Fina, Inc. v. Arco ( 2000 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
____________________________
No. 98-41021
____________________________
FINA, INC., formerly known as American Petrofina, Inc.;
FINA OIL & CHEMICAL CO., formerly known as American
Petrofina Company of Texas,
Plaintiffs-Counter Defendants-Appellants,
versus
ARCO,
Defendant-Cross Claimant-Appellee,
BP OIL COMPANY;
SOHIO PIPE LINE COMPANY,
Defendants-Counter Claimants-Cross Defendants-Appellees.
_____________________________________________________
Appeal from the United States District Court
for the Eastern District of Texas, Beaumont Division
_____________________________________________________
January 4, 2000
Before REYNALDO G. GARZA, JOLLY, and WIENER, Circuit Judges.
WIENER, Circuit Judge:
In this case arising under the Comprehensive Environmental
Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. §§
9601 et. seq., Plaintiff-Appellant Fina, Inc. (“Fina”) appeals the
district court’s grant of summary judgment in favor of Defendants-
Appellees BP Oil Company (“BP”) and Atlantic Richfield Company
1
(“ARCO”). Fina contends that the district court improperly applied
Delaware law in holding that cross-indemnities running between the
parties bar Fina’s CERCLA claims against BP and ARCO. We hold that
the indemnities are unenforceable with respect to the CERCLA
liability in question, and accordingly reverse and remand for
proceedings consistent with this opinion.
I.
Facts and Proceedings
BP acquired a refinery located in Port Arthur, Texas from ARCO
in 1969. BP subsequently sold the refinery to Fina in 1973. The
ARCO/BP and BP/Fina agreements of sale contain cross-indemnities
that apportion responsibility between the contracting parties for
liabilities arising from the operation of the refinery. The
ARCO/BP agreement provides in relevant part that:
BP shall indemnify, defend, and hold harmless
ARCO... against all claims, actions, demands,
losses or liabilities arising from the
ownership or the operation of the Assets...
and accruing from and after Closing... except
to the extent that any such claim, action,
demand, loss or liability shall arise from the
gross negligence of ARCO.
The BP/Fina agreement provides in relevant part that:
Fina shall indemnify, defend and hold harmless
BP... against all claims, actions, demands,
losses or liabilities arising from the use or
the operation of the Assets... and accruing
from and after closing.
In 1989, Fina conducted an environmental investigation
2
covering all areas of the refinery. It found seven areas of the
refinery contaminated with solid and hazardous wastes.
Investigating the origins of the contamination, Fina unearthed
evidence that the pollution was at least in part attributable to
the activities of BP and ARCO.
Fina reported its discovery to the State of Texas. The Texas
Natural Resource Conservation Commission ordered Fina to conduct
several further investigations. Those investigations are still
ongoing. Fina has already incurred over $14 million in
investigatory and remedial response costs.
In 1996, Fina sued BP and ARCO seeking contribution and cost
recovery under the Comprehensive Environmental Response,
Compensation, and Liability Act (“CERCLA”), 42 U.S.C. §§9607 and
9613(f).1 BP filed a declaratory judgment counterclaim against
Fina, arguing that Fina’s claims are covered by the indemnity
provision in the BP/Fina agreement of sale. ARCO filed a similar
declaratory judgment cross-claim against BP.
All parties moved for summary judgment. The district court
granted the motions of BP and ARCO, ruling that (1) Fina’s claims
against BP are covered by the BP/Fina indemnity provision, (2)
1
Fina has also made claims under the Resource Conservation
Recovery Act, 42 U.S.C. §§ 6901 et seq., and Section 361.344 of the
Texas Solid Waste Disposal Act. Although we follow the lead of the
district court and the parties to the case in addressing our
opinion solely to Fina’s CERCLA claims, we discern no reason why
our holding should not be equally applicable to these other claims
as well.
3
Fina’s claims against ARCO are covered by the ARCO/BP indemnity
provision, and (3) because ARCO is indemnified by BP which in turn
is indemnified by Fina, a “circuitous indemnity obligation” is owed
by Fina to ARCO, which obligation covers Fina’s claims against
ARCO.
