:: Indemnification Provisions: Do They Apply To Excuse A Party’s Own Wrongdoing?

Only after the first tranche of the settlement funds had been distributed was a challenge raised in late January 2007 by a dissatisfied class member as to the accuracy of the distribution. Upon investigating, Hewitt represents that it discovered that an archived computer system used to calculate ESOP class member allocations contained an incorrect share value for January 1, 1998, resulting in overly large losses to participants holding ESOP shares at the start of the class period. As a result, excessive amounts of the settlement proceeds were distributed to them at the expense of other class members who received underpayments.

Enron Corp. Sav. Plan v. Hewitt Assocs., L.L.C., 2009 U.S. Dist. LEXIS 34569 (S.D. Tex. Apr. 23, 2009)

A novel indemnification issue arose in the context of the complex ERISA litigation before U.S. District Court Judge Melinda Harmon in the Texas Southern District.  Can a party invoke an indemnification provision in an administrative services agreement as a defense to its own negligence?

The facts are quite complex, but unnecessary for comprehending the essential issue at stake here.   The litigation is not about the Enron class action settlement, but about mistakes in calculation of entitlement to the settlement funds.

In short, the critical issue is responsibility for losses and expenses resulting from Hewitt’s mistaken calculations for distribution of the first tranche of the settlement funds, as well as for defense of claims brought against Hewitt by Enron Corp. Savings Plan and the Administrative Committee of the Enron Savings Plan.

The procedural posture of the case was motion to dismiss Hewitt’s declaratory judgment action seeking to establish a right to indemnification from Enron under the administrative services agreement.

The Administrative Services Agreement

Enron argued that, under the express terms of the ASA, Hewitt is the only party required to provide indemnification against damages arising out of Hewitt’s own conduct.

Moreover, Enron observes “[i]t would be incongruous indeed for Hewitt to be both obligated to provide indemnification to Enron for Hewitt’s own conduct and entitled to indemnification from Enron for damages resulting from Hewitt’s own conduct. 

 Texas Fair Notice Doctrine

Enron buttressed its argument with a state law contractual doctrine requiring conspicuity in indemnification provisions.

Furthermore, argues Enron, even if Hewitt did state a claim under the ASA for contractual indemnity by Enron for Hewitt’s own conduct, it is unenforceable under Texas’ fair notice doctrine. Under Texas law, a contractual provision to indemnify a party for its own negligence must afford fair notice of its existence.

Actual Notice

Hewitt countered that (1) the ASA not only meets the fair notice requirements, but (2) even if it did not, Hewitt is entitled to demonstrate that Enron had actual notice and knowledge of its obligations to indemnify Hewitt.

The Court Decides

This Court “fully concurred]” with Enron’s reasoning. The Court concluded that “there is no basis for Hewitt’s claim for contractual indemnification for damages Hewitt suffered as a result of its own conduct.”

 Hewitt’s forced pastiche of provisions in the ASA, unconnected by proximity, reference, format, or logic, does not create a clear statement sufficient to indemnify Hewitt for damages arising from its own conduct.

Nor did Hewitt make out well with the fair notice doctrine.

[T]he Court concludes that the ASA fails to satisfy the express negligence doctrine. As the party that drafted the ASA and the party seeking indemnification from the consequences of its own negligence, Hewitt has failed to express clearly and in specific terms within the four corners of the contract the intent of the parties to the ASA to include a viable agreement to indemnify Hewitt for the results of its own negligence.

The Court thus held for Enron, stating:

. . . because the Court has concluded that the ASA does not oblige Enron to indemnify Hewitt for damages to Hewitt resulting from Hewitt’s own conduct, it also concludes that Hewitt fails to state a claim in its Declaratory Judgment Complaint, Third Party Complaint, and Counterclaim for indemnification against Enron for those damages.

Note:   Actual notice being a fact issue, it remains possible for Hewitt to make out a defense on this basis as discovery proceeds in the case.

Because the actual knowledge exception is in the nature of an affirmative defense to a claim of lack of fair notice, the burden is on the indemnitee to prove actual notice or knowledge. U.S. Rentals, Inc. v. Mundy, 901 S.W.2d 789, 792-93 & n.8 (Tex. App.–Houston [14 Dist.] 1995, writ denied); Interstate Northborough Partners v. Examination Management Serv., Inc., No. 14-96-00335-CV, 1998 Tex. App. LEXIS 2824, 1998 WL 242448, *3-4 (Tex. App.–Houston [14 Dist.] 1998); Douglas Cablevision, 992 S.W.2d at 510.

Evidence Showing Notice –  Where actual notice is concerned, the Court noted that:

The indemnitee might meet that burden with evidence of specific negotiation of those contract terms (e.g., by prior drafts), through prior dealings of the parties (e.g., evidence of similar contracts over a number of years with a similar indemnity provision), proof that the provision had been brought to the indemnitor’s attention (e.g., by a prior claim).  Whether an indemnitor had actual notice or knowledge of an indemnity provision is a question of fact. Interstate Northborough, 1998 Tex. App. LEXIS 2824, 1998 WL 242448, *4.

Indemntification Provisions –  Often overlooked, indemnification provisions (like arbitration provisions and choice of venue) are an extremely important issue in review of administrative services agreements.    This case illustrates the range of  unanticipated consequences flowing from these provisions and a good overview of issues for consideration in contract review.