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The Importance of Understanding Indemnity Clauses

Article-The Importance of Understanding Indemnity Clauses

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Legal expert Trent Cotney uses a recent Texas case to illustrate how critical the scope of such clauses is to a construction company’s success.

Anyone working in a customer service business, including construction, knows how critical an indemnity clause is. This type of clause spells out which parties are responsible for costs and expenses when there is a claim for damages.

As a recent ruling out of Texas shows, indemnity clauses—and understanding the scope of each agreement—can determine who holds responsibility for a given incident.

Details of the original case

In Loving County, Texas, in 2014, crews were working at an oil rig when a sand separator exploded, resulting in the death of two people and the injury of three others.

RKI Exploration & Production LLC had been operating the oil well, but through numerous work orders and two master service agreements (MSAs), RKI had also contracted with Crescent Services LLC and Ameriflow Energy Services LLC. Per those agreements, Ameriflow provided services and equipment for the site—including the sand separator in question. Crescent supplied management services and safety training to Ameriflow.

However, it was unclear if Crescent provided those services as part of a subcontract with Ameriflow or if the two companies were already affiliated. What was clear was that Crescent did not offer those management and safety training services as part of a work order or its MSA with RKI.

Following the explosion, the dispute among the three parties and those injured involved numerous demands, settlements and judgments. One looming question was whether RKI had indemnity obligations under its MSAs with Crescent and Ameriflow.

Ultimately, in September 2020, the court ruled that RKI did have obligations and awarded some $11 million to Crescent and Ameriflow.  

What the Texas Court of Appeals decided

Next, the case was sent to the Court of Appeals. In RKI Exploration & Production LLC v. Ameriflow Energy Services LLC et al., the court reviewed the original decision. In particular, it looked at whether the trial court had been correct in ruling that RKI’s MSA indemnity clause should cover Crescent, given that that party was not acting under the MSA when the explosion occurred.

The MSA stated that Crescent would perform based on work orders, and RKI had not issued such work orders during the time of the explosion. Because of this, RKI asserted that Crescent was not entitled to contractual indemnity.

In response, Crescent argued that, per the MSA, RKI was obligated to indemnify Crescent for all claims that resulted from any activities reasonably related to the main purpose of the site and MSA: oil well operation.

After reviewing Texas and federal case law, the court determined that the particular language referenced by Crescent from the MSA did not indicate the broader view that Crescent had argued. The indemnity clause covered work originating in the MSA or other work orders (of which there were none).

In the end, the court disagreed with the trial court and determined RKI's obligations to Crescent were tied only to Crescent's work under the MSA.

How the ruling applies to construction pros

In explaining the decision, the appellate court said, "We have concluded that the trial court's interpretation of the scope of indemnity in the RKI/Crescent MSA was too broad and that the scope was tied to the performance required under the MSA." The court reversed the initial decision and remanded the matter to the trial court. 

The appellate court also observed that contractual indemnity from RKI might have been warranted for Crescent as an Ameriflow subcontractor per the Ameriflow MSA. However, Crescent did not present this argument, and the exact relationship between Crescent and Ameriflow was not made clear; therefore, the court could not rule on that issue.

By not asserting such a claim as part of its relationship with Ameriflow, Crescent may have missed an opportunity to recover the contractual indemnity to which it was actually entitled.

While this case centers on a tragic outcome at an oil well operation, it contains plenty of familiar elements for construction pros: the use of subcontractors, the critical importance of site safety, and a look at who may be held responsible should something go wrong on a jobsite.

Review any indemnity clauses or language in your agreements with outside parties, and make sure you know where you would stand in a situation like this. It could mean the difference between life and death for your business.

The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Trent Cotney is a partner and construction practice group leader at the law firm of Adams and Reese LLP and NRCA general counsel. For more information on this subject, please contact the author at [email protected].

TAGS: legal
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