II.
Analysis
A. Standard of Review
The proper interpretation of a contract is a question of law
subject to de novo review.2
B. Issues
We are called on to interpret and determine the enforceability
of two related yet distinctly different indemnity provisions. The
BP/Fina and ARCO/BP indemnity provisions both allocate
responsibility between the contracting parties for liabilities
arising from the ownership or operation of the refinery. The two
provisions differ, however, in two significant respects. First,
whereas the BP/Fina agreement of sale includes a choice of law
provision designating Delaware law as the governing law, the
ARCO/BP agreement of sale does not contain a choice of law
2
See, e.g., Bolding v. C.I.R., 117 F.3d 270, 273 (5th Cir.
1997).
4
provision. Second, the ARCO/BP indemnity provision, unlike its
BP/Fina counterpart, states that it covers all claims “except to
the extent that any such claim... shall arise from the gross
negligence of ARCO.” We must therefore analyze the two indemnity
provisions separately.
1. The BP/Fina Indemnity Provision
Fina contends that the BP/Fina indemnity provision does not
indemnify BP for retroactive CERCLA liability. Under the indemnity
provision, Fina’s obligations to BP extend only to those
liabilities that accrue after the closing date of the BP/Fina
agreement of sale. Fina contends that, although CERCLA was not
enacted until 1980, the CERCLA liability “accrued” at the time that
BP and ARCO polluted the refinery grounds —— well before the
closing date of the BP/Fina agreement of sale. Fina argues in the
alternative that, even if the BP/Fina indemnity provision does
purport within its broad terms to cover the CERCLA liability in
question, the provision is unenforceable with respect to that
liability because governing Delaware law requires that, to
indemnify a party for prospective strict liability claims, an
indemnity provision must “clearly and unequivocally” state that it
covers such claims. As we conclude that the indemnity provision is
unenforceable under Delaware law with respect to the CERCLA
liability at issue here, we need not reach the question whether the
5
liability “accrued” prior to closing, within the meaning of the
agreement.
a. Choice of Law
In assessing the enforceability of the BP/Fina indemnity
provision, we must first determine which state’s choice-of-law
provisions govern. “A federal court must follow the choice-of-law
rules of the state in which it sits.”3 The instant case was filed
in the United States District Court for the Eastern District of
Texas. We will therefore follow Texas choice-of-law rules in
determining the governing state law.
The BP/Fina agreement of sale specifies that it is governed by
Delaware law. Texas honors contractual choice-of-law provisions
unless the designated law is contrary to a “fundamental policy” of
Texas.4
The relevant principle of Delaware law holds that “in order
for a party to be entitled to indemnification for the results of
its own negligence the contract must be crystal clear or
sufficiently unequivocal to show that the contracting party
intended to indemnify the indemnitee for the indemnitee’s own
3
St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d
202, 205 (5th Cir. 1996).
4
DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-78 (Tex.
1990).
6
negligence.”5 Prior to 1987, Texas followed an identical rule.6
In 1987, however, the Texas Supreme Court adopted the stricter
“express negligence” standard.7 This standard holds that “parties
seeking to indemnify the indemnitee from the consequences of its
own negligence must express that intent in specific terms.”8
Although the Texas and Delaware rules do differ, it can hardly
be said that Delaware’s “clear and unequivocal” test violates a
fundamental policy of Texas. “[T]he focus is on whether the law in
question is part of state policy so fundamental that the courts of
the state will refuse to enforce an agreement contrary to that law,
despite the parties’ original intentions.”9 Texas does not, as a
matter of public policy, refuse to enforce all indemnity provisions
that purport to cover the indemnitee’s own negligence. Texas
merely requires that, to merit enforcement as to such claims, an
indemnity provision must expressly state that its coverage extends
to the negligence of the indemnitee. The “clear and unequivocal”
test is not inconsistent with a fundamental policy of Texas.
