Combustion Engineering, Inc. v. Baker Hughes Incorparated

• Court: Court of Appeals of Texas
• Decided: May 4, 2004
• Docket: 14-03-00450-CV
• Status: Published

Opinion

Affirmed and Memorandum Opinion filed May 4, 2004

Affirmed and Memorandum Opinion filed May 4, 2004.

In The

Fourteenth Court of Appeals

____________

NO. 14-03-00450-CV

COMBUSTION ENGINEERING, INC., Appellant

V.

BAKER HUGHES INCORPORATED, Appellee

On Appeal from the 113th District Court

Harris County, Texas

Trial Court Cause No. 02-40689

M E M O R A N D U M   O P I N I O N

In this appeal, Combustion Engineering, Inc. seeks contractual indemnification from Baker Hughes Incorporated for settlement amounts Combustion paid to third parties who filed a wrongful death lawsuit against it, alleging gross negligence by a former Combustion subsidiary acquired by Baker Hughes pursuant to a 1989 stock purchase agreement (AStock Purchase Agreement@).  The trial court granted summary judgment in favor of Baker Hughes, finding that, under New York law, it does not owe Combustion defense or indemnity for the third-party settlement.  We affirm the trial court=s judgment.

Factual and Procedural Background

In 1989, Combustion sold certain companies, including Vetco Services, Inc., to Baker Hughes as part of a Stock Purchase Agreement effective February 18, 1989.  In 2001, the Figueroa family filed a wrongful death suit against a number of defendants, including Vetco Services, alleging gross negligence by Vetco Services while it was owned by Combustion that resulted in the death of Polito Figueroa.  In July 2002, Combustion sent a letter requesting Baker Hughes to indemnify and defend Vetco Services, Combustion, and ABB Veto Gray, Inc.  The letter states that AWe [Combustion=s counsel] direct your attention to (but do not limit our demand) to the following provisions in the enclosed [Stock Purchase Agreement]: Section [sic] 5.6(a), 5.6(b), and 5.14.@  Combustion=s counsel also said, AIf proved, a claim of gross negligence brought pursuant to the Texas Constitution allows for the recovery of exemplary damages only.@

Baker Hughes subsequently filed this suit, seeking a declaration that it has no defense or indemnity obligation to Combustion for the Figueroa claims.  Combustion filed a counterclaim, raising the same issues as Baker Hughes=s declaratory judgment action and contending that Baker Hughes owed Combustion indemnity and defense for the Figueroa lawsuit.  Baker Hughes filed a motion for summary judgment, asserting three grounds:  (1) section 5.6 of the Stock Purchase Agreement does not provide for defense or indemnification of the Figueroa claims; (2) indemnification for grossly negligent conduct and punitive damages is prohibited under New York law; and (3) the Stock Purchase Agreement does not exculpate Combustion for its own negligence.  The trial court granted Baker Hughes=s motion.  In its final judgment, the trial court made the following three findings:  A(i) New York law prohibits indemnity agreements for exemplary damages; (ii) the parties= Stock Purchase Agreement, dated February 18, 1989, does not cover the claims asserted in the lawsuit referenced herein, and (iii) said agreement does not evidence on its face the parties= intent to indemnify [Combustion] for its own acts of negligence, and Baker Hughes Incorporated, therefore, owes no defense or indemnity to any of the defendants in [the Figueroa lawsuit].@

In this appeal, Combustion argues the trial court erred in granting summary judgment and presents the following four issues for our review:

(1)     New York law allows contracting parties to indemnify for exemplary damages resulting from gross negligence for events that occur prior to the indemnity agreement.  Accordingly, did the trial court err in ruling that New York law prohibits indemnity agreements for exemplary damages without noting this exception?

(2)     Is the trial court=s ruling that the pertinent provision of the Stock Purchase Agreement does not Acover@ the Figueroa claims in error based on the plain language of the agreement?

(3)     Is the trial court=s ruling that the agreement does not evidence the parties= intent to indemnify Combustion for its own negligence in error because New York courts have upheld similar clauses as providing indemnity for a party=s own negligence?

