UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
argued as amended january 30 1978.: September 7, 1977.
GARY R. BECKER, APPELLANT
INTERSTATE PROPERTIES, INTERSTATE CONSTRUCTION CORPORATION, WINDSOR CONTRACTING CORP., WINDSOR CONTRACTING CORP., LAWRENCE CORPORATION, DIAMOND REO, JAMESWAY COMPANY, WILLARD F. EDWARDS, JOHN DOE AND RICHARD ROE, SAUL SILVERMAN, A.I.A., RAYMOND KEYES ENGINEERS AND INTERSTATE PROPERTIES AND I.P. CONSTRUCTION CORP., THIRD-PARTY PLAINTIFFS V. WOOD PINE CONSTRUCTORS, INC.
ON APPEAL FROM THE UNITED STATES DISTRICT CORT FOR THE DISTRICT OF NEW JERSEY. C.A. No. 74-430.
Adams, Van Dusen and Hunter, Circuit Judges. Hunter, Circuit Judge, dissenting.
Opinion OF THE COURT
ADAMS, Circuit Judge.
The task of a federal court sitting in diversity is frequently not an easy one, for it must foresake its realm of expertise and assume the aspect of a court of the forum state. Even when applying well-settled law, the federal tribunal must be alert to nuances of precedent. Where, as here, a federal court is asked to pass on the implication of a declaration by a state high court of a new principle in an evolving area of the law, it must act with even greater sensitivity.
In this case, we are called upon to evaluate the effect of a dictum by the New Jersey Supreme Court that failure to insist on a financially-responsible independent contractor will subject the employer of that contractor to liability to uncompensated victims for the contractor's negligence. This endeavor is a perplexing one, but it is not one this court is free to avoid. In the course of discharging our obligation, we must choose either to reject or to accept a nascent legal rule, and thus risk distorting state law as much by an excess of conservatism as by insufficient attention to stare decisis.
On August 31, 1972, appellant Gary Becker, a 19-year-old construction worker, was severely injured on his job site in Windsor, New Jersey when a heavy truck drove squarely over his pelvis.*fn1 Mr. Becker has sued to recover his damages, including the $35,000 in medical fees he had expended as of the time the complaint was filed.
The owner and general contractor of the $1.5 million shopping center project on which Mr. Becker was working at the time of the accident was I.P. Construction Corp. (hereinafter the developer).*fn2 Mr. Becker was employed by Wood-Pine Corp., a small company hired by the developer to pave the shopping center. The developer knew, or should have known, that Wood-Pine would hire subcontractors, since Wood-Pine itself had no trucks. In fact, Wood-Pine hired Windsor Contracting Corp., whose employee, Willard Edwards, drove the truck which injured Mr. Becker.*fn3
There is evidence to indicate that I.P. at least on some occasions in the past, had required insurance coverage from its subcontractors (395a, 408a-411a). Also, there is evidence that the standard liability insurance coverage in the construction industry allows for recoveries of up to $250,000 per accident. In contrast, Windsor's automobile liability insurance coverage was only $10,000, and Windsor is only minimally capitalized.
To recover for his injuries in this diversity action, Mr. Becker sued Windsor and its employee for negligence, also asserting claims against the developer. Mr. Becker contends that he will be unable to recover his damages from Windsor because of Windsor's limited insurance coverage and marginal capitalization, and that the developer breached its duty in allowing such a financially-irresponsible contractor to be hired.
