Indemnification, Express Negligence, and the Surprising Results of Constructors

One of my partners sent an email to our group attaching a copy of the Statement on Legal Opinions Regarding Indemnification and Exculpation Provisions Under Texas Law, by the Legal Opinions Committee of the Business Law Section of the State Bar of Texas, published in the Spring 2006 edition of the Texas Journal of Business Law. (Thanks, Andrew.)

A large part of the article is a thorough summary of Texas law on the enforceability of indemnities against one’s own negligence. Briefly, under Texas law, an indemnity that provides for indemnification against the indemnified party’s own negligence is not enforceable unless it satisfies two judicially created doctrines in Texas–the “conspicuousness” rule and the “express negligence” rule. In a nutshell, to be enforceable, an indemnity purporting to indemnify a party against the consequences of its own negligence must (a) say this expressly in the indemnity (this is the “express negligence rule”) and (b) be set forth conspicuously in the document containing the indemnity (this is the “conspicuousness rule”). Such a provision might look like this:

The foregoing indemnity will not be impaired or rendered inapplicable by the negligence of the indemnified party.

“So I could see when parties might agree to this,” you say. “For instance, a bank making a construction loan might insist on being indemnified against simple mistakes that it may make. This is just straight-forward contractual risk shifting.” In most indemnities, it would seem, this offensive language (i.e., you indemnify me, even if I mess up) would play no part.

But the law in Texas is actually a bit more complicated, on account of the Texas Supreme Court case Fisk v Constructors, 888 SW 2nd 813 (Tex. 1994). I was surprised that the article by the Opinion Committee made no mention of it.

In the Fisk v Constructors case, the Texas Supreme Court held that if an indemnity fails to satisfy the express negligence rule, the mere allegation of negligence by the indemnitor in a suit filed against the indemnified party will preclude recovery of anything from the indemnitor, even if the indemnified party is ultimately held not to be negligent. In other words, the indemnified party will be unable to plead its case on the merits. This case held, in essence, that an indemnitor owes no duty of defense absent a claim for which indemnity is required. It does not matter if the indemnitor’s claim that the indemnified party is negligent is ultimately determined to have no merit; there is no independent duty of defense, so long as there is no duty to indemnify against liability on the claim.

So what is the answer? Should all indemnities governed by Texas law meet the express negligence rule? In a lot of situations, the parties do not intend for the indemnitor to indemnify the indemnified party against the consequences of the indemnified party’s own negligence. But without “express negligence” language, an indemnitor may slip out of an indemnity by simply alleging negligence on the part of the indemnified party—whether meritorious or not.

The answer, of course, is careful drafting. This is yet another example of the courts helping to keep us transactional lawyers in business.