Commercial contracts involve a certain amount of risk allocation between the parties. Indemnity provisions are among the most aggressive risk shifting provisions because they can require a party to assume liability for the mistakes of another. As a result, Texas courts require indemnity provisions to comply with the Fair Notice Doctrine in order to be enforceable in Texas.[1] The Fair Notice Doctrine requires that indemnity provisions (1) be conspicuous and (2) expressly state the scope of the risk allocated in order to be enforceable.
Conspicuous: This prong of the test is generally met by changing the visual appearance of the text that creates the obligations by using bolding, underlying, italics, all caps or other visual tools to draw attention to the indemnity provision “to attract the attention of a reasonable person when he looks at it.”[2] Courts have also found that evidence of the defending party’s actual notice of the indemnity provision will satisfy this requirement, such as when the defending party made modifications of the indemnity provision in prior drafts of the contract.
Scope of the Risk: The enforcing party must also show that the provision expressly states the scope of the risk shifted. The court’s concern is that vague and/or broad language should not be used to seek indemnity for situations that were never envisioned by one or both parties. Instead, “a party seeking indemnity from the consequences of that party’s own negligence must expressly state the intended scope within the four corners of the contract.”[3] Indemnity provisions must expressly state what type of liability (e.g. negligence) that is covered and the scope of coverage. For instance, will there be indemnity for a party’s sole negligence (100% fault) or is it limited to cases in which both parties share the fault (i.e. jointly or concurrently negligence)? If the clause fails to expressly answer questions like these then it may not be enforceable in Texas.
Texas has developed the Fair Notice Doctrine to protect unsuspecting parties from taking on more liability than they anticipated. However, the Fair Notice Doctrine is not shared by every state. Therefore, contracts that are prepared outside of Texas sometimes fail to comply with the doctrine and are later found unenforceable in Texas. Be sure to have your commercial contracts reviewed by a local attorney to ensure that you will be able to achieve the benefit of all you bargain for in your contracts.
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[1] Dresser Ind., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex. 1993).
[2] Dresser Ind., Inc. v. Page Petroleum, Inc., 853 S.W.2d at (quoting Ling & Co. v. Trinity Sav. & Loan Ass’n, 482 S.W.2d 841, 843 (Tex. 1972).
[3] Enserch Corp. v. Parker, 794 S.W.2d 2, 8 (Tex.1990); Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 707-08 (Tex.1987).