Wildcat Drilling, L.L.C. v. Discovery Oil & Gas, L.L.C.

• Citation: 173 N.E.3d 1156,164 Ohio St.3d 480
• Decision Date: 22 December 2020
• Docket Number: No. 2019-0222,2019-0222
• Court: United States State Supreme Court of Ohio
• Parties: WILDCAT DRILLING, L.L.C., Appellee, v. DISCOVERY OIL AND GAS, L.L.C., Appellant.

164 Ohio St.3d 480

173 N.E.3d 1156

WILDCAT DRILLING, L.L.C., Appellee,

v.DISCOVERY OIL AND GAS, L.L.C., Appellant.

No. 2019-0222

Supreme Court of Ohio.

Submitted April 8, 2020

Decided December 22, 2020

Johnson & Johnson Law Firm and Molly K. Johnson, for appellee.

Manchester, Newman & Bennett, L.P.A., David A. Detec, and Thomas F. Hull II, Youngstown, for appellant.

French, J. {¶ 1} We accepted the discretionary appeal of appellant, Discovery Oil and Gas, L.L.C. ("Discovery"), to consider whether the common-law requirements set out in Globe Indemn. Co. v. Schmitt , 142 Ohio St. 595, 53 N.E.2d 790 (1944), for determining whether an indemnitee may recover against an indemnitor when the indemnitee has settled a claim without the indemnitor's involvement, apply even when the rights of the parties are governed by a contract that includes an indemnification provision. Because parties have a fundamental right to contract, which includes the right to abrogate the common law, we conclude that the Globe Indemn. Co. requirements do not apply when the parties express a clear intent to abrogate those common-law requirements. Because the Seventh District Court of Appeals applied the Globe Indemn. Co. requirements in this case without considering whether the parties abrogated those requirements in their contract, we reverse its judgment. And, because the trial court also did not consider whether the parties' contract expresses a clear intent to abrogate the common law on indemnification, we remand this matter to the trial court for further proceedings.

I. Background

A. Discovery and Wildcat enter into a contract for Wildcat to drill an oil and gas well for Discovery

{¶ 2} Discovery entered into a contract with appellee, Wildcat Drilling, L.L.C. ("Wildcat"), for Wildcat to drill an oil and gas well for Discovery. The contract included several provisions relating to indemnification. Generally, Wildcat was required to indemnify Discovery against any fine or penalty that resulted from pollution or contamination relating to the well. The contract specifically stated the following:

17. Responsibility for Loss or Damage.

* * *

17.9. Pollution and Contamination – Notwithstanding anything in the Contract to the contrary, excepting only Paragraph 13, it is understood and agreed by and between [Wildcat] and [Discovery] that the responsibility for pollution and contamination shall be as follows:

17.9.1[Wildcat] Liability – [Wildcat] shall assume full responsibility for and shall defend, indemnify, and hold [Discovery] and its joint owners harmless from and against any loss, damage, expense, claim, fine and penalty, demand, or liability for pollution or contamination, including control and removal thereof, that ordinates on or above the surface of the land or water from spills, leaks, or discharges of motor fuels, lubricants, and oils; pipe dope; paints and solvents; ballast, bilge, sludge, and garbage; and other liquids or solids in possession and control of [Wildcat]. These obligations are assumed without regard to the negligence of any party or parties.

* * *

17.11 Indemnity Obligations – Except as otherwise expressly limited in this Contract, it is the intent of the parties hereto that all indemnity obligations and/or liabilities assumed by such parties under the terms of this Contract will be without limit and without regard to the cause or causes thereof (including pre-existing conditions), strict liability, or the negligence of any party or parties, whether such negligence be sole, joint or concurrent, active or passive * * *.

(Boldface and underlining sic.) After the parties had entered into the contract, Wildcat began drilling an oil and gas well for Discovery in late 2014.

B. The Ohio Department of Natural Resources discovers Wildcat's illegal use of brine water

{¶ 3} In early 2015, an inspector with the Ohio Department of Natural Resources ("ODNR") determined that Wildcat had violated Ohio law by improperly using brine water in its drilling operations. ODNR notified Discovery of the violation. Several months later, Discovery met with ODNR and agreed to pay a $50,000 fine relating to Wildcat's use of brine water in its drilling operations. Discovery then refused to pay any portion of the invoice owed to Wildcat until Wildcat agreed to indemnify it for the ODNR fine.

C. The parties sue each other for breach of contract

{¶ 4} Wildcat sued Discovery for breach of contract for Discovery's failure to timely pay the invoice for Wildcat's completed work. Discovery answered Wildcat's complaint and asserted counterclaims for breach of contract and civil liability for criminal conduct, based on Wildcat's illegal use of brine water and its refusal to indemnify Discovery for the ODNR fine.