Delaware law will therefore be applied in interpreting and
5
Sweetman v. Strescon Industries, Inc., 389 A.2d 1319, 1321
(Del. Super. 1978).
6
See Dorchester v. American Petrofina, Inc., 710 S.W.2d 541,
543 (Tex. 1986).
7
See Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex.
1987).
8
Id at 708.
9
DeSantis, 793 S.W.2d at 680.
7
assessing the enforceability of the BP/Fina indemnity provision.
b. Application of Delaware law
Fina has indemnified BP for “all claims, actions, demands,
losses or liabilities arising from the use or operation of the
Assets... and accruing from and after Closing.” Assuming, without
deciding, that the CERCLA liability at issue “accrued” after the
closing date of the BP/Fina agreement of sale, the indemnity
provision clearly purports to cover CERCLA liability within its
broad terms: The phrase “all claims” certainly encompasses claims
arising under CERCLA.10
The analysis, however, does not stop there. Under Delaware
law, contracts to indemnify a party against the consequences of its
own negligence are strictly construed against the indemnitee.11 The
purpose of this rule is to ensure that the indemnitor is fully
cognizant of the extraordinary risk that it is assuming.12 The
rule functions as a “penalty default”; any entity that wishes to
contract away liability for the consequences of its own negligence
10
We do not decide whether a reasonable interpretation of the
phrase “all claims” would include claims that were merely
prospective at the time the indemnity provision was signed.
11
See Powell v. Interstate Vendaway, Inc., 300 A.2d 241, 243
(Del Super. 1972); Laws v. Ayre Leasing, No. 92C-07-254, 1995 WL
465334, at *2 (Del. Super. July 31, 1995).
12
See Laws, 1995 WL 465334, at *2; Clark C. Johnson, Note,
Collapsing the Legal Impediments to Indemnification, 69 Ind. L.J.
867, 878 (1994).
8
is put on notice by the rule that, to be enforceable, any indemnity
provision that it signs must state with specificity the types of
risks that it is transferring to the indemnitor. If an indemnity
provision is not sufficiently specific, Delaware courts simply will
refuse to enforce the risk transfer.
Delaware law thus requires that, to be enforceable, “the
intent to indemnify must be clear and unequivocal” on the face of
an indemnity provision.13 “To be enforceable, the provision must
specifically focus attention on the fact that by the agreement the
indemnitor was assuming liability for [the] indemnitee’s own
negligence.”14 The Delaware courts have often stated that there are
no particular words that must be used to render an indemnity
provision enforceable.15 But “[n]o Delaware case has allowed
13
Cumberbatch v. Bd. of Trustees of Del. Tech. & Community
College, 382 A.2d 1383, 1386 (Del. Super. 1978). See also Blum v.
Kauffman, 297 A.2d 48, 49 (Del. 1972); All-State Investigation and
Security Agency v. Turner Constr. Co., 301 A.2d 273, 274-75 (Del.
1972).
14
James v. Getty Oil Co., 472 A.2d 33, 36 (Del. Super. 1984)
(citing Sweetman, 389 A.2d 1319).
The sophistication of the contracting parties is irrelevant;
the vast majority of the cases in which Delaware courts have
applied the clear and unequivocal test have involved contracts
between large, sophisticated entities. See, for example, Powell,
300 A.2d 241 (contract between Interstate Vendaway, Inc. and
Chrysler Corp.); Paoli v. Dave Hall, Inc., 462 A.2d 1094 (Del.
Super. 1983) (contract between a construction contractor and a
subcontractor); James v. Getty Oil Co., 472 A.2d 33 (Del. Super.
1984) (contract between Getty Oil Co. and Catalytic, Inc.).
15
See James, 472 A.2d at 37; Laws, 1995 WL 465334, at *2
(citing Rock v. Delaware Elec. Coop., Inc., 328 A.2d 449 (Del.
Super. 1974)).
