Texas Court Addresses MSA Indemnity Obligations

Gray Reed
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Gray Reed

At issue in RKI Exploration and Production LLC v. AmeriFlow Energy Services LLC and Crescent Services, LLC. were two Master Service Agreements.  RKI was the operator of a well in Loving County; AmeriFlow and Crescent were contractors. A sand separator exploded at the well site injuring or killing three workers who worked for another subcontractor. The result was three suits in New Mexico and a mazelike series of indemnity demands, denials, settlements, and judgments, including settlement of one death case for $9.1 million.

To preserve your patience, and mine, let’s focus on the takeaways from this 72-page opinion based on a 10,000-page record.

Grammar lessons

The court defined a phrase common to Master Service Agreements: “arising in connection herewith”. Indemnitees AmeriFlow and Crescent argued that the phrase “encompasses all activities reasonably incident to or anticipated by the principal activity of the MSA, which was oil well operation”. No, it doesn’t. The court determined that the phrase requires a causal connection between the MSA and the claims for which the indemnitee sought indemnity. The scope of work envisioned in the MSA was defined by work orders, and the indemnity could go no further than the scope of work.

The court considered the plain meaning of “herewith”, referred to the dictionary definition of “arise”, and concluded that although “arise” has a broad meaning it still connotes some causal nexus. If there were no connection between the indemnitee’s contract obligations and the indemnity obligation, an indemnitor would be required to indemnify even if performance was not an alleged cause of a loss. There must be a but-for causal connection between the indemnity claim provided for in the contract provision and “something else”.  What the “something else” turns on is the meaning of “in connection herewith”.

The required connection created by the use of “arise” or “arising” was limited by the additional phrase that narrowed the scope of the connection created by the word “arise”. That limiting phrase was “in connection herewith”. Citing dictionaries, the Court concluded that “herewith” means “accompanying this writing or document”.  The court interpreted “arising in connection herewith” to mean originating from the document or writing in which the obligation is contained. The term is a description of the relationship that a purported indemnity claim must bear to the underlying obligations between the parties.

Did RKI waive its right to challenge the settlement?

RKI the indemnitor refused to participate in settlement negotiations, ignored demands for indemnity, and refused to enter an appearance in the suit for the indemnitee. This raised the question about whether RKI waived its right to contest defense and indemnity claims because it wrongfully denied those claims. if denial was wrongful RKI would be bound by the settlement of the underlying suit and unable to insist on adjudication of the indemnitee’s rights to indemnity and damages.

The premise of AmeriFLow and Crescents’ argument was that when an indemnitor denies its obligation, the indemnitee has the right to make good-faith and reasonable settlement with the injured party without judicial ascertainment of liability. Here, whether RKI wrongfully denied indemnity was not established. An indemnitor may not be held liable for an indemnitee’s purely voluntary payment to an injured party. The indemnitees assumed the risk of being able to prove the facts which might have made them liable to the plaintiff and as well as the reasonableness of the amount they paid.

Your musical interlude.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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