A closely divided Texas Supreme Court has reversed a Beaumont Court of Appeals decision that erroneously applied the express negligence rule to an indemnity provision in a contract between a general and subcontractor.
S&B Engineers & Constructors, Ltd. and Zurich American Insurance Company v. Scallon Controls, Inc. (No. 24-0525; March 13, 20265) arose from a personal injury lawsuit filed by employees of an insulation contractor hired to work at a Sunoco Logistics Terminal. While working at the site, the employees heard an explosion and saw a “chemical cloud” moving in their direction. As they fled the area, several fell and sustained injuries. The cloud was later determined to be a fire suppressant chemical released by the Fire Suppression System, which was activated while S&B technicians were working in the area. Allegedly, the loud noise and release occurred when they tried to “put the system in alarm fail.” Plaintiffs sued S&B and Sunoco, alleging various negligence theories. S&B filed a general denial and a third-party petition against Scallon, alleging that Scallon’s negligence proximately caused the chemical release and Plaintiffs’ injuries (Plaintiffs did not sue Scallon). Scallon had been hired to perform technical services on the fire suppressant system. S&B asserted that if found liable for Plaintiffs’ damages, it would be entitled to contribution from Scallon. S&B further asserted that its subcontract with Scallon required Scallon to “defend, indemnify, and hold S&B harmless against any and all losses.” Finally, S&B asserted a claim for contribution and indemnity under the subcontract and purchase order. Sunoco likewise filed a third-party petition against Scallon, alleging that Scallon’s negligence caused software and hardware errors that caused the accident and seeking contribution and indemnity.
In the course of the lawsuit, S&B added claims for breach of contract, breach of express warranty, and breaching the implied warranty of fitness for a particular purpose and warrant of merchantability under the UCC. S&B sought damages of $2,350,000 that it paid in settling with the injured insulators plus $2 million paid by its insurers, Zurich and American Guarantee and Liability Insurance Company. Scallon counterclaimed, seeking recovery of its attorney’s fees and expenses. It further demanded that S&B defend and indemnify it pursuant to the parties’ subcontract, pleading actual and consequential damages, attorney’s fees, and interest. S&B and Sunoco ended up settling with the injured insulators, who agreed that to release and discharge their claims. Sunoco nonsuited its claims against Scallon, but Zurich filed a petition in intervention seeking to recover amounts paid on Sunoco’s behalf to settle with the insulators. Eventually, the trial court granted Scallon’s motion for summary judgment and denied S&B’s motion for partial summary judgment. Later the court likewise granted Scallon’s motion for summary judgment against Zurich. S&B and Zurich appealed.
In an opinion by Justice Johnson, the court of appeals affirmed. First, the court ruled that since Zurich filed its petition in intervention outside the four year statute of limitations on the underlying contract action (Zurich filed as a subrogee), its claim was barred. Moving to S&B’s indemnification claim, the court determined that the indemnity provisions in the subcontract and purchase order with Scallon violated the express negligence rule. That rule provides that “parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms [] within the four corners of the contract” (citing Ethyl Corp., 725 S.W.2d at 708). Reviewing the indemnity provisions, the court concluded that “the indemnity language fails to specify that Scallon will indemnify S&B for S&B’s own negligence.” Observing that the personal injury plaintiffs did not sue Scallon, and that S&B and Sunoco settled with them, the court read the “indemnification provisions of both the Subcontract and the Purchase order [to] only require Scallon to indemnify S&B (and its clients) for Scallon’s negligence and not for S&B’s own negligence.” Consequently, the court ruled that since “Scallon was not sued by the Individual Plaintiffs, S&B may not seek indemnification from Scallon where S&B settled the Individual Plaintiffs’ claims against S&B for negligence ….” Finally, since Scallon was not a joint tortfeasor with S&B, S&B had no claim for contribution. The court thus affirmed the trial court’s take-nothing judgment in favor of Scallon.
