Know What It Takes For Contract Clauses To Be Conspicuous Where Required
Company A‘s predecessor entered into a contract with Company B‘s predecessor to build a water pipeline and A promised B indemnity for claims resulting from A‘s work. While building the water pipeline, Company A accidentally hit a methanol pipeline and caused a leak that was not discovered for more than 20 years when the owner of the methanol pipeline had to pay for the cleanup and then sought to recover expenses from Company A and Company B. Although A and B prevailed, Company B incurred more than $2 million in legal fees and sought to invoke A‘s indemnity promise, suing A and A‘s liability insurer. The district court, however, granted summary judgment in favor of A and the insurer on the grounds that the indemnity clause was not conspicuous and therefore was unenforceable as a matter of Texas law. The Tenth Circuit affirmed that decision earlier this month.
The appellate court agreed that the indemnity provision covered the claims that had been asserted by the methanol pipeline owner against Company B but the “fair notice rule” precluded it from being enforceable. The court found that the fair notice rule applied to this situation where an indemnity clause covers the indemnitee’s fault implicitly, but not explicitly, and also covered application of the indemnity clause for each of the five asserted claims (fraud, nuisance, restitution, violation of a federal environmental statute, and violation of a state environmental statute). In Texas, promises to indemnify a party for its own fault must be expressly stated and conspicuous, and to be conspicuous, it must attract the attention of a reasonable person.
The Tenth Circuit found that the indemnity clause in this case was not conspicuous as it was on page 86 of a 197-page document, all of which was single-spaced, in small type, and in black and white. Further, the table of contents and applicable headings did not help given that the clause was located in a section entitled “Protection of Existing Structures and Facilities.”
Company B also attempted to advance an argument in its reply brief to the Tenth Circuit that Company A had actual notice of the indemnity provision but the court concluded that this argument was waived given that it was not included in the party’s opening brief (the court also commented that the argument, even if not waived, was not adequately supported).
