Maxus Exploration Co. v. Moran Bros., Inc.

• Decision Date: 19 June 1991
• Docket Number: No. C-8984,C-8984
• Citation: 817 S.W.2d 50
• Parties: MAXUS EXPLORATION CO., f/k/a Diamond Shamrock Exploration Co., Petitioner, v. MORAN BROS., INC., Respondent.
• Court: Texas Supreme Court

Page 50

817 S.W.2d 50

MAXUS EXPLORATION CO., f/k/a Diamond Shamrock Exploration Co., Petitioner, v. MORAN BROS., INC., Respondent.

No. C-8984.

Supreme Court of Texas.

June 19, 1991.

Rehearing Overruled Sept. 11, 1991.

Kevin P. Parker, Harlow Sprouse, Amarillo, for petitioner.

Michael W. Powell, Cynthia Keely Timms, Karen F. Gray, A. Darby Dickerson, Dallas, for respondent.

OPINION

HECHT, Justice.

At issue in this case is the enforceability of an indemnity clause in a contract between two companies, each with its principal place of business in Texas, for the drilling of an oil well in Kansas. We hold that Kansas law applies, and that the indemnity clause is valid. Accordingly, we affirm the judgment of the court of appeals.

I

Moran Bros., Inc. agreed to drill an oil well in Kansas for Diamond Shamrock Exploration Co., now Maxus Exploration Co. Moran, a Texas corporation, and Diamond Shamrock, a Delaware corporation, negotiated their contract in Texas, where each has its principal place of business. Using a standard form "Daywork Drilling Contract" published by the International Association of Drilling Contractors, Diamond and Moran each agreed to indemnify the other against bodily injury claims by its own employees and its contractors' employees, even if caused by the other's negligence. Each also agreed to support its indemnity obligation by liability insurance or to be self-insured. ¹ The contract required Moran to maintain liability insurance policy with limits of $100,000 per person and $300,000 per accident. Diamond Shamrock was not required to obtain a specific amount of liability insurance, but it had policies covering 70% of each bodily injury claim over $1 million, up to $6 million.

The contract was executed, and the well drilled, in 1980. During the drilling operation, an employee of one of Diamond Shamrock's contractors, Keith Boydstun, was injured on Moran's rig. Boydstun, an Oklahoma resident whose employer was also located in Oklahoma, sued Moran in United States District Court in Kansas. Moran filed a cross-action against Diamond Shamrock for indemnity under the drilling contract. ² Diamond Shamrock undertook to defend Moran in the litigation, each reserving any right it might have to seek indemnity or other damages from the other. Based upon a jury verdict that Boydstun had suffered $3 million in damages caused 90% by Moran's negligence, the court rendered judgment against Moran for $2.7 million. Moran then settled with Boydstun. Diamond Shamrock and its insurer paid approximately half the settlement amount and Moran paid the balance. ³ Diamond Shamrock and Moran continued to reserve their indemnity claims against one another.

Sometime later Diamond Shamrock brought this action against Moran to determine the validity of the indemnity provisions in their agreement. Diamond Shamrock contends that those provisions are governed by Texas law, and that what is now chapter 127 of the Texas Civil Practice and Remedies Code, a statute governing indemnity provisions in certain mineral agreements, voids or at least limits its obligation to indemnify Moran. ⁴ Alternatively, Diamond Shamrock argues that the provisions are unenforceable under Kansas law. Kansas has no statute governing indemnity agreements but requires generally a clear and unequivocal expression of intent to indemnify a party against its own negligence, and Diamond Shamrock argues that the provisions in its contract do not meet this requirement. Diamond Shamrock seeks reimbursement from Moran for most or all of what it paid Boydstun, plus its litigation costs and expenses in defending Moran. Moran contends that the indemnity provisions are valid under both Kansas and Texas law, and seeks reimbursement of the amount it paid Boydstun.

Diamond Shamrock and Moran both moved for summary judgment. The trial court granted Moran's motion to take judicial notice of Kansas law; it also denied Diamond Shamrock's motion for summary judgment and granted Moran's, upholding the indemnity provision. ⁵ The court of appeals affirmed, holding the indemnity agreement valid under Texas law, which it assumed applied. 773 S.W.2d 358.

