In a closely watched case, the Texas Supreme Court in S&B Engineers & Contractors, Ltd. v. Scallon Controls, Inc. held that settlement does not cut off rights to contractual indemnity and that indemnity clauses that only require comparative indemnity are not subject to the requirements of the express negligence rule.

The underlying case involved personal injuries sustained by employees at a facility owned by a Sunoco entity. Sunoco hired S&B Engineers & Contractors to design and install a safety system in its South Texas refinery. S&B, in turn, hired Scallon Controls to supply and program a fire suppression system. Scallon installed the system, encoding a failsafe mode that would release a chemical fire suppressant if the system lost power.

In January 2015, the system briefly lost power while another contractor’s employees were working on insulation atop tall scaffolding in the refinery.  The electricity lapse triggered the chemical fire suppressant, and seven workers fell while trying to escape.  The injured workers sued S&B and Sunoco, which in turn filed a third-party suit against Scallon for breach of contract, breach of express warranty, and enforcement of the indemnity provisions into which S&B and Scallon had entered.  In May 2019, after four years of litigation, the workers settled with S&B and Sunoco. S&B and Sunoco’s insurer, Zurich, pursued a recovery action against Scallon, seeking to enforce the indemnity clause in Scallon’s purchase agreement.

The indemnity clause in the agreement was for comparative negligence, meaning Scallon only had to indemnity to the extent the injuries were due to its own negligence or fault. The clause provided as follows.

To the maximum extent permitted by applicable law, [Scallon] shall defend, indemnify and hold harmless S&B, and its affiliated companies, subsidiaries and clients from and against any and all loss, damage, claim, suit, liability, strict liability, product liability, judgment and expense (including attorney’s fees and other costs of litigation) and any fines, penalties and assessments, arising out of (A) damage to or loss of property or (B) bodily injury, disease or death to persons other than employees of [Scallon], its agents or subcontractors resulting from or in connection with the execution of this purchase order to the extent of [Scallon]’s negligence or willful misconduct.  In case of comparative, concurrent and/or contributing negligence, fault or strict liability of [Scallon] or [S&B], whether through its employees and/or representatives, [Scallon]’s duty to indemnify and hold harmless referred to in the previous sentence shall be [Scallon]’s allocable share of comparative, concurrent and/or contributing negligence, fault or strict liability.

The first issue the Court tackled was whether S&B and Sunoco’s settlement of the injured workers’ claims cut off the right to indemnity. The Court held it did not. In reaching this conclusion, the Court drew in sharp relief the difference between contribution and indemnity.  In contribution, a settling party has no right of contribution against other parties. Citing its seminal 1987 decision in Beech Aircraft Corp. v Jinkins, the Court reiterated that, “a defendant can settle only his proportionate share of a common liability and cannot preserve contribution rights under either the common law or the comparative negligence statute by attempting to settle the plaintiff’s entire claim.”

In contrast, in the context of contractual indemnity, “a defendant does not ‘buy’ the plaintiff’s rights and use them against other liable parties, as if it could profit from successfully prosecuting the very claims that have been settled.  Rather, the defendant already has a contractual right to indemnification that it seeks to enforce against the other liable parties.” The Court held that S&B and Sunoco’s settlement with the injured workers did extinguish their contractual indemnity claim against Scallon.

The second issue the Court tacked was whether the comparative indemnity clause, above, had to meet the requirements of the “express negligence rule”. The Court held it did not. Citing to another of its seminal cases, Ethyl Corp. v. Daniel Construction Co., the justices held that, “Ethyl’s only requirement is that express and specific language is necessary before courts will read a contract to indemnify a party for its own negligence.” Here, the contract with Scallon did not require Scallon to indemnify S&B or Sunoco for their own negligence. The contract only required Scallon to provide comparative indemnity for Scallon’s own “allocable share” of liability. As the Court noted, Ethyl “green lights”  the comparative indemnity clause in the Scallon agreement by rendering, “the express negligence doctrine inapplicable by affirmatively disclaiming any entitlement to indemnification for one’s own negligence.”

In remanding the case to the trial court to determine the parties’ indemnification rights and obligations, the Court provided a framework for the trial court to use in determining whether S&B and Sunoco were entitled to any recovery. S&B and Sunoco, as the parties who settled with the injured workers, bear the burden of proving that the settlement was made in good faith and for a reasonable amount to discharge the potential liability.  They also bear the burden of proving the “allocable share” of Scallon’s negligence.

In its final holding, the Court held that the indemnity claim that Sunoco’s insurer asserted was timely under the statute of limitations. The Court reiterated the long-standing concept that, “indemnity claims begin to run when ‘the indemnitee’s liability becomes fixed and certain’ through settlement or judgment.”

The Court’s opinion clarifies that the express negligence test is not applicable to comparative indemnity clauses that do require the indemnitor (the one agreeing to indemnify) to take on liability for the indemnitee’s negligence or fault. The opinion also crystallizes that settlement does not cut off contractual indemnity claims, but will start the accrual of limitations to sue to enforce or recover under a contractual indemnity clause.

If you have any questions about this opinion or wish to discuss whether your current contracts comply with the requirements the Court has imposed, please contact our Austin or Dallas attorneys at info@gstexlaw.com.

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