The district court granted summary judgment for the developer, holding that under New Jersey Law the developer could not be held liable for the tort of an independent subcontractor regardless of the financial status of such subcontractor. It is this conclusion that we review here.*fn4
Inasmuch as no New Jersey cases are squarely on point, it is important to make clear that our disposition of this case must be governed by a prediction of what a New Jersey court would do if confronted with the facts before us.*fn5 Such an estimate cannot be the product of a mere recitation of previously decided cases. Rather, as in any diversity case, a federal court must be sensitive to the doctrinal trends of the state whose law it applies, and the policies which inform the prior adjudications by the state courts.*fn6 A diversity litigant should not be drawn to the federal forum by the prospect of a more favorable outcome than he could expect in the state courts. But neither should he be penalized for his choice of the federal court by being deprived of the flexibility that a state court could reasonably be expected to show.*fn7
The federal tribunal is thus obligated to follow the course that it expects New Jersey courts would adopt in similar circumstances.*fn8
Because we are dealing here with a summary judgment, our analysis is limited to the inquiry of whether any state of facts reasonably inferable from the record could entitle the plaintiff to send the case to the jury under New Jersey law. Our disposition is also influenced by the reluctance which New Jersey courts have manifested to dismiss innovative tort claims without full development of facts at trial.*fn9
It is true, as Mr. Becker suggests, that the concept of immunity of the employer of an independent contractor is in tension with the more general tort doctrine of respondeat superior, and that the former represents a judicial gloss on the latter.*fn10 Indeed some authorities have advocated the all-out abolition of the independent contractor immunity,*fn11 and one noted commentator has espoused the view that the proliferation of exceptions to the immunity precept is "sufficient to cast doubt on the validity of the rule."*fn12
Nonetheless, we discern no indication that the New Jersey courts are prepared to abandon on a wholesale basis the rule of an employer's immunity for the acts of his independent contractors and to adopt a pure theory of "enterprise liability." Instead, the New Jersey courts have adhered to the general doctrine of immunity, and the liability of employers has emanated from the exceptions articulated in Majestic Realty Associates Inc. v. Toti Contracting Co.*fn13
Under Majestic, an employer is responsible for the negligence of an independent contractor if one of three special circumstances is present:
(1) where the employer retains control over the aspect of the activity in which the negligence occurs;
(2) where the contractor employed is incompetent; or
(3) where the performance of the contract involves an inherently dangerous activity.*fn14
The sharp conflict in the case at hand centers on Mr. Becker's contention that by hiring or permitting the hiring of Windsor - a contractor financially unable to respond in damages - the developer came within the second exception to the immunity rule. Mr. Becker places his reliance primarily on a passage from Majestic suggesting that, as a matter of distributive justice, the employer should be liable for the torts of financially-irresponsible contractors. A proper construction of that key passage is crucial to the outcome of this litigation.
In Majestic, the New Jersey Parking Authority hired Toti Contracting Co. as an independent contractor to demolish a building owned by the Authority. Toti's employees negligently allowed a part of the demolished building to collapse and to damage Majestic's adjoining property. In a unanimous opinion adjudicating Majestic's claim against the Parking Authority, the New Jersey Supreme Court began by articulating the general rule that employers are immune from liability arising out of the torts of their independent contractors, and set forth the general exceptions to the immunity concept that are adumbrated above. After eliminating the "control" exception as a factor in the case, the New Jersey Supreme Court discussed at length the argument that employing a financially-irresponsible contractor is tantamount to hiring one who is incompetent, and therefore comes within the second exception. The Court cited several commentators advocating such a rule,*fn15 and then noted that the principle had not been applied previously. Justice Francis went on to state for a unanimous court, albeit in what was characterized as "an incidental comment,":
Inevitably the mind turns to the fact that the injured third party is entirely innocent and that the occasion for his injury arises out of the desire of the contractee to have certain activities performed. The injured has no control over or relation with the contractor. The contractee, true, has no control over the doing of the work and in that sense is also innocent of the wrongdoing; but he does have the power of selection and in the application of concepts of distributive justice perhaps much can be said for the view that a loss arising out of the tortious conduct of a financially irresponsible contractor should fall on the contractee.*fn16
Imposition of liability under such circumstances is particularly appropriate, the Court said, in light of the ready availability of liability insurance, which is viewed as a normal cost of doing business in the construction industry.*fn17 Nonetheless, the issue was expressly reserved.
Since the financial-irresponsibility contention had not been raised in appellate briefs or at trial in Majestic, the New Jersey Court declined to rule on it. Instead it held the Authority liable on the ground that demolition constituted an "inherently dangerous" activity.