9
indemnification of a party for its own negligence without making
specific reference to negligence of the indemnified party.”16
Moreover, Delaware courts have consistently refused to enforce
indemnity provisions that use broad, catch-all language but fail to
make a specific reference to claims arising from the indemnitee’s
own negligence.17
Thus, to merit enforcement under Delaware law, an indemnity
provision must at a minimum demonstrate on its face “that the
16
See Jordan v. E.I. duPont de Nemours and Co., 1986 WL
11553, at *3 (Del. Super. Aug. 8, 1986); Paoli v. Dave Hall, Inc.,
462 A.2d 1094, 1098 (Del. Super. 1983). For examples of indemnity
provisions that have been upheld as applied to claims arising from
the indemnitee’s own negligence, see All-State, 301 A.2d at 274
(enforcing a provision indemnifying for “any claims... whether or
not such claims are based on Turner’s alleged active or passive
negligence”); Noble J. Dick, Inc. v. Warburton, 321 A.2d 345, 346
(Del. 1975) (enforcing a provision indemnifying for “all claims...
whether or not such injury is due to or chargeable to any
negligence of the Contractor”); Cumberbatch, 382 A.2d at 1385
(enforcing a provision indemnifying for “all claims... regardless
of whether or not it is caused in part by a party indemnified
hereunder”); Fountain v. Colonial Chevrolet Co., 1988 WL 40019
(Del. Super. Apr. 13, 1988) (enforcing a provision indemnifying for
“all loss or damages... even if said losses arise out of the
negligence of Company”).
17
See Marshall v. Maryland, D. & V. Ry. Co., 112 A. 526 (Del.
Super. 1921) (refusing to enforce as applied to a claim arising
from the indemnitee’s own negligence an indemnity covering “damages
of whatsoever kind of nature arising in any manner or under any
circumstances”); Paoli, 462 A.2d at 1098 (refusing to enforce as
applied to the indemnitee’s own negligence an indemnity covering
“all suits”); Hitchens v. Cannon & Cannon, 1987 WL 17440 (Del.
Super. Sept. 16, 1987) (refusing to enforce as applied to a claim
arising from the indemnitee’s own negligence an indemnity covering
“all... claims... howsoever arising or incurred”); Kreider v.
Schumacher & Co., 816 F. Supp. 957, 962 (D. Del. 1993) (stating that
“the 297 A.2d 48 (Del. 1972).
10
subject of negligence of the indemnitee was expressly considered”
by the parties in the drafting of the agreement.18 The BP/Fina
indemnity provision gives no indication that the parties considered
the issue of indemnifying BP for the consequences of its own
negligence: There is no reference in the indemnity to BP’s own
negligence, and its use of the phrase “all claims, actions,
demands, losses or liabilities” is insufficient as a matter of
Delaware law to satisfy the clear and unequivocal test. Thus, the
BP/Fina indemnity provision is unenforceable as applied to the
prospective CERCLA liability at issue in this case.
BP attempts to avoid this result on two grounds. BP first
argues that the clear and unequivocal rule is inapplicable here
because it only applies to claims based on negligence, whereas
CERCLA claims are based on strict liability. No Delaware case has
addressed the applicability of the clear and unequivocal test to
claims based on strict liability. Several other jurisdictions,
however, have held that the clear and unequivocal test is fully
applicable to claims based on strict liability.19 The transfer of
liability for any prospective legal claim, whether based on
18
Rizzo v. John E. Healy and Sons, Inc., 1990 WL 18378, at *2
(Del. Super. Feb. 16, 1990).
19
See, e.g, Purolator Products v. Allied Signal, Inc., 772
F. Supp. 124, 131 n.3 (W.D.N.Y. 1991) (“While CERCLA liability is
strict, and is not based on negligence, I believe that the policy
behind the rule regarding negligence is also applicable here”);
Houston Lighting & Power Co. v. Atchison, Topeka & Santa Fe Ry.,
890 S.W.2d 455, 458 (Tex. 1994).
11
negligence or on strict liability, involves an extraordinary
shifting of risk. We perceive no reason why Delaware would choose
to differentiate between the two types of claims for purposes of
this rule. We therefore hold that Delaware’s clear and unequivocal
rule is equally applicable to indemnification for strict liability
claims.
