Imagine a customer slips and falls inside a tenant’s leased space. The injured party alleges that the fall was caused by water leaking from the building’s sprinkler system. Although no fault has been determined, the claim names the landlord and asserts that the landlord was negligent in maintaining the building systems. In this common scenario, the landlord would typically expect the tenant—and more importantly, the tenant’s insurer—to investigate and, if appropriate, resolve the claim. But whether the landlord receives that protection may depend entirely on how the lease’s indemnity provision was drafted. If the clause fails to meet Texas’s fair notice requirements, the mere fact that negligence on the part of the landlord has been alleged could leave the landlord alone to defend and pay for a claim it never expected to shoulder.
Introduction
Indemnity clauses are essential tools for allocating risks in contracts. At their basis, they protect the indemnified party by shifting the costs of a loss—often arising under some form of vicarious, constructive, derivative, or technical liability—to the indemnifying party. But what about when—as in the example above—the indemnified party’s own wrongdoing allegedly caused the loss? Must the indemnitor cover those costs as well? The Supreme Court of Texas has held that indemnifying a party from claims based on such party’s own negligence is an extraordinary shifting of risk and therefore must comply with the principle of fair notice.
Fair notice in Texas requires that indemnity provisions seeking to indemnify parties for their own negligence must meet two specific requirements to be enforceable:
- the express negligence doctrine; and
- the conspicuousness requirement.
This article outlines these requirements and offers practical tips for drafting indemnity provisions that will reliably stand up in Texas’ courts.
Express Negligence Doctrine
In Texas, the express negligence doctrine is a key component in determining whether a party had fair notice of the extraordinary risk shifting involved in indemnifying a party for its own negligence. This doctrine requires that if a party wants to be indemnified for its own negligence, then that specific intent must be stated clearly within the contract itself—often referred to as “within the four corners” of the agreement. Consequently, simply drafting a broad and general clause that covers all losses and claims will not suffice if the intent is for the indemnitee’s negligence to be covered. The drafted language must expressly state that the indemnitor is agreeing to cover losses caused by the indemnitee’s own negligence. If it does not, then the indemnified party, like the landlord in the example above, whose alleged negligence caused a loss, is not going to be able to rely on the indemnity clause for protection.
It is important to note that this doctrine isn’t a legal defense—it’s a rule of contract interpretation designed to make sure both parties have fair notice when one of them is taking on the risk of the other’s negligence. If language to this effect is not explicitly and unambiguously stated in the contract, then Texas courts are not likely to enforce the indemnity provision to cover the indemnitee’s alleged negligent acts.
Conspicuousness Requirement
Even if an indemnity clause stands up under the express negligence doctrine, to be enforceable in Texas, the language must also satisfy the second prong of fair notice—conspicuousness. The conspicuousness requirement is much as the name might suggest—the language must stand out in the document. The purpose of this is to ensure that everyone is aware (or at least should be) that this extraordinary shifting of risk has been included by preventing the language from being obscurely buried in the text of a document—i.e., it helps provide fair notice.
Fortunately, Texas courts have been consistent through the years when expounding on what constitutes conspicuous drafting. The Texas Supreme Court has adopted and applied the standard set forth in the Uniform Commercial Code Section 1.201(10) for making this determination. Here, the UCC states that the language must be presented in a way that a reasonable person against whom the language is to operate ought to notice it. This generally includes (i) having the section heading in capital letters that are equal to or greater in size than the surrounding text or in a contrasting type, font, or color, and (ii) having the language itself in a larger type than the surrounding text, in a contrasting type, font, or color, or otherwise set off from surrounding text by symbols or marks that call attention to the language.
In brief, to pass the conspicuousness requirement, something on the face of the contract must be sufficiently obvious to attract the attention of a reasonable reader to the indemnity language. This can be achieved by ensuring the clause is clearly titled and by using larger font, bold text, or other distinguishing features to ensure the clause is reasonably noticeable.
Drafting Example
What follows is a basic indemnity example putting the foregoing fair notice requirements into practice:
INDEMNIFICATION. Tenant shall indemnify landlord against any claim, loss, or damage arising from any occurrence on the premises, EVEN IF CAUSED, OR ALLEGED TO BE CAUSED, BY THE NEGLIGENCE OF LANDLORD OR ITS AGENTS OR EMPLOYEES.
Note how, even among the text of this article, the language draws the reader’s attention to it. The title is bold, underlined, and in all caps. Similarly, the language itself is bold, in a larger font size than the surrounding text, and in all caps. All things are designed, when taken together, to ensure the language is conspicuous.
The language also leaves no room for argument as to whether the indemnity was intended to cover the indemnitee’s own negligence. The language clearly and expressly states that the parties intend for the tenant to indemnify the landlord for claims based on the landlord’s negligence—i.e., it satisfies the express negligence doctrine.
Taken as a whole, the above simple example illustrates what is needed to ensure that an indemnity clause provides the parties to a contract with fair notice of the extraordinary shifting of risk involved with indemnifying a party for claims based on its own negligence.
Other Considerations
Below are a few additional points to keep in mind when drafting indemnity clauses:
- Texas courts apply the fair notice requirements not just to indemnity clauses, but also to waivers and releases of liability.
- When it comes to conspicuousness, using multiple techniques to draw attention to the clause (e.g., bold, caps, larger font, etc.) is best practice. Relying on just one may not be enough to satisfy the requirement.
- Some courts in Texas hold that indemnifying a party for its own gross negligence or intentional misconduct violates public policy and therefore will not enforce language to this effect.
- Texas courts have held that the entirety of an indemnity clause does not have to be in one place to be enforceable—it just needs to satisfy fair notice when the contract is read as a whole. So, if an existing contract does not already meet the fair notice requirements, it can be addressed in an amendment by simply stating the intent expressly and in a conspicuous manner.
Conclusion
Indemnity clauses can be (and usually are) much more complex than the simple example above. However, consistently applying the basic principles set forth in this article can help ensure such clauses, regardless of their complexity, stand up to Texas’ fair notice requirement.
