In a case with massive implications for commercial construction contracts, the Texas Supreme Court is poised to decide whether an indemnitee may enforce an indemnification provision in a construction contract when the indemnitee has settled with parties other than the indemnitor.
Industrial Specialists, LLC v. Blanchard Refining Company LLC and Marathon Petroleum Company LP (No. 20-0174) presents an issue of first impression in Texas law. Unusually, both sides urged the Court to grant review of the First [Houston] Court of Appeals’ denial of a permissive appeal from the trial court under Rule 28.3, TRCP. SCOTX initially denied review last November but reinstated the petition in April and called for merits briefing. The threshold issue is whether the case qualifies for permissive appeal. The court of appeals did not give any “basic reasons” for denial of the appeal, which the parties argue constituted an abuse of discretion. The parties argue further that the appeal meets the requirements of the rule: (1) it involves a controlling question of law (the enforceability of the indemnity agreement); (2) there is substantial ground for difference of opinion, either because the appeal presents a novel or difficult issue, controlling precedent is doubtful, disagreement among courts of appeals exists, or when courts have little authority to guide them; and (3) immediate appeal may materially advance the ultimate termination of the litigation.
Should SCOTX find the requirements of the rule satisfied (which it appears likely to do), the substantive law issue is of extreme importance to any business that contracts for construction services on its premises. There is no need to recount TCJL’s long involvement in contractual indemnity, both in the Legislature and the courts, but an adverse decision in this case could conceivably eliminate the ability of businesses to allocate risk by contract, even in contracts between highly sophisticated parties. Even legislatively enacted limitations on indemnity provisions have left the parties with wide latitude to manage risk contractually as long as parties did not seek indemnity for their own negligence (except in the case of bodily injury or death of an employee of the indemnitor). Indeed, Blanchard and Marathon (the premises owners) base much of their argument on the Court’s repeated long-held position that Texas law and public policy favor freedom of contract, including the allocation of risk through indemnification agreements.
ISI argues that Beech Aircraft Corp. v. Jinkins, 739 S.W.2d 19 (Tex. 1987) should be expanded beyond the confines of personal injury tort litigation to apply to contractual indemnity. Since Blanchard settled its claims with each party except ISI, it cannot enforce the indemnity agreement against ISI because Jinkins prohibits a settling party from seeking contribution from a non-settling party for more than its share of liability. Put another way, an indemnity agreement may be voided any time an indemnitor refuses to settle. Further, ISI’s argument holds that an indemnity agreement may only be enforced if each party’s share of liability is adjudicated. Extending Jinkins would thus have the effect of encouraging litigation, contravening a strong public policy preference for settlement. In every setting in which TCJL has argued in favor of permitting parties, especially sophisticated ones, the freedom to allocate risk by contract, we have contended that indemnity provisions encourage settlement and cooperation between defendants and the subscribing employer whose employee was injured. If ISI’s argument prevails, the incentives will be reversed.
We are pleased that the Court has decided to rule in this case to put the Jinkins issue to rest once and for all. Expansion of that case into contractual risk allocation would upend construction contracts all over the state and result in a surge of unnecessary and unproductive litigation. Oral arguments will be held on February 1 at 9 a.m.