The initial step in our inquiry as to the probable reaction of New Jersey courts to the suggested financial-responsibility criterion must be an examination of the reception that has been accorded the Majestic dictum by the New Jersey judiciary. The Majestic court's suggestion of employer liability for hiring a financially-irresponsible contractor evoked a flurry of contemporaneous commentary, predominantly favorable.*fn18 Nonetheless, since its enunciation, the financial-responsibility test has not come before the New Jersey courts. We thus have no directly applicable precedent upon which to rely.
However, the New Jersey courts since Majestic have consistently acknowledged both the rule of immunity and its tripartite exceptions.*fn19 Indeed, the three most recently reported independent contractor decisions of the New Jersey appellate bench have held against employer immunity on somewhat novel grounds.*fn20 One of these cases, Bennett v. T&F Distributing Co.,*fn21 quoted Majestic's discussion regarding "distributive justice" in extenso as an authoritative exposition of the "policy considerations" upon which it based its decision.*fn22 It appears, therefore, that the Majestic dictum is regarded by a New Jersey court of state-wide jurisdiction as persuasive, and that immunity for independent contractees is not an ironclad rule of New Jersey jurisprudence. We must therefore look to the more general principles which govern New Jersey courts in their exposition of common law doctrines.
In applying the common law, the New Jersey courts have been sensitive to the considerations of substantive policy which must temper the doctrine of stare decisis. As the New Jersey Supreme Court specifically declared in Immer v. Risko :*fn23
The nature of the common law requires that each time a rule of law is applied it be carefully scrutinized to make sure that the conditions and needs of the times have not so changed as to make further application of it the instrument of injustice.
The flexible approach set forth in Immer has been particularly evident in the area of tort law, where New Jersey courts have been notably willing to reexamine and modify traditional doctrine.*fn24
This case brings before us a young construction worker whose body has in all probability been ruined for life. Yet, he is denied all but nominal recovery against the subcontractor who is responsible for his injury because that subcontractor is effectively judgment-proof*fn25 and was not required by the developer to carry standard insurance.*fn26 In such a situation, we believe the goals of New Jersey tort law in three areas would impel a New Jersey court to hold that the failure to engage a properly solvent or adequately insured subcontractor is a violation of the duty to obtain a competent independent contractor.*fn27
First, the New Jersey courts have manifested a concern in their formulation of tort law to ensure that the burden of accidental loss be shifted to those best able to bear and distribute that loss rather than having it imposed on the hapless victim.*fn28 In holding a mass-housing developer liable for a dangerously constructed hot-water heater in one of the homes he built, for example, the New Jersey Supreme Court placed great weight on the fact that "the builder-vendors are admittedly in a much better position than the injured party to absorb the crippling losses caused by their own . . . defective construction."*fn29 Similarly, in declaring that an implied warranty of fitness is deemed to be a part of an automobile leasing agreement, the New Jersey Supreme Court stated that warranties of fitness are regarded as an incident of a transaction in part "because one party to the relationship is in a better position than the other to . . . distribute losses which may occur because of a dangerous condition of the chattel."*fn30
In this case, as in any case in which a financially-irresponsible contractor is hired, the choice of the party to bear the loss falls between the developer and the victim. Where, as here, the developer is a substantial entrepreneur and a member of an industry that carries large liability insurance policies as a matter of course, there is little question but that he is in the better position to bear the loss of such an accident.*fn31 Moreover, the developer can spread the increased costs of insurance or liability to ultimate users of the project. It is only in rare circumstances that a victim will have a similar option. Thus in a context such as we have here the doctrine suggested in Majestic is indicated by the policies previously adopted by the New Jersey courts.*fn32
Second, it is a well-recognized principle of tort law that, where feasible, liability for an accident should be allocated to those in the best position to control the factors leading to such accidents.*fn33 Indeed, this is said to be the basis for the independent contractor exception to respondeat superior - the independent contractor is in a better position to control the work of his employees than is his employer.*fn34
In the situation contemplated by the financial-irresponsibility exception, however, the loss must fall either upon the developer or upon the victim, for the subcontractor is by definition incapable of bearing it. In general, the developer has more control than the victim.
