Fina Inc. v. Arco

• Decision Date: 04 January 2000
• Docket Number: No. 98-41021,98-41021
• Citation: 200 F.3d 266
• Parties: (5th Cir. 2000) FINA, INC., formerly known as American Petrofina, Inc.; FINA OIL & CHEMICAL CO., formerly known as American Petrofina Company of Texas, Plaintiffs-Counter Defendants-Appellants, v. ARCO, Defendant-Cross Claimant-Appellee, BP OIL COMPANY; SOHIO PIPE LINE COMPANY, Defendants-Counter Claimants-Cross Defendants-Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

Page 266

200 F.3d 266 (5th Cir. 2000)

FINA, INC., formerly known as American Petrofina, Inc.; FINA OIL & CHEMICAL CO., formerly known as American Petrofina Company of Texas, Plaintiffs-Counter Defendants-Appellants, v. ARCO, Defendant-Cross Claimant-Appellee, BP OIL COMPANY; SOHIO PIPE LINE COMPANY, Defendants-Counter Claimants-Cross Defendants-Appellees.

No. 98-41021

IN THE UNITED STATES COURT OF APPEALS, FIFTH CIRCUIT

January 4, 2000

Rehearing and Rehearing En Banc Denied Feb. 17, 2000.

Appeal from the United States District Court for the Eastern District of Texas, Beaumont Division

Before REYNALDO G. GARZA, JOLLY, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

In this case arising under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. 9601 et. seq., Plaintiff-Appellant Fina, Inc. ("Fina") appeals the district court's grant of summary judgment in favor of Defendants-Appellees BP Oil Company ("BP") and Atlantic Richfield Company ("ARCO"). Fina contends that the district court improperly applied Delaware law in holding that cross-indemnities running between the parties bar Fina's CERCLA claims against BP and ARCO. We hold that the indemnities are unenforceable with respect to the CERCLA liability in question, and accordingly reverse and remand for proceedings consistent with this opinion.

I. Facts and Proceedings

BP acquired a refinery located in Port Arthur, Texas from ARCO in 1969. BP subsequently sold the refinery to Fina in 1973. The ARCO/BP and BP/Fina agreements of sale contain cross-indemnities that apportion responsibility between the contracting parties for liabilities arising from the operation of the refinery. The ARCO/BP agreement provides in relevant part that:

BP shall indemnify, defend, and hold harmless ARCO... against all claims, actions, demands, losses or liabilities arising from the ownership or the operation of the Assets... and accruing from and after Closing... except to the extent that any such claim, action, demand, loss or liability shall arise from the gross negligence of ARCO.

The BP/Fina agreement provides in relevant part that:

Fina shall indemnify, defend and hold harmless BP... against all claims, actions, demands, losses or liabilities arising from the use or the operation of the Assets... and accruing from and after closing.

In 1989, Fina conducted an environmental investigation covering all areas of the refinery. It found seven areas of the refinery contaminated with solid and hazardous wastes. Investigating the origins of the contamination, Fina unearthed evidence that the pollution was at least in part attributable to the activities of BP and ARCO.

Fina reported its discovery to the State of Texas. The Texas Natural Resource Conservation Commission ordered Fina to conduct several further investigations. Those investigations are still ongoing. Fina has already incurred over $14 million in investigatory and remedial response costs.

In 1996, Fina sued BP and ARCO seeking contribution and cost recovery under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. 9607 and 9613(f).¹ BP filed a declaratory judgment counterclaim against Fina, arguing that Fina's claims are covered by the indemnity provision in the BP/Fina agreement of sale. ARCO filed a similar declaratory judgment cross-claim against BP.

All parties moved for summary judgment. The district court granted the motions of BP and ARCO, ruling that (1) Fina's claims against BP are covered by the BP/Fina indemnity provision, (2) Fina's claims against ARCO are covered by the ARCO/BP indemnity provision, and (3) because ARCO is indemnified by BP which in turn is indemnified by Fina, a "circuitous indemnity obligation" is owed by Fina to ARCO, which obligation covers Fina's claims against ARCO.

II. Analysis A.Standard of Review

The proper interpretation of a contract is a question of law subject to de novo review.²

B. Issues

We are called on to interpret and determine the enforceability of two related yet distinctly different indemnity provisions. The BP/Fina and ARCO/BP indemnity provisions both allocate responsibility between the contracting parties for liabilities arising from the ownership or operation of the refinery. The two provisions differ, however, in two significant respects. First, whereas the BP/Fina agreement of sale includes a choice of law provision designating Delaware law as the governing law, the ARCO/BP agreement of sale does not contain a choice of law provision. Second, the ARCO/BP indemnity provision, unlike its BP/Fina counterpart, states that it covers all claims "except to the extent that any such claim... shall arise from the gross negligence of ARCO." We must therefore analyze the two indemnity provisions separately.

