United States: Texas Indemnity And Express Negligence

A recent Texas Court of Appeals decision (Tutle & Tutle Trucking v. EOG Resources, Inc., Waco Court of Appeals 2012) illustrates the importance of carefully drafting indemnity clauses in oil and gas Master Service Agreements. EOG had a Master Services Agreement with Tutle, a trucking company. Frac Source was a contractor of EOG's and had a separate MSA with EOG. Tutle's employee, Henderson, was injured, apparently in Texas, while assisting Frac Source in unloading sand from a Frac Source truck. Henderson sued Frac Source and Tutle for negligence, but never made a claim directly against EOG, claiming that Frac Source had modified or removed a safety device from its equipment, rendering such equipment unreasonably dangerous. Frac Source then made demand on EOG to defend and indemnify it under the EOG/Frac Source MSA. EOG, in turn, demanded indemnity from Tutle under the EOG/Tutle MSA.¹

Paragarph 6 of the EOG/Tutle MSA set out the parties indemnity obligations. Paragraph 6A of the EOG/Tutle MSA contained an indemnification (in all capital letters) under which Tutle agreed to indemifiy EOG, its related companies, partners, etc., but did not include its contractors or subcontractors, against claims asserted by Tutle's employees "arising in connection [with the MSA]." However, since (a) Henderson (Tutle's employee) had not sued EOG and (b) the claim for which EOG sought indemnity from Tutle was a contractual claim which had been made by EOG's contractor (Frac Source), Paragraph 6 A of the EOG/Tutle did not provide any protection to EOG.

Nevertheless, the EOG/Tutle indemnity provisions also included Paragraph 6E (in lower case letters) which the parties called the "pass through" provision and provided as follows:

EOG relied upon the "pass through" provision in arguing that Tutle owed EOG a duty to defend and indemnify it against Frac Source's contractual indemnification claim. Tutle defended by asserting, as a matter of law, that it owed no contractual duty to indemnify Frac Source under the MSA because it had not agreed to indemnify EOG for claims asserted by EOG's contractors, and the indemnity provisions did not satisfy Texas law's "fair-notice" requirements consisting of the express negligence test and conspicuousness.

The trial court found for EOG holding that Tutle had a contractual duty under Paragraph 6E to defend and indemnify EOG and Frac Source in the suit by Tutle's employee. Implicit in such finding is the fact that Tutle owed EOG indemnity for contractual claims made by Frac Source based on negligence claims by Henderson.

Texas courts have created two conditions to enforcement of indemnifications against one's own negligence. The first requires that a party's intent to be released from all liability caused by its own future negligence must be expressed in unambiguous terms in the contract. The second is that something appear on the face of the contract to attract the attention of the person looking at it; this is why you see these provisions in all caps, in contrasting colors, larger type, etc.

In a 2-1 decision, the Waco Court of Appeals said that the Business and Commerce Code's definition of conspicuous includes language in which both the heading and text are in larger or contrasting type but "it does not require both the heading and the text to be in larger or contrasting type." It concluded that "the numbering for the 'pass through' provision is capitalized and is different from other provisions in the [MSA]. And, perhaps more importantly, the location of paragraph 6E, being numerically linked to paragraphs 6A ..., is such that a reasonable person ought to have noticed it." The dissent, however, concluded that "one probably cannot bury another company's agreement to indemnify for an act of negligence much deeper than that."

With respect to the express negligence issue, EOG argued that because EOG was seeking indemnity for Frac Source's negligence, not its own negligence, the express-negligence doctrine should not apply. Without specifically deciding the issue put to it by EOG the court assumed the Tutle position, that any extraordinary sharing of risk should be subject to the doctrine, and concluded that the language was not vague and ambiguous and met the express negligence test.

The dissent raised the issue, not answered by the majority, of whether the doctrine applies because it is an indemnity of a contractual indemnity, which, at the pass through level is only a contract claim not a negligence claim. It is this issue that has caused scriveners to attempt to add "contractual" to many of the indemnity clauses we have seen recently; however simply inserting "contractual or" every place you have a mention of negligence has the potential to obviate many of the contractual undertakings in the contract in which the indemnity clause appears -- an unintentional result. To us the preferable solution is to include contractors and their subs in the group of indemnified parties.

We also note that the Texas anti-indemnity law in the Civil Practice & Remedies Code voids any contract relating to a well or mine if it indemnifies a person against loss caused by the negligence of the indemnitee unless the parties agree in writing that any mutual indemnity obligation will be supported by liability insurance coverage limited to the amount each party has agreed to obtain for the benefit of the other. The insurance issue was not addressed in Tutle v EOG.

The biggest lesson in the case is that you should carefully scrutinize the definitions of "Company Group," and "Contractor Group," that are entitled to receive the benefit of the indemnify obligations and ensure that contractors and subcontractors of every tier and their employees, agents, etc. are included in those definitions. The other lesson is that you must expressly state that the indemnification includes an indemnification against one's own negligence, and state it clearly, and set all parts of the indemnification clause out in larger type, in bold, or all caps.

Additionally, too often the indemnity provisions are regarded as boiler plate and simply inserted from one document into the next. We suggest you pay close attention to your drafting of each clause each time.

Footnotes

1Tutle & Tutle Trucking, Inc. v EOG Resources, Inc., 10-11-00062-CV (TXCA10), November 15, 2012.

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