More importantly, however, in the context in which the Majestic dictum applies, two elements have conjoined to give rise to the loss before the Court: the negligence leading to an injury and the failure to assure the financial responsibility that would allow compensation for the damages flowing from such negligence.*fn35 While the developer might be in a disadvantageous position to control the negligent conduct, in a case such as this - where the developer has negotiated at length regarding the insurance coverage of his independent contractor - he is in an excellent position to assure the proper degree of financial responsibility. The doctrine suggested by Majestic places the costs of a failure to insure, and the consequent incentives, on the party in a superior position to evaluate and avoid such costs.*fn36
In this connection it is in order to note the definition of legal duty adopted by the New Jersey Supreme Court in Kahalili v. Rosecliff Realty Inc.*fn37
The standard of conduct laid down by the law is care commensurate with the reasonably foreseeable risk of harm, such as would be reasonable in light of the apparent risk.
Using Kahalili as an analogue, the question for the jury in this case, is whether the behavior of the developer in failing to obtain or to require adequate insurance was reasonable in light of the apparent risk that an individual seriously injured by one of its contractors would go substantially without compensation.
Third, the New Jersey courts have expressed the view that the costs of accidents should be borne by those who secure the benefit of the activities that engender the mishaps.*fn38 Where only one party is involved, a decision declining to insure carries with it an automatic penalty: unshielded liability to tort judgments. By hiring an independent contractor, however, without the rule suggested by Majestic, the developer could obtain the advantage of lowered operating costs (passed on to him by his contractor in the form of reduced prices) without liability for the decision to expose third parties to the risk of uncompensated losses.*fn39 This is particularly so where, as here, the subcontractor has effectively shielded himself from suit by incorporating several minimally financed business entities.*fn40
The Majestic doctrine would impose costs of financial irresponsibility on parties who benefit from that irresponsibility. In this respect, also, such an approach seems fully at one with the goals of New Jersey law.
The dissent's disagreement with our assessment of New Jersey policy leans heavily on two statutes. The first, the New Jersey Construction Safety Act, N.J. Stat. Ann. §§ 34:5-166 et seq., was enacted after the Majestic decision. We have found no indication in legislative history that the New Jersey Legislature intended to reject Justice Francis' dictum in Majestic. Indeed, as the dissent notes, the Act expressly leaves the "burden of care ordinarily imposed by the common law" unaltered. § 34:5-177. In New Jersey, this wording cannot be said to connote the expectation of static adherence to precedent.*fn41
The second statute relied on by the dissent, N.J. Stat. Ann. § 34:15-79, provides that contractors shall be liable for "compensation due" to employees of subcontractors when the subcontractors fail to carry mandatory workmen's compensation insurance. On its face, this statute would seem to suggest a concern on the part of the Legislature to insure that victims are reimbursed when injured by financially irresponsible subcontractors. Since that provision already had been adopted long before the 1938 revision of the statute, however, we do not read it to reflect the New Jersey Legislature's reactions to the position suggested by Majestic in 1959.
Admittedly, the few cases in other jurisdictions to have addressed the question directly do not support Mr. Becker's contention, and the Majestic dictum has yet to be adopted outside of New Jersey.*fn42 However, in view of the strong policy considerations undergirding the Majestic reasoning, the cases from other jurisdictions rejecting it would appear to be neither dispositive nor even persuasive.
Attention should focus primarily on Coleman v. Silverberg Plumbing Co.,*fn43 and Matanuska Electric Assn. Inc. v. Johnson,*fn44 since they represent the only extensive judicial discussion of the issue aside from Majestic.*fn45
Coleman is more clearly distinguishable. First, the claim which Coleman rejected was specifically identified by the California Court as an attempt to impose strict liability on contractees for failure to insist on workmen's compensation coverage by their contractor. Unlike the present case, no negligence was alleged, and the California Court apparently took the broad nature of the claim into account in refusing to accept it.*fn46 Second, the Coleman Court relied heavily on its obligation to defer to a 1918 case of the California Supreme Court that declared unconstitutional a statute that imposed tort liability of precisely the sort contended for.*fn47
In Matanuska, on the other hand, disposition of the claim rested squarely on an analysis of the policy opposing imposition of liability. The Matanuska Court, like the district court in this case, first based its opinion on an assumption that any liability rule enunciated would apply to all independent contractor situations. The court argued that most of those adversely affected by the proposed rule would be "salaried working men and wage earners of modest means." In general, it concluded, no spreading of costs would be accomplished by imposing liability.*fn48 The Matanuska Court then noted that the plaintiff was not an uninvolved third party - as in most "incompetent contractor" cases - but was an employee of the uninsured contractor. As between the employee and the average, inexperienced contractee, the court stated, the employee may well have the better opportunity to evaluate the financial responsibility of a contractor.*fn49 And, although the Matanuska Court did not mention it, the employee may be in a position to extract higher wage payments for taking greater uninsured risks.
