WHAT’S FAIR ABOUT FAIR NOTICE?

Whether your interest lies with an owner, general contractor or a subcontractor, contractual indemnity provisions play an important part in evaluating claims and lawsuits. If, for example, a subcontractor has agreed to indemnify the general contractor on the project for personal injuries sustained by the subcontractor’s own employees, this will have a significant financial impact on the representation of both parties in a lawsuit. This impact could be even greater if there is a potential conflict between the general contractor and the subcontractor that would require each party to have separate counsel.

In order to evaluate such provisions, it is necessary to determine if they are enforceable under Texas law. Texas requires that the indemnity language provides fair notice to the person/entity that is assuming the transfer of risk (the indemnitor). Through a litany of cases, this has become known as the express negligence test. Under the express negligence doctrine, a party seeking indemnity from the consequences of that party’s own negligence must express that intent in clear and specific terms within the four corners of the contract. Ethyl Corp. v. Daniel Construction Company, 725 S.W.2d 705, 709 (Tex. 1987). A contractual indemnity provision contemplating indemnification for the indemnitee’s own negligence will not be enforced where the provision itself is not conspicuous within the overall agreement. Dresser Indus., Inc. v. Page Petroleum, Inc., 852 S.W.2d 505, 511 (Tex. 1993). Examples of such conspicuousness have included placing the text of the provision in all caps, in bold or in a larger font. These are questions of law, and it is up to the court to determine their enforceability.

On January 1, 2012, Chapter 151 of the Insurance Code became effective, and applies to construction contracts that were executed on or after January 1, 2012. This section has become known as an “anti-indemnity” statute. It makes indemnity provisions that shift the risk for the negligence of one party to another void as a matter of law, and further prevents parties from contracting around such rules. However, Chapter 151 does not apply to the “bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.” Texas Insurance Code §151.103. Therefore, the parties are free to continue to provide indemnification in these situations.

The Texas Oilfield Anti-Indemnity Act provides further limitations to agreement pertaining to oil and gas wells. Indemnity provisions between oil-well drilling companies are void unless specific requirements are met to make the obligations mutual through the purchase of insurance. Expro Americas, LLC v. Sanguine Gas exploration, LLC, 351 S.W.3d 915 (Tex. App. – Houston [14th Dist.] 2011, no pet).

Over the years, drafters of such contract provisions have attempted to push the limits of these requirements and, as always, there are exceptions to these rules. As noted by the new “anti-indemnity” statute and the Texas Oilfield Anti-Indemnity Act, it appears that the law is shifting away from allowing parties to contract for indemnification involving another’s negligence. Thus, careful analysis will always be necessary to determine any indemnification provision’s enforceability.

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