(4)     Was summary judgment improperly granted because the trial court did not consider the applicability of section 5.14 of the Stock Purchase Agreement, which requires Baker Hughes reimburse Combustion=s expenditures for deductibles, co-payments, or other out-of-pocket costs incurred before execution of the Agreement?

Standard of Review

As the plaintiff and summary-judgment movant, Baker Hughes was required, as a matter of law, to prove all elements of its claim and disprove one element of Combustion=s counterclaim.  See Park Place Hosp. v. Estate of Milo, 909 S.W.2d 508, 511 (Tex. 1995).  We take as true all evidence favorable to the nonmovant and indulge every reasonable inference and resolve any doubts in the nonmovant=s favor.  Limestone Prods. Distr. v. McNamara, 71 S.W.3d 308, 311 (Tex. 2002).  In this case, the trial court=s order specified the grounds upon which it was granting summary judgment.  We consider all summary judgment grounds the trial court ruled on and the movant preserved that are necessary for final disposition of the appeal.  Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 626 (Tex. 1996).  In the interest of judicial economy, we also have the discretion to consider other grounds the movant preserved for review and on which the trial court did not rule.  Id.

                                                        Analysis

Combustion contends the language of section 5.6 of the Stock Purchase Agreement provides indemnity to it for Aall liabilities,@ whenever they happen and that it evidences the parties= Aunmistakable intent@ that Baker Hughes should indemnify Combustion for its own negligence.  We disagree.

Article 5 of the Stock Purchase Agreement is titled ACOVENANTS.@  In contrast, Article 8 of the agreement is titled AINDEMNIFICATION AND REIMBURSEMENT.@  Section 5.6 of the Stock Purchase Agreement reads in its entirety as follows:

5.6     Seller=s Obligations.  (a) After the Closing, Buyer shall be substituted for Seller and its subsidiaries and affiliates that are not constituents of the Business on the agreements, obligations and liabilities in respect of the Business which are obligations of Seller and its subsidiaries and affiliates that are not constituents of the Business, in each case so that Seller and its subsidiaries and affiliates that are not constituents of the Business are relieved of all liability with respect to such agreements, obligations and liabilities, provided, however, that nothing in the foregoing shall require Buyer or allow Seller to amend the terms of any obligation of the Business in any way to provide for less favorable terms either to the Business or to any other obligor thereof.  To the extent that Buyer is not substituted for Seller and such subsidiaries and affiliates on (and the failure to be so substituted despite Buyer=s best efforts to do so shall not be a breach), or Seller and such subsidiaries and affiliates are not relieved of, such agreements, obligations and liabilities, Buyer shall hold Seller and such subsidiaries and affiliates harmless in respect of such matters, including reimbursing them for all costs and expenses (including reasonable legal fees and disbursements) of paying, discharging, and defending such agreements, obligations and liabilities and, where appropriate, entering into agreements with appropriate parties which shall provide that Buyer shall be obligated or liable to such parties to the same extent as Seller or any such subsidiary or affiliate is obligated or liable.

New York courts require an indemnification agreement to unambiguously set forth the parties= Aunmistakable intent@ to indemnify an indemnitee for its own acts of negligence.^[1]  See, e.g., Quinones v. Waldbaum=s Inc., 469 N.Y.S.2d 743, 743 (App. Div. 1983) (AAgreements that would exculpate one from the consequences of his own negligence are strictly construed against him who would be exculpated, and, while less precise or less explicit language may suffice for indemnity agreements between businessmen dealing at arm=s length, even they must express the >unmistakable intent of the parties.=@) (quoting Gross v. Sweet, 400 N.E.2d 306, 310 (N.Y. 1979)); Commander Oil Corp. v. Advance Food Serv. Equip., 991 F.2d 49, 51 (2d Cir. 1993) (applying New York law) (A[I]n New York indemnification agreements are strictly construed; a court cannot find a duty to indemnify absent manifestation of a >clear and unmistakable= intent to indemnify.@) (citing Heimbach v. Metro. Transp. Auth., 553 N.E.2d 242, 246 (N.Y. 1990)).  Although the use of the word Anegligence@ is not mandated under New York law, Awords conveying a similar import must appear.@  Gross, 400 N.E.2d at 309; see also id. (ASo, it has been repeatedly emphasized that unless the intention of the parties is expressed in unmistakable language, an exculpatory clause will not be deemed to insulate a party from liability for his own negligent acts.@).  The intention to indemnify the indemnitee for its own negligence must be Aimplied from the language and purposes of the entire agreements, and the surrounding facts and circumstances.@  Margolin v. New York Life Ins. Co., 344 N.Y.S.2d 336, 339 (App. Div. 1972).