1. The BP/Fina Indemnity Provision

Fina contends that the BP/Fina indemnity provision does not indemnify BP for retroactive CERCLA liability. Under the indemnity provision, Fina's obligations to BP extend only to those liabilities that accrue after the closing date of the BP/Fina agreement of sale. Fina contends that, although CERCLA was not enacted until 1980, the CERCLA liability "accrued" at the time that BP and ARCO polluted the refinery grounds -- well before the closing date of the BP/Fina agreement of sale. Fina argues in the alternative that, even if the BP/Fina indemnity provision does purport within its broad terms to cover the CERCLA liability in question, the provision is unenforceable with respect to that liability because governing Delaware law requires that, to indemnify a party for prospective strict liability claims, an indemnity provision must "clearly and unequivocally" state that it covers such claims. As we conclude that the indemnity provision is unenforceable under Delaware law with respect to the CERCLA liability at issue here, we need not reach the question whether the liability "accrued" prior to closing, within the meaning of the agreement.

a. Choice of Law

In assessing the enforceability of the BP/Fina indemnity provision, we must first determine which state's choice-of-law provisions govern. "A federal court must follow the choice-of-law rules of the state in which it sits."³ The instant case was filed in the United States District Court for the Eastern District of Texas. We will therefore follow Texas choice-of-law rules in determining the governing state law.

The BP/Fina agreement of sale specifies that it is governed by Delaware law. Texas honors contractual choice-of-law provisions unless the designated law is contrary to a "fundamental policy" of Texas.⁴

The relevant principle of Delaware law holds that "in order for a party to be entitled to indemnification for the results of its own negligence the contract must be crystal clear or sufficiently unequivocal to show that the contracting party intended to indemnify the indemnitee for the indemnitee's own negligence."⁵ Prior to 1987, Texas followed an identical rule.⁶ In 1987, however, the Texas Supreme Court adopted the stricter "express negligence" standard.⁷ This standard holds that "parties seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms."⁸

Although the Texas and Delaware rules do differ, it can hardly be said that Delaware's "clear and unequivocal" test violates a fundamental policy of Texas. "[T]he focus is on whether the law in question is part of state policy so fundamental that the courts of the state will refuse to enforce an agreement contrary to that law, despite the parties' original intentions."⁹ Texas does not, as a matter of public policy, refuse to enforce all indemnity provisions that purport to cover the indemnitee's own negligence. Texas merely requires that, to merit enforcement as to such claims, an indemnity provision must expressly state that its coverage extends to the negligence of the indemnitee. The "clear and unequivocal" test is not inconsistent with a fundamental policy of Texas. Delaware law will therefore be applied in interpreting and assessing the enforceability of the BP/Fina indemnity provision.

b. Application of Delaware law

Fina has indemnified BP for "all claims, actions, demands, losses or liabilities arising from the use or operation of the Assets... and accruing from and after Closing." Assuming, without deciding, that the CERCLA liability at issue "accrued" after the closing date of the BP/Fina agreement of sale, the indemnity provision clearly purports to cover CERCLA liability within its broad terms: The phrase "all claims" certainly encompasses claims arising under CERCLA.¹⁰

The analysis, however, does not stop there. Under Delaware law, contracts to indemnify a party against the consequences of its own negligence are strictly construed against the indemnitee.¹¹ The purpose of this rule is to ensure that the indemnitor is fully cognizant of the extraordinary risk that it is assuming.¹² The rule functions as a "penalty default"; any entity that wishes to contract away liability for the consequences of its own negligence is put on notice by the rule that, to be enforceable, any indemnity provision that it signs must state with specificity the types of risks that it is transferring to the indemnitor. If an indemnity provision is not sufficiently specific, Delaware courts simply will refuse to enforce the risk transfer.

Delaware law thus requires that, to be enforceable, "the intent to indemnify must be clear and unequivocal" on the face of an indemnity provision.¹³ "To be enforceable, the provision must specifically focus attention on the fact that by the agreement the indemnitor was assuming liability for [the] indemnitee's own negligence."¹⁴ The Delaware courts have often stated that there are no particular words that must be used to render an indemnity provision enforceable.¹⁵ But "[n]o Delaware case has allowed indemnification of a party for its own...