{¶ 5} The parties filed competing motions for summary judgment. Discovery argued that Wildcat was required under the terms of the contract to indemnify Discovery for the ODNR fine it had incurred due to Wildcat's illegal use of brine water in its drilling operations. Wildcat argued that Discovery's indemnification claim failed under this court's decision in Globe Indemn. Co. , 142 Ohio St. 595, 53 N.E.2d 790, and its progeny, because Discovery had failed to provide Wildcat with notice of the ODNR claim prior to Discovery's payment of the fine to ODNR. Wildcat complained that it was deprived of the opportunity to defend against the purported violation. Based on that lack of notice, Wildcat maintained that it was under no duty to defend, indemnify, or hold Discovery harmless from the ODNR claim.

{¶ 6} Discovery countered that the plain language of the contract did not require it to give Wildcat notice of the ODNR claim and instead obligated Wildcat to indemnify Discovery for any fine or penalty relating to pollution or contamination. Discovery further argued that this court's holding in Globe Indemn. Co. did not apply, because that case dealt with principles of common-law indemnity, not contractual indemnity. And Discovery maintained that even if Globe Indemn. Co. did apply, Wildcat knew of the ODNR claim prior to Discovery's payment of the fine.

{¶ 7} The trial court granted both parties' motions for summary judgment, finding that each party had breached the contract. According to the trial court, Discovery had breached the contract by failing to timely pay Wildcat's invoice. And Wildcat had breached the contract by causing Discovery to pay a fine to ODNR as a result of Wildcat's drilling practices. The trial court determined that Wildcat had known of the compliance issues with ODNR and that it could not claim that it did not have an opportunity to challenge the allegations prior to Discovery's payment of the fine. The trial court then ordered Discovery to pay Wildcat the amount of the invoice, less the amount of the fine and Discovery's expenses, and to pay prejudgment interest pursuant to the contract. The trial court's judgment entry did not address whether the parties' contract expressed an intent to abrogate the common-law Globe Indemn. Co. requirements. It simply concluded that Discovery was entitled to indemnification.

D. The parties appeal to the Seventh District Court of Appeals

{¶ 8} Both Discovery and Wildcat appealed the trial court's judgment to the Seventh District Court of Appeals. The appellate court reversed the trial court's judgment as to the indemnification issue, holding that Wildcat is not required to indemnify Discovery, because Discovery did not provide Wildcat with the notice required to be entitled to indemnification. 2018-Ohio-4015, 121 N.E.3d 65, ¶ 69-71.

{¶ 9} Applying Globe Indemn. Co. , the Seventh District determined that Discovery could be entitled to indemnification only if (1) it had given proper and timely notice to Wildcat of the ODNR claim, (2) it was legally liable to respond to the settled claim, and (3) the settlement was fair and reasonable. Id. at ¶ 61, 69. Because Discovery had not notified Wildcat of the ODNR claim or of its intent to settle the claim, the court of appeals concluded that Discovery was not entitled to indemnification. Id. at ¶ 69.

E. Discovery appeals to the Supreme Court of Ohio

{¶ 10} Discovery appealed to this court, raising four propositions of law. We accepted jurisdiction over Discovery's second proposition of law, which states: "Contractually-negotiated indemnification clauses are not subject to the common law Globe indemnification requirements." See 155 Ohio St.3d 1463, 2019-Ohio-1817, 122 N.E.3d 1285.

II. Analysis

{¶ 11} The issue before this court is whether the requirements set out in Globe Indemn. Co. , 142 Ohio St. 595, 53 N.E.2d 790, for determining whether an indemnitee may recover against an indemnitor when the indemnitee has settled a claim without the indemnitor's involvement, apply when the parties' rights are governed by a contract that includes an indemnification provision.

A. Globe Indemn. Co. and its progeny set out Ohio's common law on indemnification

{¶ 12} In Globe Indemn. Co. , this court, "[a]s a concluding observation," determined that the right to indemnification against an actual wrongdoer exists when the individual proceeded against in the first instance settles the loss voluntarily or has a judgment recovered against him. Id. at 604, 53 N.E.2d 790. The court expressed that an indemnitee's voluntary payment does not negate the right to indemnification. Id. Rather, in order to be entitled to indemnification after a voluntary settlement, the indemnitee must prove that (1) proper and timely notice was provided to the indemnitor, (2) the indemnitee was legally liable to respond, and (3) the settlement was fair and reasonable. Id. , citing Tugboat Indian Co. v. A/S Ivarans Rederi , 334 Pa. 15, 21, 5 A.2d 153 (1939).

{¶ 13} This court has followed and applied Globe Indemn. Co. in other cases relating to indemnification, and it has expressly applied the Globe Indemn. Co. requirements to determine whether a party has a right to indemnification. See New York Cent. R.R. Co. v. Linamen , 171 Ohio...