kansas-city-southern-railway-company-v-missouri-pacific-railroad ( 2004 )

In The

Court of Appeals

Ninth District of Texas at Beaumont

____________________

NO. 09-04-172 CV ____________________

THE KANSAS CITY SOUTHERN RAILWAY COMPANY, Appellant

V.

MISSOURI PACIFIC RAILROAD, individually and d/b/a UNION PACIFIC RAILROAD COMPANY, UNION PACIFIC RAILROAD COMPANY, UNION PACIFIC SYSTEM, Appellees

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On Appeal from the 163rd District Court Orange County, Texas Trial Cause No. B-980133-AC

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MEMORANDUM OPINION  

The Kansas City Southern Railway Company (KCS) brought suit against Missouri Pacific Railroad Individually and d/b/a Union Pacific Railroad Company, Union Pacific Railroad Company, and Union Pacific System (Union Pacific) seeking damages for breach of defense and indemnity obligations pursuant to a joint track agreement and for declaratory relief. KCS seeks those damages pursuant to monetary losses incurred in defending and settling an underlying lawsuit in which Union Pacific refused to defend and indemnify KCS. Union Pacific moved for summary judgment on the basis the indemnity provisions were unenforceable as a matter of law under the fair-notice test. Following a hearing, the trial court granted Union Pacific's motion in its entirety. Subsequently, Union Pacific filed a notice of non-suit of its counterclaim and the trial court dismissed it. KCS brings this appeal claiming the trial court erred in granting summary judgment in favor of Union Pacific.

In its motion for summary judgment, Union Pacific asserted the indemnity provisions in the Joint Track Agreement were unenforceable for failure to satisfy the "conspicuousness" and "express negligence" requirements established by the Texas Supreme Court in Ethyl and Dresser.

A contract which fails to satisfy either of the fair notice requirements when they are imposed is unenforceable as a matter of law. See Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 509-10 (Tex.1993); see also U.S. Rentals, Inc. v. Mundy Serv. Corp., 901 S.W.2d 789, 792 (Tex.App.-Houston [14th Dist.] 1995, writ denied). One fair notice requirement, the express negligence doctrine, requires that 'the intent of the parties must be specifically stated in the four corners of the contract.' Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 707 (Tex.1987). The other requirement, of conspicuousness, mandates 'that something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.' Dresser, 853 S.W.2d at 508 (quoting Ling & Co. v. Trinity Sav. & Loan Ass'n, 482 S.W.2d 841, 843 (Tex.1972)). . . . However, if both contracting parties have actual knowledge of the plan's terms, an agreement can be enforced even if the fair notice requirements were not satisfied. Dresser, 853 S.W.2d at 508 n. 2 (citing Cate v. Dover Corp., 790 S.W.2d 559, 561 (Tex.1990)).

Storage & Processors, Inc. v. Reyes, 134 S.W.3d 190, 192 (Tex. 2004) (footnote omitted). The burden of establishing actual knowledge is on the party seeking indemnification. See Missouri Pacific R. Co. v. Lely Development Corp., 86 S.W.3d 787, 791 (Tex. App.-- Austin 2002, pet. dism'd).

Based on Reyes, we reject Union Pacific's argument that actual knowledge is irrelevant. Likewise, Reyes refutes Union Pacific's contention that Lely incorrectly analyzed Dresser by inserting express negligence into the fair notice test. Reyes clearly holds the express negligence doctrine is one of two "fair notice" requirements and that actual knowledge is an exception to those requirements. Reyes, 134 S.W.3d at 192.

The record reflects Union Pacific signed a supplemental agreement in October of 1991 reinstating the agreement. "One who signs a contract is presumed to know its contents and its legal effects." Lely, 86 S.W.3d at 791. KCS attached summary judgment evidence that Union Pacific assumed the defense of KCS in a lawsuit after a demand was made pursuant to the contract. In two cases, counsel for KCS originally filed an answer, but Union Pacific then assumed the defense. The record contains no evidence Union Pacific ever objected to or sought to avoid the contract. "Any act inconsistent with an intent to avoid a contract has the effect of ratifying the contract." Id. at 792. Furthermore, Union Pacific accepted the benefits of the agreement by operating on the joint tracks. "Ratification may be inferred by a party's course of conduct and need not be shown by express word or deed." Id.

We find the summary judgment evidence raises a fact issue as to whether Union Pacific had actual knowledge of and/or ratified the defense and indemnity provisions of the contract. Accordingly, the district court erred in granting Union Pacific's motion for summary judgment. We reverse the trial court's judgment, and remand the cause for further proceedings.

The judgment of the trial court is REVERSED AND REMANDED.

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DON BURGESS

Justice

Submitted on October 21, 2004

Opinion Delivered December 30, 2004

Before McKeithen, C.J., Burgess and Gaultney, JJ.