Section 5.6 does not reflect the parties= unmistakable intent to indemnify the other for its own negligence.  To the contrary, giving section 5.6 its plain meaning, it is not an indemnity provision.  By using the phrase Aare obligations,@ the provision instead requires Baker Hughes to assume the existing contractual liabilities of Combustion and otherwise Astep into the shoes@ of Combustion with respect to certain existing obligations.  Section 5.6 is very different than indemnity provisions that courts applying New York law have found to be sufficiently broad to require indemnification of a party for its own negligence.  See, e.g., Margolin, 344 N.Y.S.2d at 339 (concluding that indemnity provision stating that Acontractor hereby assumes entire responsibility and liability for any and all damage or injury of any kind or nature to persons . . ., and to property . . ., and agrees to indemnify and save harmless the owner . . . from and against any and all claims, liability, loss, expense, damage or injury . . .@ evidenced parties= unequivocal intention to have the contractor assume the entire risk of any liability arising from its work); Olin Corp. v. Consol. Alum. Corp., 5 F.3d 10, 12B13 (2d Cir. 1993) (applying New York law) (concluding that agreement=s provision stating that buyer would agree Ato be responsible for and to pay, perform, discharge and indemnify [seller] against, [sic] all liabilities (absolute or contingent), obligations and indebtedness of [seller] related to the [assets acquired by buyer] as they exist on the Effective Time or arise thereafter with respect to actions or failures to act occurring prior to the Effective Time@ evidenced the parties= Aclear and unmistakable intent@ that the buyer would indemnify the seller for future unknown liabilities).

This conclusion is supported by comparing the terminology of section 5.6 to other sections in the agreement.  It is a well-established rule of contract construction that A[a]ll parts of a contract must be read in harmony to determine its meaning.@  In re Bombay Realty Corp. v. Magna Carta, Inc., 790 N.E.2d 1163, 1165 (N.Y. 2003) (citation omitted).  A[O]ne term should not be interpreted in a vacuum.@  The Vermont Teddy Bear Co., Inc. v. 538 Madison Realty Co., 761 N.Y.S.2d 620, 623 (App. Div. 2003) (citation omitted).  In the instant case, sections 8.2 (AIndemnity.@), 8.5 (AAdditional Indemnification by Seller.@), and 8.6 (AThird Party Claims.@) of the agreement^[2] all deal with indemnity rights and obligations and reflect the parties= ability to draft indemnification provisions with such key terms as Aindemnify@ and Ahold harmless,@ words that do not appear in section 5.6 at all.  The trial court=s conclusion that the plain language of section 5.6 of the Stock Purchase Agreement does not require Baker Hughes to defend and indemnify Combustion for the Figueroa settlement is proper.  Accordingly, Combustion=s second and third issues are overruled.

In its fourth issue, Combustion contends the trial court failed to address the applicability of section 5.14 of the Stock Purchase Agreement to Combustion=s request for defense and indemnity.

