BP Products N. Am. Inc. v. J.V. Industrial Cos., LTD, # H-07-2369 (S.D. Tex. April 21, 2010) see Decision
Forgive me for yet another indemnification decision, but this is a rare case: adjudication of a indemnity dispute in which the injured plaintiff is also the indemnified party. Usually, a third party sues the indemnitee, who then seeks defense and indemnification from the indemnitor. Some judges have held that contractual indemnity applies only to third-party disputes, but, as this case shows, Texas law allows contractual indemnification to remedy breach-of-contract claims, unless the indemnity clause says otherwise.
BP Products hired J.V. Industrial to reinstall metal couplings on heat exchangers at BP's refinery. BP alleges that J.V. mixed up the couplings, a mistake that resulted in a fire that destroyed BP's property. The parties' contract contained the following agreement:
J.V. shall reimburse BP for, defend, indemnify, and hold BP harmless from and against all liability, costs (including reimbursement of all attorneys' fees and other costs of defense), loss, damage, expense, claims ..., suits, fines, and penalties on account of any and all ... damage to or loss or destruction of of any property (including without limitation, the [Contract Work] and the property of J.V. and BP] arising directly or indirectly out of or in connection the performance of this Contract, whether caused or contributed to in whole or in part by the concurrent, joint, active, or passive negligent act or commission of BP or J.V.], except that J.V. assumes no liability for the sole negligent acts of BP.
In the lawsuit that followed, J.V. denied any responsibility for the damage and challenged BP's reliance on the indemnity clause, arguing that the provision applied only to third-party actions brought against BP.
The court first determined that, without regard to who brings the claim, the indemnity met Texas's "Fair Notice" requirements as stated in Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993) (holding that the indemnity must expressly include the indemnitee's fault and appear in conspicuous type). The court noted the absence of conspicuous type but acknowledged the parties' stipulation that J.V. was actually aware of the provision, which excuses lack of conspicuousness.
On the key issue, the court found that a party to the contract could recover for its own damage if the indemnity provision was written to permit this recovery. Earlier Texas cases illustrate the principle:
- In Kellog Brown & Root Int'l, Inc. v. Altanmia Comm. Mfg Co., 2008 WL 5114962 (S.D. Tex. Dec. 3, 2008), Altanmia's agreement "to bear, without right of reimbursement, the full risk of loss or damage" to certain vehicles used in performance of the contract did not obligate Altanmia to indemnify Kellog, because the provision did not expressly provide for indemnification of claims asserted between the parties.
- By contrast, in Radiant Systems, Inc. v. American Scheduling, Inc., 2006 WL 2583266 (N.D. Tex. Sept. 7, 2006), Radiant's agreement (as the successor of the purchaser of software in question) "to be liable for 'Losses' resulting from the breach or falsity of any covenant or agreement made by the Purchaser," was held to specifically contemplate a suit for breach of contract by one party against the other.
The court noted that J.V.'s indemnity explicitly applied to the property held by the contracting parties, which necessarily affords BP a remedy for damage to its property.
We have in this case, therefore, two important lessons and one enigma.
First, the indemnity will include recovery for damage to the indemnitee's property only if the provision explicitly includes that right. From the Radiant case, it should be enough if the provision covers loss or damage resulting from breach of the contract itself.
Second, this case provides comfort for those drafting high powered merger and buy-sell agreements that list each party's "reps and warranties," and then provide that indemnification will be the sole remedy for any breach of those reps and warranties. It's nice to find some authority that this kind of indemnity is enforceable.
The enigma: Do all indemnity agreements need to meet the Dresser test, described above? Before addressing enforceability in a two-party dispute, the BP court first asked if the indemnity met the Dresser test. I wager that it would come as a shock to most corporate lawyers who draft merger and buy-sell agreements to learn that they must add that the indemnity applies even if the indemnitee is negligent. The purpose of this kind of indemnity is meant to cover one party's breach of contract that damages another party to the contract. Why put in express-negligence language?
In the Dresser case, and in all other Texas Supreme Court cases discussing the Dresser test, the court was concerned with third-party claims against the indemnitee arising from the parties' joint contract operations. The Dresser test is meant to prevent the unfairness of one party shifting liability for its own negligence to the other (presumably innocent) party, unless the contract explicitly says that the indemnitor is responsible even if the indemnitee is at fault. However, that concern is not present when the contracting parties simply want the breaching party to reimburse the other party.
This snake in the grass bears watching.
David S. White, Thompson & Knight L.L.P.www.tklaw.com