The Texas Anti-Indemnity Act and the Common Law: What Happens Next?
By: Tara Sohlman
Prior to January 1, 2012, Texas was one of the few jurisdictions without an anti-indemnity statute. In the construction industry, indemnity has been used for many years in construction contracts to pass risk downstream. However, for a party to receive indemnity for its own negligence, specific requirements had to be met under the common law; otherwise, the indemnity clause would be invalid. In 2011, the Texas Legislature passed Chapter 151 of the Texas Insurance Code, the Texas Anti-Indemnity Act. The statute makes indemnity clauses in construction contracts unenforceable for the most part, but there are key areas excluded from the statute’s reach. As a result, this statute will have far reaching consequences in the construction industry. However, its total effects are not yet known as the law only applies to contracts entered into on or after January 1, 2012; it will not apply retroactively. Further, the question remains as to how the rules developed under the common law will be applied going forward.
A. Rules of Indemnity under Texas’ Common Law
Before Chapter 151, rules developed under the common law that controlled the enforceability of indemnity clauses depended on which form of indemnity was provided. There are three forms of indemnity. Under “broad form indemnity”, the indemnitor agrees to indemnify the indemnitee for any and all liability regardless of who is at fault. The “intermediate form” of indemnity requires the indemnitor to indemnify the indemnitee for any and all liability, even if the damage arises as a result of the indemnitee’s contributory negligence; however, there was no indemnity owed if the indemnitee is solely negligent. For “limited form” indemnity, the indemnitor agrees to indemnify the indemnitee only to the extent of the indemnitor’s own negligence, not for any of the indemnitee’s negligence.
Under the common law, an indemnity clause providing for broad form and/or intermediate form indemnity must satisfy the two subparts of the Fair Notice Doctrine: the express negligence rule and the conspicuousness test. The intent of the Fair Notice Doctrine is that the indemnitor is put on notice that it is agreeing to indemnify the indemnitee for its own negligence.
The express negligence rule provides that parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms. Ethyl Corp. v. Daniel Constr. Co., 725 S.W.2d 705, 708 (Tex. 1987). The intent of the parties must be stated within the four corners of the contract. Id. Examples of indemnity clauses that have satisfied the express negligence rule are:
Contractor agrees to protect, defend, and indemnify, and save operator . . . from and against all claims, demands, and causes of action . . . without regard to the cause or causes thereof or the negligence of any party or parties . . . . Adams Resources Exploration Corp. v. Resource Drilling Inc., 761 S.W.2d 63, 64 (Tex. App.—Houston [14th Dist.] 1988, no writ) (emphasis added); and
Subcontractor shall fully protect, indemnify, and defend contractor . . . against any . . . causes of action . . . regardless of cause or of any fault or negligence of contractor. B-F-W Construction Co. v. Garza, 748 S.W.2d 611, 613 (Tex. App.—Fort Worth 1988, no writ) (emphasis added).
Both clauses were interpreted to put the indemnitor on notice that it must indemnify the indemnitee for the indemnitee’s own negligence. The key language in the above clauses that allowed them to meet the express negligence rule is italicized.
The conspicuousness test mandates that the indemnity clause appear on the face of the contract so that it attracts the attention of a reasonable person when viewed. Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993). This requirement can be met by a heading being printed in capital letters and by text printed in larger or other contrasting type. Id. at 511.
B. Texas Insurance Code Chapter 151
Indemnity clauses in construction contracts became void and unenforceable in Texas under Texas Insurance Code §151.102, which states as follows:
Except as provided by Section 151.103, a provision in a construction contract, or in an agreement collateral to or affecting a construction contract, is void and unenforceable as against public policy to the extent that it requires an indemnitor to indemnify, hold harmless, or defend a party, including a third party, against a claim caused the negligence or fault, the breach or violation of a statute, ordinance, governmental regulation, standard, or rule, or the breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier.
The Texas Legislature set forth eleven specific exclusions within the Anti-Indemnity statute; there are three very important categories to note. First, the Anti-Indemnity act does not apply to a construction contract relating to “a single family house, townhouse, duplex, or land development related directly thereto.” In other words, residential construction has been excluded. Tex. Ins. Code §151.105(1)(A). The second exclusion carves out municipal construction contracts, which will encompass contracts with cities or municipalities relating to public projects. Tex. Ins. Code §151.105(1)(B). The third notable exception addresses injuries or a death. Section 151.102, set forth above, does not apply to an indemnity clause that “requires a person to indemnify, hold harmless, or defend another party to the construction contract or a third party against a claim for the bodily injury or death of an employee of the indemnitor, its agent, or its subcontractor of any tier.” Tex. Ins. Code §152.103.
C. What Happens Next?
As the Anti-Indemnity Act applies only to contracts entered into on or after January 1, 2012, case law interpreting this Act will be slow to develop. Litigation relating to indemnity clauses enforced under the common law will continue for some time. However, at some point the statute and the common law rules will intersect. If an indemnity clause in a construction contract falls within one of the exclusions and can be enforced, it will most likely still need to satisfy the Fair Notice Doctrine. As a result, an indemnity clause providing for broad form or intermediate form indemnity should not be valid simply because it falls within §151.103 or §151.105. The clause could still be unenforceable if it does not satisfy the express negligence rule and is not conspicuous. Thus, indemnity clauses that will be allowed under the Anti-Indemnity Act still need to be carefully drafted to comply with the Fair Notice Doctrine.