Section 5.14 (AInsurance.@) provides as follows:

The parties recognize that Seller [Combustion] has obtained various insurance policies (the >Policies=) from carriers (the >Carriers=) providing insurance coverage for business conducted by the Seller, its subsidiaries and companies associated therewith.  The parties also recognize that included in the assets and liabilities of the Business are applicable rights and obligations under existing Policies arranged for by Seller in respect of the Business (including the insured=s right to defense and indemnity by the Carrier, the insured=s duty to give notice and cooperate and the insured=s liability for deductible amounts, defense costs, premiums and administrative fees) and that, to the extent so provided under the terms and conditions of individual Policies, certain elements of such insurance coverages for periods prior to sale of the Shares to Buyer may survive thereafter for the benefit of the Business and the Buyer.  In the event that subsequent to the date hereof Seller shall pay to or receive from a Carrier an amount required to be paid or credited under a Policy with respect to or relating to any claim or other insured matter in respect of the Business, then forthwith upon Seller=s making of such payment or receipt of such credit, Buyer shall make equivalent payment to, or receive equivalent credit from, Seller.        

The trial court=s failure to specifically refer to section 5.14 is not relevant to our analysis.  The court=s finding that the Stock Purchase Agreement Adoes not cover the claims asserted in the [Figueroa lawsuit]@ is sufficient to reflect the trial court considered and rejected Combustion=s argument regarding the applicability of section 5.14.  As Baker Hughes noted in its motion for summary judgment, section 5.14 allows Baker Hughes to avail itself of the benefits of any Combustion insurance policies existing at the time of the Stock Purchase Agreement.  Section 5.14, however, does not address either indemnification or defense for third-party claims.  Construing section 5.14 in accordance with its plain and ordinary meaning, it is not an indemnification provision.  See generally, e.g., Edwards v. Poulmentis, 763 N.Y.S.2d 677, 679 (App. Div. 2003) (AWhere the provisions of a contract are clear and unambiguous and the intent of the parties can be gleaned from the four corners of the document, a court should interpret the contract in accordance with its plain and ordinary meaning.@) (citation omitted).  Accordingly, we overrule Combustion=s fourth issue.^[3]

The trial court=s judgment is affirmed.

/s/      Leslie Brock Yates

Justice

Judgment rendered and Memorandum Opinion filed May 4, 2004.

Panel consists of Justices Yates, Anderson, and Hudson.

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^[1]  Neither party contests that the choice-of-law provision of the Stock Purchase Agreement dictates that we must construe the pertinent provisions of the agreement under New York law.

^[2]  Section 8.2 of the agreement reads in its entirety as follows:

Each party hereto shall indemnify and hold the other party hereto harmless, subject to the terms and conditions and to the extent provided in this Article 8, from and against all losses, damages, liabilities, claims, demands, judgments, settlements, costs and expenses (including reasonable attorneys= fees) resulting from or arising out of (i) any breach of any representation or warranty of the indemnifying party contained in Article 3 or 4, as the case may be, or (ii) any breach of or failure to comply with any covenant or agreement of the indemnifying party contained in Article 5, as the case may be, in either case to the extent not waived by the indemnified party.  This Section 8.2 shall constitute the exclusive remedy after the Closing Date for any breach of any representation or warranty hereunder or any claim for misrepresentation in connection with this Agreement.

Section 8.4 provides that, in addition to the indemnification provided for in section 8.2, ASeller shall indemnify and hold Buyer harmless from and against all Environmental Remediation Costs actually incurred by Buyer prior to the second anniversary of the Closing Date with respect to real property owned or leased by the Business as of the Closing Date. . . .@  Section 8.5 reads, in relevant part, as follows:

(a) In the event that any legal proceedings shall be instituted or any claim or demand shall be asserted by any person in respect of which payment may be sought by any party or parties from any other party or parties under the provisions of Section 8.2, the party or parties seeking indemnification (collectively, the >Indemnitee=) shall cause written notice of the assertion of any claim of which it has knowledge that is covered by this indemnity to be forwarded promptly to the party or parties from which indemnification is sought (collectively, the >Indemnitor=) . . . .

^[3]  Because of our disposition of Combustion=s second and third issues, we need not address Combustion=s first issue of whether New York law prohibits indemnification for gross negligence or prohibits indemnification for exemplary damages in all cases.  Further, because of our disposition of Combustion=s fourth issue, we also do not address Baker Hughes=s argument that there is no evidence in the record that Combustion incurred any expenses under any liability insurance contracts.