I spent this morning in Toronto conducting a seminar at Rogers Communications, the Canadian communications company. David Miller, the general counsel of Rogers Communications, mentioned a requirement under Texas law that certain indemnification language be conspicuous. I’ve long been vaguely aware of that, so after the seminar I chased down further information.
The gist of it is that Texas courts have ruled that an indemnity provision that requires Party A to indemnify Party B for Party B’s own negligence is unenforceable unless (1) the contract is explicit that the indemnification covers the negligence of the indemnitee and (2) the provision in question is conspicuous.
In Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 509-11 (Tex. 1993), the Texas Supreme Court applied to the express negligence rule the Uniform Commerical Code’s standard for conspicuousness. As explained in MSCD 15.37 and in this February 2008 blog post, for something to be conspicuous under the UCC it doesn’t need to be in all capitals, so it follows that the same applies for purposes of the express negligence rule under Texas law. And using some other form of emphasis, such as bold italics, would make the provision conspicuous yet much easier to read.
The most accessible article I’ve seen on the conspicuousness requirement of the Texas express negligence rule is this one, written by Randy King, a partner at Porter & Hedges. The article was published in 2002, and there’s been some caselaw since then, but nothing that changes the basic conspicuousness analysis. A quick source of more recent caselaw is a Baylor Law Review article at 60 Baylor L. Rev. 941.
When he mentioned the Texas conspicuousness requirement in this morning’s seminar, David Miller recalled how he once found himself working on a transaction involving a Texas company. A Texas law firm had been called on to give an opinion, but they were nervous about whether a given indemnification provision—evidently one aimed at satisfying the express negligence rule—was sufficiently conspicuous. Demonstrating the expediency that is the stock in trade of the transactional lawyer, those gathered in the conference room solved this problem by using a fluourescent marker to highlight the provision in the copies to be signed …
It sure would be refreshing to see a widespread reform on the use of all caps to denote the parts that must be conspicuous. I’VE ALWAYS FOUND IT IRONIC THAT THESE CRITICAL PARTS OF AN AGREEMENT, PARTS ABOUT WHICH UNDERSTANDING IS CRITICAL, ARE USUALLY RENDERED IN TEXT THAT IS THE MOST INCOMPREHENSIBLE.
Ken–There are actually two different rules that are often lumped together: First, a 1987 Texas Supreme Court case said that if you want to be indemnified against the consequences of your own negligence, you must say so expressly. For example, “This indemnity applies even if the indemnified party was negligent.” Then, six years later, the Dresser case said that these provisions had to be conspicuous. (I like bold, small caps.)
These rules also apply to releases and shifting risk from a party who would otherwise be strictly liable under applicable law.
Here’s the most interesting aspect of the Texas express negligence and conspicuousness rules: The Texas Supreme Court has held that if an indemnity fails to satisfy the express negligence rule, the mere allegation of negligence by the indemnitor in a suit filed against an indemnified party will preclude recovery of anything from the indemnitor, EVEN IF the the indemnified party is ultimately held not to be negligent. In other words, the indemnified party will be unable to plead its case on the merits.
I share Evan’s sentiments – capitals are harder to read, and much less likely to be read than ordinary type if they go over more than one line. Still, as the UCC seems to give US lawyers a “safe harbour” for capitalised text, one can hardly complain that many do it.
Incidentally, I think that the Dresser case uses a dangerous principle in commercial contracts – if a Party A signs a contract and Party B fulfills their side of the bargain on that basis, surely Party B should always be able to rely on the fact that the contract binds Party A? If not, Party A is being rewarded for their own carelessness. Dresser seems to apply an entirely different principle in this regard to that in Ethyl Corp., which was concerned with ambiguity (of one sort or another).
Art: Methinks you misunderstand the UCC requirement of conspicuousness. I suggest you consult MSCD or the blog post I link. Ken
Ken, that may well be the case – I was looking at the Porter & Hedges article that you linked to, which I misread. It was in fact the Texas Supreme Court, applying the UCC, which said “language in capital headings, language in contrasting type or color, and language in an extremely short document, such as a telegram, is conspicuous”.
My facts, alas, were wrong. However, I think I stick by the general point – that if the law states explicitly that “contrasting type… is conspicuous” for the purposes of this requirement, it is hard to blame lawyers who capitalise the relevant clauses.
We have a similar problem in Ohio, where warrants of attorney must be accompanied by a statutory warning more conspicuous than anything else in the document. Courts hae invalidated the cognovit provision when the warning was no more conspicuous than the section captions or the title. I make sure to put the warning in bold type, at least 2 points larger than anything else in the document, and to enclose the warning in a box or between bars in each side margin. For those who want to use capital letters, using large and small caps is more readable than all caps.
WOOOOOWWWWW…. as a Mexican lawyer, it amazes me that US law provides to have this conpicuousness rule… I’ve always seen the indemnity clauses in agreements with US parties in capital letters (not bold) and thought.. “man these US lawyers want this clause to stand out…” but never thought that there was a rule to it to make enforceable…
In Mexico it is customary for the agreement to include a wording stating that the parties have read the agreement, understand it and that there is no misinterpretation of its contents…
Interesting!