The first ground of analysis is applicable if the rule of law contended for is the elimination of all independent contractee immunity. However, the Majestic dictum contemplates no such rule, nor is one necessary to decide the present case. The principal defendant here is a large, sophisticated and well-financed general contracting corporation with extensive experience in an industry in which high-coverage insurance is a matter of trade practice. To say that it is negligent for such an entity to fail to take steps to assure the financial responsibility of its subcontractors does not inexorably require similar liability for modestly-financed individuals of limited business experience.
Matanuska's second point also is inapplicable here. In contrast to the situation contemplated by Matanuska, Mr. Becker was not an employee of an uninsured contractor. He was in no position to be aware of, and to bargain for, the relevant insurance coverage. Rather, he had been hired by a subcontractor who in turn employed the uninsured sub-subcontractor. It cannot be said that a 19-year-old employee of a building subcontractor is in a better position to know of, and to comprehend fully, the degree of insurance coverage carried by a sub-subcontractor on the job than is a substantial and experienced housing developer.
No persuasive argument has been adduced by the cases that have declined to adopt the Majestic approach. Accordingly, it seems doubtful that a New Jersey court would give controlling weight to the decisions of tribunals of other states in the face of the considered reflections of its own Supreme Court.*fn50
The three concerns of tort law outlined above - spreading costs, minimizing losses, assuring that an activity's risks are borne by its beneficiaries - will not always point in one direction. Often trade-offs among those considerations will be necessary. And frequently they will, themselves, conflict with other elements of a just and reasonable outcome.
But the case before us presents no occasion to face such difficulties.
When the objectives of spreading costs and ensuring victim compensation, the goal of encouraging action to minimize losses, and the end of placing the cost of risks upon those who profit from those risks are all served by a single doctrine, it would appear that such a precept would commend itself to the judiciary. When the effect of applying that doctrine is to assure the right of a tragically injured young person to have a day in court in which to seek recovery from a developer who failed to follow a trade practice which would have allowed compensation directly, I do not believe that application of that doctrine is at odds with intuitive notions of justice. When policy concerns and practical effect so merge to support a rule of law, and when no prior New Jersey case has rejected it, it seems reasonable to predict that such a rule would be adopted by the New Jersey courts.
The scope of our decision here must be clearly understood. We assume in this opinion, without deciding, that the plaintiff's allegations that Windsor is liable for Mr. Becker's injuries are correct. This, of course, is ultimately a question for the jury. Likewise, we assume, as the plaintiff alleges, that Windsor will, in fact, be unable to respond to a damage award against it. This also is a matter for proof at trial.
Moreover, we take as given, on the basis of plaintiff's allegations and the record before us, that the developer's failure to require financial ability to meet damage awards was an unreasonable violation of a trade practice. Whether I.P.'s actions were at variance with trade practice in the construction industry, and whether those actions were unreasonable are additional matters for the jury to decide. Finally, under the Majestic dictum, I.P. would be liable only for the difference between the insurance which it actually required and the amount it would have been reasonable, in the light of trade practice, to expect. This amount, too, is a matter to be determined by the jury at trial.
The judgment of the district court will be affirmed in regard to defendants Raymond Keyes Engineers and Saul Silverman, See n.4 supra. The remainder of the judgment will be reversed and remanded for action in accordance with this opinion. No costs shall be taxed against any party to this appeal.
