Tenth Circuit Finds Indemnity Clause Unenforceable Under Fair Notice Rule In Pipeline Case

While building a water pipeline in the 1970s, a construction company engaged a contractor to perform some of the work.  In a 190-page plus contract, the construction company promised to indemnify the contractor for claims resulting from the construction company’s work.  During construction, the construction company accidentally hit a methanol pipeline and caused a leak, but the leak was not discovered for more than 20 years.  The owner of the methanol pipeline sued the construction company and the contractor, and even though the latter companies prevailed, the contractor incurred more than $2 million in attorneys’ fees and costs, and then attempted to invoke the indemnity provisions by suing the construction company and that company’s insurer.

On Tuesday, the Tenth Circuit, applying Texas law, concluded that the promise of indemnification was broad enough to cover the pipeline owner’s claims against the contractor for its inaction after the construction company caused the leak, but that the clause was unenforceable because it was not conspicuous, which was required by the fair notice rule.  Because the clause was unenforceable, the construction company did not assume the contractor’s liabilities, and thus neither the construction company nor the insurer had an obligation to pay the contractor’s costs.