Second, BP argues that the clear and unequivocal test is
applicable only to indemnification for that subset of prospective
liabilities that is given rise to by future acts of the indemnitee.
All of Fina’s claims against BP are predicated on actions taken by
BP prior to the signing of the BP/Fina indemnity provision. Thus,
if BP’s argument were correct, the BP/Fina indemnity provision
should be interpreted according to normal contract interpretation
principles —— rather than the “clear and unequivocal” rule —— and
would preclude Fina’s recovery against BP.
No Delaware case has directly addressed the applicability of
the clear and unequivocal test to indemnification for prior acts
giving rise to potential future liability (with “past” and “future”
being determined by reference to the time at which the indemnity
provision was signed). Indeed, it does not appear that any
Delaware case has ever distinguished between past and future
conduct or past and future liability in applying the clear and
unequivocal test to an indemnification provision. BP’s argument
appears to be predicated on Texas law, which specifies that “[the
express negligence test] is explicitly limited to releases and
12
indemnity clauses in which one party exculpates itself from its own
future negligence.”20 BP relies on this and other similar
statements in Texas cases in concluding that, under Texas law, at
least, the express negligence test is inapplicable to
indemnification for past conduct giving rise to potential future
liability.
Even as to Texas law, it is not at all clear that BP’s
conclusion is correct. The language used by the Texas courts is
ambiguous: “Future negligence” might refer to future negligent
conduct, but it also might refer to future claims based on
negligence. True, the Texas rule does clearly distinguish between
(1) indemnification for past conduct for which claims have already
been filed at the time the indemnity provision is signed and (2)
indemnification for future conduct for which claims could not
possibly have been filed at the time the indemnity provision was
signed. Still, no Texas case has addressed the applicability of
the rule to the rare situation in which a party attempts to invoke
the protection of an indemnity against a claim filed after the
indemnity was signed but arising from conduct that occurred prior
to the signing of the indemnity.21
20
Green Int’l, Inc. v. Solis, 951 S.W.2d 384, 86-87 (Tex.
1997).
21
Two Texas courts —— neither of which appears to have been
aware of the unusual posture of the case before it —— have decided
cases involving such a fact pattern. One court held that the
express negligence rule was applicable, but the case is
distinguishable because it involved not only an indemnity but also
13
The purpose of Delaware’s clear and unequivocal test is to
ensure that indemnitors are fully cognizant of the extraordinary
risks that they are assuming. This rationale is consistent with
distinguishing between those claims that have been filed at the
time that an indemnity is signed and those that are merely
prospective: Claims that have already been filed are not an
extraordinary risk, as they are a known and calculable quantity.
The rationale behind the Delaware rule is not consistent, however,
with distinguishing between prospective claims that are based on
past conduct and prospective claims that are based on future
conduct. Both types of prospective claims constitute unknown
quantities. Virtually all prospective claims are in fact
unknowable quantities to an indemnitor unless the indemnitee brings
the prospective claims to the indemnitor’s attention: An
indemnitor can always determine whether claims have already been
filed against an indemnitee, but it is nearly impossible for an
indemnitor to determine whether an indemnitee has engaged in
conduct that is likely to give rise to claims in the future.
a warranty. See Dorchester Gas Co. v. American Petrofina, Inc.,
710 S.W.2d 541 (Tex. 1986), overruled on other grounds, Ethyl Corp.
v. Daniel constr. Co., 725 S.W.2d 705 (Tex. 1987). The other court
held that the express negligence rule was inapplicable, but that
case is also distinguishable because the court found that, although
the claim was not filed until after the signing of the indemnity,
the dispute that gave rise to the claim arose before the signing of
the indemnity and was within the contemplation of the parties when
they signed it. Lexington Insurance Co. v. The W.M. Kellogg Co.,
976 S.W.2d 807 (Tex.App. 1 Dist. 1998). In conclusion, Texas law
concerning indemnification for past acts giving rise to potential
future liability is at best unclear.
