In a case that could have 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.
So what’s going on? The facts of the case are straightforward and undisputed by the parties. Blanchard owns and operates a refinery in Texas City. Industrial Services (ISI) provides construction services to the oil and gas industry. Blanchard contracted with ISI and other contractors to perform a turnaround at the refinery. The contract included an indemnity provision requiring ISI to indemnify Blanchard “from and against all losses, damages (including punitive damages), demands, claims, suits and other liabilities . . . because of (i) bodily injury, including death . . . of its employees.” This provision excluded indemnity for loss attributable to and caused by the negligence of Blanchard. Several ISI employees were injured when a fire broke out inside a regenerator vessel in which they were working. As a comp subscriber, ISI was immune from suit. The injured employees sued Blanchard, Marathon, and other contractors working at the site. The cases were consolidated in an MDL in Galveston. ISI intervened to assert its workers’ comp lien and was named a responsible third party.
Blanchard requested defense and indemnity from ISI pursuant to the contract. ISI’s insurer, on behalf of itself and ISI, rejected the request. Meanwhile, the parties, including ISI, engaged in mediation and settled the lawsuits. Only ISI refused to participate in the settlement. The parties reserved their claims against ISI in the settlement agreement. Blanchard and Marathon subsequently sued ISI to enforce the indemnity agreement with respect to ISI’s negligence. ISI moved to dismiss for failure to state a claim under Rule 91a, which the trial court denied. It then requested mandamus from the court of appeals, which it likewise denied. Not taking no for an answer, ISI filed a motion for summary judgment contending that the indemnity provision was unenforceable. The trial court denied the motion. Finally, ISI filed a motion for a permissive appeal seeking to resolve the issue of enforceability, which the trial court granted. As we have seen, the court of appeals denied the appeal, bringing the matter before SCOTX.
ISI bases its argument on SCOTX’s decision in Beech Aircraft Corp. v. Jinkins, 739 S.W.2d 19 (Tex. 1987). In Beech, a pilot and passenger were injured in an airplane accident. The passenger sued Beech (and others) on negligence and product liability claims but did not sue the pilot. Beech settled with the passenger in an agreement that purported to release both Beech and the pilot, so that Beech could preserve its common law right of contribution against the pilot. Beech then counterclaimed against the pilot seeking contribution. The pilot moved for summary judgment, contending that the settlement agreement releasing Beech extinguished its right of contribution. In an opinion by Justice Mauzy, SCOTX held that Beech lacked both a statutory right of contribution (only available to judgment debtors) and a right of contribution under the comparative negligence statute (which did not grant contribution to a settling defendant). With respect to common law contribution, the Court held that a settling party could settle only its own share of liability and that contribution requires a party is jointly liable for a disproportionate share of liability greater than its own. Consequently, the Court made an exception from the general rule that a party may assign its cause of action to another party (as the passenger in effect did in this case by releasing his cause of action against the pilot).
ISI argues that Jinkins 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.
In addition to the policy arguments discussed above, Blanchard points out that no precedent exists for extending Jinkins to contract law, and that the Court has declined to do so when give the opportunity. Additionally, the Court has repeatedly upheld freedom of contract principles in the indemnity context, as well as ruling that “a settling indemnitee must only show a potential liability and that his settlement was reasonable, prudent and in good faith under the circumstances.” Enforcing the indemnification clause would merely require a jury to apportion liability, as it currently does. Unlike in Jinkins, which involved common law contribution in the context of assignment of a cause of action against a non-settling defendant, this case presents a standard situation in which a settling indemnitee seeks enforcement of a contract against a non-settling indemnitor. No one is buying a cause of action or seeking to recover from someone else more than the contract entitles them to.
We hope 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.