the aircraft manufactured by entities other than [McDonnell Douglas], regardless of who supplied the design specifications." (Citations omitted.)

Thus, the holdings of the Aeronaves and Airlift cases derived from (1) express language in an exculpatory clause which extended exculpation to component manufacturers and (2) on the existence of a servicing agreement for the seller's benefit. In the case here, there is no such express language in article 7 nor is there a similar servicing agreement extended to Western Union.

Article 7, however, is not the only exculpatory clause in the contract. The contract also contains article 14 which provides, in pertinent part:

"14.2 Purchaser and [McDonnell Douglas] (the Parties) will respectively utilize their property and employees in STS Operations in close proximity to one another and to others. Furthermore, the parties recognize that all participants in STS Operations are engaged in the common goal of meaningful exploration, exploitation and uses of outer space. In furtherance of this goal, the parties hereto agree to a no-fault, no-subrogation, inter-party waiver of liability pursuant to which each party agrees not to bring a claim against or sue the other party. NASA, or other NASA customers and agrees to absorb the financial and any other consequences for Damage it incurs to its own property and employees as a result of participation in STS Operations during Protected STS Operations, irrespective of whether such Damage is caused by NAS, Purchaser, [McDonnell Douglas], or other NASA customers participating in the STS Operations, and regardless of whether such Damage arises through negligence or otherwise. Thus, the Parties, by absorbing the consequences of damage to their property and employees without recourse against each other, NASA, or other NASA Customers participating in STS Operations during Protected STS Operations, jointly contribute to the common goal of meaningful exploration of outer space.

"14.3 The parties agree that this common goal will also be advanced through extension of the inter-party waiver of liability to other participants in STS Operations. Accordingly, the parties agree to extend the waiver as set forth in Paragraph 14.2 above to their respective contractors and subcontractors at every tier, as third party beneficiaries, whether or not such contractors or subcontractors causing damage bring property or employees to a United States Government Installation or retain title to or other interest in property provided by them to be used, or otherwise involved, in STS Operations. Specifically, the parties intend to protect these contractors and subcontractors from claims, including 'products liability' claims, which might otherwise [be] pursued by the Parties, or the respective contractors or subcontractors of the Parties, or other NASA customers or the contractors or subcontractors of other customers. Moreover, it is the intent of the parties that each will take all necessary and reasonable steps in accordance with Paragraph 14.5 below to foreclose claims for Damage by any participant in STS Operations during protected STS Operations, under the same conditions and to the same extent as set forth in Paragraph 14.2 above, except for claims between Purchaser and its other contractors or subcontractors and claims between [McDonnell Douglas] and its contractors and subcontractors.

"14.4 The parties intend that the inter-party waiver of liability set forth in Paragraph 14.2 and 14.3 above be broadly construed to achieve the intended objectives.

"14.5 Purchaser and [McDonnell Douglas] will each require the following to agree to the waiver of liability set forth in Paragraph 14.3 above: (i) all persons and entities to whom it assigns all or part of its right to Launch and Associated Services: (ii) any person or entity to whom it has sold or leased or otherwise agreed, prior to the completion of NASA's launch services for a particular Payload, to provide all or any portion of its Payload or Payload services: (iii) all its prime contractors; and (iv) all its subcontractors who will have persons or property involved in STS Operations during Protected STS Operations.

"14.6 Words or phrases capitalized but not defined in this Article 14, shall have the meaning attributed to such words or phrases in the NASA/Purchaser Launch Services Agreement for WESTER VI.

"14.7 In the event NASA and Purchaser should modify any of the provisions entitled 'Damages to Persons or Property involved in STS Operation,' [the inter-party waiver] [McDonald Douglas] and Purchaser agree to modify this Article 14, to conform to such modification."

Appalachian argues its suit is permitted by the "except" clause in paragraph 14.3. We disagree. That clause excepts "claims between [Western Union] and its other contractors and subcontractors . . ." (Emphasis added.) Morton Thiokol and Hitco were not "other" contractors or subcontractors of Western Union; they were a contractor and subcontractor of McDonnell Douglas. As such, they were specifically extended protection by paragraph 14.3's language stating: (1) the inter-party waiver of liability was extended to each parties' "respective contractors and subcontractors" and (2) the parties's intent was to protect "these contractors and subcontractors from claims, including 'products liability' claims, which might otherwise [be] pursued by the Parties . . . ." (Emphasis added.) To adopt Appalachian's argument would render this language, which lies at the heart of paragraph 14.3, mere surplusage, a result to be avoided. (See Estate of Newmark, supra, 67 Cal.App. 3d 350, 356.)