II

We consider first whether the indemnity provisions of the drilling contract are governed by Texas or Kansas law. In deciding which state's law should govern the construction of contractual rights we have previously looked to the principles stated in the RESTATEMENT (SECOND) OF CONFLICT OF LAWS (1971) [hereinafter the Restatement]. DeSantis v. Wackenhut, 793 S.W.2d 670, 679 (Tex.1990), cert. denied, 498 U.S. 1048, 111 S.Ct. 755, 112 L.Ed.2d 775 (1991); Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 420 (Tex.1984). We look to those principles again here.

A

Comment b to section 173 of the Restatement states: "The existence of a contractual right to indemnity, and the rights created thereby, are determined by the law selected by application of the rules of §§ 187-188." When the parties to a contract, as in this case, have not themselves chosen what law is to govern their agreement, section 188(1) of the Restatement states the general rule: "The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in § 6." Section 188(2) lists the contacts comprising the relationship between transaction and locale ordinarily to be taken into account in applying the principles in section 6. These include "(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil, residence, nationality, place of incorporation and place of business of the parties." We agree that the general rule in section 188 controls the choice of law governing contractual rights and duties, see DeSantis, 793 S.W.2d at 678-79, and that these include indemnity agreements.

With respect to certain specific transactions, the Restatement indicates how the contacts listed in section 188(2) should be evaluated. In the case of a contract for the rendition of services, section 196 accords the place of performance paramount importance. DeSantis, 793 S.W.2d at 679. Section 196 states:

The validity of a contract for the rendition of services and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that the services, or a major portion of the services, be rendered, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.

See also Castilleja v. Camero, 414 S.W.2d 424, 426 (Tex.1967) ("A contract which is made in one jurisdiction but which relates to and is to be performed in another jurisdiction is governed by the law of the place of performance ..."); Gorsalitz v. Olin Mathieson Chem. Corp., 429 F.2d 1033, 1048 (5th Cir.1970) ("the interpretation of a contract executed in Texas but to be performed wholly outside the state is governed by the law of the place of performance"). The several virtues of this rule, when applicable, are explained in comment c to section 196:

The rendition of the services is the principal objective of the contract, and the place where the services, or a major portion of the services, are to be rendered will naturally loom large in the minds of the parties. Indeed, it can often be assumed that the parties, to the extent that they thought about the matter at all, would expect that the local law of the state where the services, or a major portion of the services, are to be rendered would be applied to determine many of the issues under the contract. The state where the services are to be rendered will also have a natural interest in them.... The rule of this Section also furthers the choice-of-law values of certainty, predictability and uniformity of result and, since the place where the contract requires that the services, or a major portion of the services, are to be rendered will be readily ascertainable, of ease in the determination of the applicable law.

The contract before us involved services associated with drilling an oil well. Nearly all such services were contemplated by the parties to be rendered, and were actually rendered, in Kansas where the well was drilled. Taken as a whole, the contract was performable almost entirely in Kansas. "As a rule, that factor alone is conclusive in determining what state's law is to apply." DeSantis, 793 S.W.2d at 679. In some instances, however, it is more appropriate to consider the disputed contractual issue separately from the contract as a whole. See Restatement Title C, Particular Issues, at 631-32 (although "most issues involving a contract will usually be governed by a single law," occasionally "an approach directed to the particular issue, rather than to the kind of contract involved, will provide a more helpful basis for the decision of a choice-of-law question"). Even assuming that the indemnity obligations in the agreement should be considered separately, they were also performable, at least for the most part, in Kansas, where Diamond Shamrock, pursuant to those obligations while reserving the issue of their validity, defended Moran in the Boydstun litigation. Thus, following section 196 of the Restatement, we conclude that Kansas law should be applied to determine the parties' rights under their contract unless, with respect to the validity of the indemnity provisions, some other state has a more significant relationship to the parties and their transaction under the principles in section 6 of the Restatement. ⁶

Section 6 provides that absent a statutory directive concerning the law to be applied in...