14
It is consistent with the “penalty default” nature of the
Delaware rule to place the burden on an indemnitee both to inform
potential indemnitors that it has engaged in conduct that may give
rise to future liability and to ensure that any indemnity provision
that is signed clearly states that the indemnification extends to
such future claims. Only by applying the “clear and unequivocal”
rule to indemnification for all claims that were merely prospective
at the time that an indemnity provision was signed can the courts
be sure that the indemnitor was fully cognizant of the
extraordinary risk that it was assuming. We are convinced that the
Delaware courts would apply the clear and unequivocal rule to BP’s
claim for indemnification by Fina.
We hold, therefore, that (1) the BP/Fina indemnity provision
is subject to the clear and unequivocal test under Delaware law as
applied to Fina’s CERCLA claims against BP; (2) the BP/Fina
indemnity provision fails to satisfy the clear and unequivocal
test; and (3) the indemnity provision consequently does not bar
Fina’s claims against BP.
2. Fina’s “circuitous indemnity obligation” to ARCO
The district court held that because ARCO is indemnified by BP
which in turn is indemnified by Fina, a “circuitous indemnity
obligation” is owed by Fina to ARCO. As we hold that Fina does not
owe an indemnity obligation to BP with respect to the CERCLA
15
liability in question, Fina necessarily does not owe a “circuitous
indemnity obligation” to ARCO. Consequently, Fina is not barred by
the indemnity provisions in question from pursuing its claims
against ARCO.
3. The ARCO/BP indemnity provision
The ARCO/BP agreement of sale does not contain a choice-of-law
provision. ARCO and BP agree, however, that the contract is
governed by Texas law. Since 1987, Texas has applied the “express
negligence” test in lieu of the “clear and unequivocal” test. The
“express negligence” test holds that “parties seeking to indemnify
the indemnitee from the consequences of its own negligence must
express that intent in specific terms.”22 This rule is applicable
to claims based on strict liability.23 And, because the rationale
behind the Texas rule is the same as the rationale behind the
Delaware rule,24 we are satisfied that Texas would apply the
“express negligence” test to all claims that were merely
prospective at the time the indemnity provision was signed.
The ARCO/BP provision indemnifies ARCO for “all claims...
arising from the ownership or the operation of the Assets... and
accruing from and after Closing... except to the extent that any
22
Ethyl Corp., 725 S.W.2d at 708.
23
Houston Lighting & Power Co., 890 S.W.2d at 459.
24
See id.
16
such claim... shall arise from the gross negligence of ARCO.” It
makes no mention of claims based on BP’s own negligence or on
strict liability. The Texas Supreme Court has held that an
indemnification provision is not enforceable as applied to claims
based on strict liability unless that provision expressly states
the indemnitor’s intent to cover such claims.25 Even if the
exclusion of gross negligence from the indemnity’s coverage is
interpreted as indicating that BP intended to indemnify ARCO for
ordinary negligence,26 claims based on strict liability are of
quite a different nature. Texas law requires that each type of
claim be separately referenced by an indemnity provision:
“Indemnification against strict liability is an exception to usual
business practices in the same manner as indemnifying against
someone else’s negligence. ... [F]airness dictates against imposing
liability on an indemnitor unless the agreement clearly and
specifically expresses the intent to encompass strict liability
claims.”27 Thus, the ARCO/BP indemnity provision is not enforceable
under Texas law as applied to claims based on strict liability.
Consequently, ARCO may not seek indemnification from BP for any
amounts recovered against it by Fina based on strict liability.
25
Houston Lighting & Power Co., 890 S.W.2d at 458-59.
26
See Rizzo, 1990 WL 18378, at *2; Laws, 1995 WL 465334, at
*2-*3.
27
Houston Lighting & Power Co., 890 S.W.2d at 458 (refusing
to enforce as applied to a strict liability claim an indemnity
provision that expressly covered ordinary negligence claims).
17
III.
Conclusion
For the reasons discussed above, the district court’s grant of
summary judgment is reversed and the case is remanded for further
proceedings consistent with this opinion.
REVERSED and REMANDED
18