Texas Construction Law Blog

In a recent decision with important implications for construction contracts, the Texas Supreme Court clarified that a party that settles a claim may still pursue contractual indemnification from a non-settling party for the non-settling party’s proportionate share of liability.

In S&B Engineers & Constructors, Ltd. v. Scallon Controls, Inc., the Court held that a settlement with injured plaintiffs does not automatically extinguish a party’s contractual indemnity rights. Instead, where a contract allocates responsibility among project participants, those contractual rights remain enforceable even after the settling party resolves the underlying claims.

The decision reinforces Texas courts’ longstanding commitment to enforcing negotiated risk-allocation provisions commonly found in construction contracts.

Background

The dispute arose from an accident that injured several construction workers at a Texas refinery. The refinery owner hired S&B as a general contractor to design and install a safety system, and S&B subcontracted supply and installation of the fire-suppression system to Scallon.

While workers from a separate contractor were performing insulation work on the scaffolding, the fire-suppression system discharged a chemical suppressant. Seven workers fell and were injured while attempting to escape the discharge and later filed negligence and tort claims against S&B and the project owner, but not Scallon. S&B and the owner in turn brought third party claims against Scallon, including claims for indemnity under the S&B-Scallon agreements.

After several years of litigation, S&B and the owner settled the workers’ claims against them. The S&B and the owner’s insurer then sought indemnity from Scallon under the following fault-based indemnity provision:

To the maximum extent permitted by applicable law, [Scallon] shall defend, indemnify and hold harmless S&B, and its affiliated companies, subsidiaries and clients from and against any and all loss, damage, claim, suit, liability, strict liability, product liability, judgment and expense (including attorney’s fees and other costs of litigation) and any fines, penalties and assessments, arising out of (A) damage to or loss of property or (B) bodily injury, disease or death to persons other than employees of [Scallon], its agents or subcontractors resulting from or in connection. with the execution of this purchase order to the extent of [Scallon]’s negligence or willful misconduct. In case of comparative, concurrent and/or contributing negligence, fault or strict liability of [Scallon] or [S&B], whether through its employees and/or representatives, [Scallon]’s duty to indemnify and hold harmless referred to in the previous sentence shall be [Scallon]’s allocable share of comparative, concurrent and/or contributing negligence, fault or strict liability.

 Scallon argued that because the injured workers did not allege negligence against Scallon and it did not participate in the settlement, the settling parties were effectively seeking indemnity for their own negligence beyond what the indemnity provision allowed. Both the trial court and the court of appeals agreed and granted and affirmed summary judgment in the Scallon’s favor.

The Texas Supreme Court’s Decision

The Texas Supreme Court reversed. The court of appeals had relied on a pair of Texas Supreme Court decisions holding that a settling defendant cannot seek contribution from a non-settling party under common law or by statute. The Court distinguished those decisions by noting they addressed statutory and common-law contribution claims—not contractual indemnity provisions negotiated by the parties.

The Court emphasized that Texas law strongly favors freedom of contract and allows parties to allocate risk as they see fit. Because the subcontract in this case required Scallon to indemnify the contractor for the subcontractor’s “allocable share” of comparative negligence, the Court found that S&B could pursue indemnification even after settling the underlying injury claims by seeking a judicial determination regarding the extent of Scallon’s share of “allocable” negligence.

The Court also rejected the argument that the express-negligence doctrine barred the claim. That doctrine requires clear language if a party intends to obtain indemnity for its own negligence from another party. The Court found that the indemnity provision quoted above did not implicate the express negligence doctrine as it expressly limited indemnification to Scallon’s share of fault and disclaimed indemnification for indemnified parties’ own negligence or fault.

The Court remanded the case to the trial court to determine whether S&B and the owner’s insurer are entitled to indemnification.

What the Settling Party Must Still Prove

Although the Court allowed the indemnity claim by S&B and the owner’s insurer to proceed, it emphasized that a settling party seeking contractual indemnification still carries significant burdens. Specifically, The Court confirmed the settling party must prove:

• the settlement was a reasonable amount and made in good faith, and
• the portion of negligence or fault that is properly attributable to the indemnitor.

If the settling party cannot establish the settlement was reasonable—or if a factfinder determines that the indemnitor bears no responsibility—the settling party may recover nothing.

Key Takeaways

• Settlement does not automatically eliminate indemnity claims. A party (whether owner, contractor, or subcontractor) that settles claims may still pursue contractual indemnification claims from non-settling parties.
• Increased post-settlement indemnity litigation is likely. By providing a roadmap to pursue post-settlement indemnity claims, the S&B Engineers decision will likely lead to more litigation over indemnity clauses in construction contracts as well as whether the underlying settlements were appropriate.
• Indemnity provisions should be carefully drafted. The indemnity clause at issue in S&B Engineers was very specific in limiting the subcontractor’s indemnity to its “allocable share” of negligence or fault. Many indemnity provisions are not so specific. While the Court emphasized that “allocable” is not a magic word, parties should carefully draft indemnity provisions to fit within the Texas Construction Anti-Indemnity Act and either comply with or avoid the application of Texas’s express-negligence doctrine.
• Post-settlement indemnity claims still require proof. A party seeking contractual indemnity after settling must demonstrate both the reasonableness of the settlement and the indemnitor’s share of fault.