Fina, Inc. v. Arco

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________________

No. 98-41021
____________________________

FINA, INC., formerly known as American Petrofina, Inc.;
FINA OIL & CHEMICAL CO., formerly known as American
Petrofina Company of Texas,

Plaintiffs-Counter Defendants-Appellants,

versus

ARCO,

Defendant-Cross Claimant-Appellee,

BP OIL COMPANY;
SOHIO PIPE LINE COMPANY,

Defendants-Counter Claimants-Cross Defendants-Appellees.

_____________________________________________________

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

_____________________________________________________

January 4, 2000
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

1
(“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

2
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)

1
Fina has also made claims under the Resource Conservation
Recovery Act, 42 U.S.C. §§ 6901 et seq., and Section 361.344 of the
Texas Solid Waste Disposal Act. Although we follow the lead of the
district court and the parties to the case in addressing our
opinion solely to Fina’s CERCLA claims, we discern no reason why
our holding should not be equally applicable to these other claims
as well.

3
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

2
See, e.g., Bolding v. C.I.R., 117 F.3d 270, 273 (5th Cir.
1997).

4
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

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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

3
St. Paul Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d
202, 205 (5th Cir. 1996).
4
DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677-78 (Tex.
1990).

6
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

5
Sweetman v. Strescon Industries, Inc., 389 A.2d 1319, 1321
(Del. Super. 1978).
6
See Dorchester v. American Petrofina, Inc., 710 S.W.2d 541,
543 (Tex. 1986).
7
See Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705 (Tex.
1987).
8
Id at 708.
9
DeSantis, 793 S.W.2d at 680.

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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

10
We do not decide whether a reasonable interpretation of the
phrase “all claims” would include claims that were merely
prospective at the time the indemnity provision was signed.
11
See Powell v. Interstate Vendaway, Inc., 300 A.2d 241, 243
(Del Super. 1972); Laws v. Ayre Leasing, No. 92C-07-254, 1995 WL
465334, at *2 (Del. Super. July 31, 1995).
12
See Laws, 1995 WL 465334, at *2; Clark C. Johnson, Note,
Collapsing the Legal Impediments to Indemnification, 69 Ind. L.J.
867, 878 (1994).

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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

13
Cumberbatch v. Bd. of Trustees of Del. Tech. & Community
College, 382 A.2d 1383, 1386 (Del. Super. 1978). See also Blum v.
Kauffman, 297 A.2d 48, 49 (Del. 1972); All-State Investigation and
Security Agency v. Turner Constr. Co., 301 A.2d 273, 274-75 (Del.
1972).
14
James v. Getty Oil Co., 472 A.2d 33, 36 (Del. Super. 1984)
(citing Sweetman, 389 A.2d 1319).
The sophistication of the contracting parties is irrelevant;
the vast majority of the cases in which Delaware courts have
applied the clear and unequivocal test have involved contracts
between large, sophisticated entities. See, for example, Powell,
300 A.2d 241 (contract between Interstate Vendaway, Inc. and
Chrysler Corp.); Paoli v. Dave Hall, Inc., 462 A.2d 1094 (Del.
Super. 1983) (contract between a construction contractor and a
subcontractor); James v. Getty Oil Co., 472 A.2d 33 (Del. Super.
1984) (contract between Getty Oil Co. and Catalytic, Inc.).
15
See James, 472 A.2d at 37; Laws, 1995 WL 465334, at *2
(citing Rock v. Delaware Elec. Coop., Inc., 328 A.2d 449 (Del.
Super. 1974)).

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indemnification of a party for its own negligence without making

specific reference to negligence of the indemnified party.”16

Moreover, Delaware courts have consistently refused to enforce

indemnity provisions that use broad, catch-all language but fail to

make a specific reference to claims arising from the indemnitee’s

own negligence.17

Thus, to merit enforcement under Delaware law, an indemnity

provision must at a minimum demonstrate on its face “that the

16
See Jordan v. E.I. duPont de Nemours and Co., 1986 WL
11553, at *3 (Del. Super. Aug. 8, 1986); Paoli v. Dave Hall, Inc.,
462 A.2d 1094, 1098 (Del. Super. 1983). For examples of indemnity
provisions that have been upheld as applied to claims arising from
the indemnitee’s own negligence, see All-State, 301 A.2d at 274
(enforcing a provision indemnifying for “any claims... whether or
not such claims are based on Turner’s alleged active or passive
negligence”); Noble J. Dick, Inc. v. Warburton, 321 A.2d 345, 346
(Del. 1975) (enforcing a provision indemnifying for “all claims...
whether or not such injury is due to or chargeable to any
negligence of the Contractor”); Cumberbatch, 382 A.2d at 1385
(enforcing a provision indemnifying for “all claims... regardless
of whether or not it is caused in part by a party indemnified
hereunder”); Fountain v. Colonial Chevrolet Co., 1988 WL 40019
(Del. Super. Apr. 13, 1988) (enforcing a provision indemnifying for
“all loss or damages... even if said losses arise out of the
negligence of Company”).
17
See Marshall v. Maryland, D. & V. Ry. Co., 112 A. 526 (Del.
Super. 1921) (refusing to enforce as applied to a claim arising
from the indemnitee’s own negligence an indemnity covering “damages
of whatsoever kind of nature arising in any manner or under any
circumstances”); Paoli, 462 A.2d at 1098 (refusing to enforce as
applied to the indemnitee’s own negligence an indemnity covering
“all suits”); Hitchens v. Cannon & Cannon, 1987 WL 17440 (Del.
Super. Sept. 16, 1987) (refusing to enforce as applied to a claim
arising from the indemnitee’s own negligence an indemnity covering
“all... claims... howsoever arising or incurred”); Kreider v.
Schumacher & Co., 816 F.Supp. 957, 962 (D. Del. 1993) (stating that
“the