Appalachian contends article 14, and the "except" clause of paragraph 14.3 in particular, must be construed in light of the inter-party waiver contained in the Launch Services Agreement between NASA and Western Union.⁴ Appalachian explains Western Union drafted article 14 for the sole purpose of complying with NASA's condition that Space Shuttle customers "flow down" the inter-party waiver of liability contained in the Launch Services Agreement to their prime contractors and subcontractors.⁵The inter-party waiver of liability contained in the Launch Services Agreement required Space Shuttle customers to agree not to sue NASA or other customers or the contractors or subcontractors of NASA or other customers for any loss occurring during Space Shuttle operation. The "flow down" provision of the Launch Services Agreement's inter-party waiver required Space Shuttle customers to obtain similar waivers of liability (i.e., agreements not to sue other customers, NASA or the contractors and subcontractors of other customers and NASA for losses incurred during Space Shuttle operations) from the customers' prime contractors and subcontractors.⁶

Appalachian cites evidence indicating the inter-party waiver of liability in the Launch Services Agreement was not intended to preclude lawsuits like the one here, i.e., between a Space Shuttle customer and its own contractors and subcontractors. For example, Robert Wojtal, NASA's general counsel, in his deposition explained:

"Well, essentially we drafted a clause that applied to the user, that is the customer who came in and purchased launch services, and it applied to anyone who continued to own property, for example the component on board the Shuttle, that is no—NASA would not sue him nor would another user sue that person who had that defective component, who manufactured the defective component and retained title to that defective component while on board the Shuttle."

When asked if the inter-party waiver in the Launch Services Agreement was intended to allow Western Union from suing Morton Thiokol "for the loss of its satellite caused by the exploding motor," Wojtal answered: ". . . The answer is yes. The user, the customer, could bring suit against his own contractor. There's nothing in the agreement which is intended to preclude that. In fact there's language in the agreement that was intended to permit the suit."

Appalachian also points to language in the NASA Launch Services Agreement specifically allowing this suit against Western Union's contractor (McDonnell Douglas) and subcontractors (Morton Thiokol and Hitco). The "except" clause in the Launch Services Agreement excepts from the general inter-party waiver of liability "claims between the Customer and its contractors or subcontractors." Appalachian argues that since article 14.3 was modeled on the Launch Services Agreement and because it contains nearly identical language as the Launch Services Agreement, article 14 and the "except" clause of paragraph 14.3 should be construed as reflecting the same intent as the NASA/Western Union Launch Services Agreement, i.e., permitting suits by Western Union against Morton Thiokol and Hitco.

The problem with hits argument is that the language of the Launch Services Agreement and the McDonnell Douglas/Western Union contract, while similar, are not identical. There are significant differences in the wording of the two instruments. The McDonnell Douglas/Western Union contract specifically prohibits suits by the parties against each other's respective contractors and subcontractors, excepting only claims between Western Union and its "other" contractors and claims between McDonnell Douglas and its contractors and subcontractors. In contrast, the Launch Services Agreement, an agreement between Western Union and NASA prohibits claims between NASA and the Space Shuttle's customers (and their contractors and subcontractors) and between Space Shuttle customers (and their contractors and subcontractors) but specifically excepts claims between a customer and its own contractors or subcontractors and between the United States Government and its contractors and subcontractors.

To ignore the differences in the language used in the two agreements, would violate a fundamental rule of contract interpretation, that is, the words of a contract, if clear, must govern its interpretation. The words of the McDonnell Douglas/Western Union contract are clear; they unambiguously preclude a suit by Western Union against McDonnell Douglas's respective contractors and subcontractors, i.e., against Morton Thiokol and Hitco. The fact that the Launch Services Agreement reflects a different intent does not render the McDonnell Douglas/Western Union contract ambiguous; the Launch Services Agreement involves different parties, a different subject matter and different language. Appalachian's argument, based on importing language from a different agreement, is unpersuasive.⁷