In an opinion by Justice Young, joined by Chief Justice Blacklock and Justices Busby, Sullivan, and Hawkins, SCOTX reversed and remanded to the trial court. The opinion centered on the court of appeals’ misapplication of SCOTX’s holdings in Beech Aircraft Corp. v. Jinkins, 739 S.W.2d 19 (Tex. 1987) and Ethyl Corp. v. Daniel Construction Co., 725 S.W.2d 705 (Tex. 1987). In Jinkins, the court ruled that a “settling defendant has no right to contribution from a non-settling party under Texas statutory or common law.” 739 S.W.2d at 21-22. In Ethyl, the court held that “[p]arties may contract for comparative indemnity so long as they comply with the express negligence doctrine set out herein.” 725 S.W.2d at 708-709. “The key dispute,” the majority stated, “is whether S&B and Zurich may ask a factfinder to allocate any portion of the settlement amount of Scallon’s negligence, or whether, as the court of appeals and Scallon contend, it covered only their own as a matter of law.”
First, Jinkins did not apply because its holding was based on “common-law and statutory avenues for a settling party to impose contribution obligations on a settling party.” Since a joint tortfeasor can only settle its proportionate share of liability, it can’t ask a non-settling tortfeasor to pay the settling tortfeasor’s share. But in this case, the parties chose to allocate risk by way of a contractual indemnification provision. As the majority observed, “in the context of contractual indemnity, a defendant does not ‘buy’ the plaintiff’s rights and use them against other liable parties, as if it could profit from successfully prosecuting the very claims that have been settled. Rather, the defendant already has a contractual right to indemnification that it seeks to enforce against other liable parties.” The court thus ruled that the parties “by contract impose[ed] comparative indemnity.”
Second, the majority addressed the express negligence rule laid down in Ethyl. It took issue with the court of appeals’ erroneous interpretation of “indemnify” to shift “the entire burden of loss from one tortfeasor to another” (citation omitted). But here the contract provided for proportional indemnity. The only question, consequently, is whether “the express and specific language” of the contract permits a party to be indemnified for the party’s own negligence. And in this case, the contract “avoid[ed] any express-negligence problem both with its unambiguous disclaimer and by textually limiting Scallon’s indemnification to only its own share ‘allocable share’ rather than seeking some way to force it to bear the burden of S&B’s or Sunoco’s negligence.” [The Court also determined that the court of appeals erred in deeming Zurich’s claim untimely, since Zurich’s indemnity claim “‘began to run when its liability became fixed and certain’ through settlement or judgment.” Noble Energy, Inc. v. ConocoPhillips Co., 532 S.W.3d 771, 778 (Tex. 2017). Here Zurich’s claim, while seven years after the accident, was brought only three years after Sunoco’s liability became fixed and certain.”
The court thus remanded the case to the trial court to “resolve the merits of the parties’ indemnification dispute.” But the burden will belong to Zurich and S&B to “establish that the settlement was made in good faith and for a reasonable amount to discharge the potential liability. If they show that, they will then have to prove up Scallon’s allocable share of the liability. But if the settlement was unreasonably excessive, Scallon “will be responsible only for its proportional share of that amount, if any, that would have been reasonable. A settling party unable to establish that any amount of negligence is attributable to the non-settling party cannot recover at all.” The majority explained that its ruling “would not constitute ‘satellite litigation’ any more here than in any other action seeking to enforce an indemnification provision.” In addition to that, a “streamlined trial” will replace the more complex one that would have occurred had Zurich and S&B not settled.
Justice Bland, joined by Justices Lehrmann, Devine, and Huddle, dissented. The minority would have affirmed the court of appeals on the basis that “the agreement at issue does not indemnify the buyer for the buyer’s settlement of the buyer’s own negligence.” Since a party can settle only its own proportionate share of liability, it can’t assign somebody else’s claims. Here, the dissenters argued, the majority basically allowed that by reading the indemnification provision in the purchase order to “permit[] S&B to pursue Scallon for S&B’s settlement of the claims made against S&B, not Scallon.” To avoid that result, the contract should have complied with the express negligence rule, which it did not.
“S&B and others like it are sophisticated parties, capable of arranging their own allocation of risk” Justice Bland stated. “It was S&B that (1) chose to forgo naming Scallon as contributorily negligent, and (2) elected not to enforce its bargained-for indemnity rights against Scallon. S&B could have designed Scallon as a responsible third party at the proper time, with the natural consequence of inducing Scallon to participate in settlement negotiations. If the case proceeded to trial, Scallon would be liable for its share of any joint and several liability the judgment imposed against it and S&B.” Instead, “S&B elected to buy peace at the cost of nullifying its indemnity brights, rights that did not indemnify it for its own negligence….We need to rescue S&B from its litigation strategy under the guise of contract negotiation.”