HUNTER, Circuit Judge, dissenting:
I respectfully dissent. The majority has, in my view, formulated a new duty in the law of torts, which until now has not been part of the law of any jurisdiction in this country. As we see it, this concept imposes liability upon a contractor for selecting a subcontractor who, though mechanically competent, is not sufficiently responsible financially. The majority's decision, in my belief, is not an apt prediction of what the New Jersey courts would hold had this case arisen within the state system.
The majority's statement of the principles by which a federal court, sitting in diversity, must determine an issue of state law not yet decided by the courts of that state is, of course, entirely correct. A federal court must make an informed estimate of what is the applicable state law when state precedent is unclear or incomplete with respect to an issue litigated before the federal court.*fn1
Nevertheless, the majority's reliance on the obiter dicta in Majestic Realty Associates, Inc. v. Toti Contracting Co.*fn2 and on its perception of the relevant policies considered by the New Jersey courts leads this court to impose a duty on those who engage independent contractors which I feel that New Jersey courts would be most reluctant to apply. The language in Majestic Realty, enshrouded in caveats and encircled with disclaimers of precedential value, must be viewed as a discussion of an issue neither decided by the trial court in the case nor briefed by the parties on appeal. Rather, the issue arose as "an emanation of the oral argument." As the majority has pointed out, Justice Francis characterized the portion of his opinion dealing with financial irresponsibility of independent contractors as an "incidental comment" for which "no decision is rendered" and on which decision was "expressly reserved."*fn3
In the eighteen years since the Majestic Realty opinion was rendered, the New Jersey courts have not responded to Justice Francis' query whether liability might be imposed on the landowner who hires a financially irresponsible independent contractor through whose negligence a third party is injured. As the majority acknowledges, other states have not taken this step and imposed liability on one so far removed, if not isolated, from the physical cause of the injury.
Certainly a federal court sitting in diversity should not mechanically follow precedent and blindly apply principles of stare decisis when it appears that the corresponding state court would adjust its common law to meet changing conditions. At the same time, however, when no other court in this country has as yet broken from a traditional precept of the law, a federal court should proceed cautiously.
One important development in the law of New Jersey has been the advancements in the protection of the public from physical injuries by laws enacted by the legislature. In the construction industry, the state legislature has been active in defining standards of conduct by which construction sites can be made safer for employees on the site and the public. See New Jersey Stat. Ann. §§ 34:5-166 et seq.; New Jersey Admin. Code ch. 180.*fn4 These statutes and regulations have not gone so far as to impose upon developers or general contractors a duty of ensuring that subcontractors on a site be able to respond financially to tort claims arising out of their work. Rather, the legislature has sought to implement a policy of financial protection of workers on a construction project through New Jersey Stat. Ann. § 34:15-79, which states:
Consequently, it appears that the legislature has provided a standard by which the duty of a developer-general contractor to require financial ability to respond to injuries suffered by an employee of an independent subcontractor or sub-subcontractor can be measured. Since the legislature has taken the initiative in formulating the duty of a general contractor to insure that injuries sustained on the job will be covered by workmen's compensation, I am unwilling to predict that the New Jersey courts would add on the requirement that "adequate" insurance coverage or its equivalent (apparently beyond workmen's compensation) be extended to all employees on a construction site.*fn5
Further, I have difficulty with the majority's formulation of the duty of a developer of land to take reasonable care that its independent subcontractors be able to respond financially, through insurance or otherwise, to claims for injuries suffered as a result of the contractor's negligence. The inexactitude of the standard for imposing liability arises since the majority limits the scope of the duty to include only those whose financial capabilities and business acumen are more than "modest."
To my knowledge, New Jersey courts have never defined the scope of a tort duty on the basis of an individual's financial capabilities. The majority's decision will, I think, cause uncertainty and doubt for every financial strata and every court, as well as hinder the employment opportunities of an independent contractor trying to enter the marketplace but lacking much in the way of start-up capital.
Behind this "duty" that the majority imposes lie significant policy questions relating to economic and social costs and benefits. It appears to me that the New Jersey courts would look to the legislature for the determination of whether to adopt this novel aspect of tort law.
Certainly, the facts in this case are most compelling. However, I do not reach the conclusion that the New Jersey courts would decide the case in the manner in which the majority has determined. Thus I am unable to join in the court's opinion.