1 IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________________________

No. 98-41021

____________________________

FINA, INC., formerly known as American Petrofina, Inc.;

FINA OIL & CHEMICAL CO., formerly known as American

Petrofina Company of Texas,

Plaintiffs-Counter Defendants-Appellants,

versus

ARCO,

Defendant-Cross Claimant-Appellee,

BP OIL COMPANY;

SOHIO PIPE LINE COMPANY,

Defendants-Counter Claimants-Cross Defendants-Appellees.

_____________________________________________________

Appeal from the United States District Court

for the Eastern District of Texas, Beaumont Division

_____________________________________________________

January 4, 2000

Before REYNALDO G. GARZA, JOLLY, and WIENER, Circuit Judges.

WIENER, Circuit Judge:

In this case arising under the Comprehensive Envir onmental

Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. §§

9601 et. seq.

, Plaintiff-Appellant Fina, Inc. (“Fina”) appeals the

district court’s grant of summary judgment in favor of DefendantsAppellees BP Oil Company (“BP”) and Atlant ic Richfield Company2

(“ARCO”). Fina contends that the district court improperly applied

Delaware law in holding that cross-indemnities running between the

parties bar Fina’s CERCLA claims against BP and ARCO. We hold that

the indemnities are unenforceable with respect to the CERCLA

liability in question, and accordingly reverse and remand for

proceedings consistent with this opinion.

I.

Facts and Proceedings

BP acquired a refinery located in Port Arthur, Texas from ARCO

in 1969. BP subsequently sold the refinery to Fina in 1973. The

ARCO/BP and BP/Fina agreements of sale contain cross-indemnities

that apportion responsibility between the contracting parties for

liabilities arising from the operation of t he refinery. The

ARCO/BP agreement provides in relevant part that:

BP shall indemnify, defend, and hold harmless

ARCO... against all claims, actions, demands,

losses or liabilities arising from the

ownership or the operation of the Assets...

and accruing from and after Closing... except

to the extent that any such claim, action,

demand, loss or liability shall arise from the

gross negligence of ARCO.

The BP/Fina agreement provides in relevant part that:

Fina shall indemnify, defend and hold harmless

BP... against all claims, actions, demands,

losses or liabilities arising from the use or

the operation of the Assets... and accruing

from and after closing.

In 1989, Fina conducted an environmental investigation1 Fina has also made claims under the Resource Conservation

Recovery Act, 42 U.S.C. §§ 6901 et seq.

, and Section 361.344 of the

Texas Solid Waste Disposal Act. Although we follow the lead of the

district court and the parties to the case in addressing our

opinion solely to Fina’s CERCLA claims, we discern no reason why

our holding should not be equally applicable to these other claims

as well.

3 covering all areas of the refinery. It found seven areas of the

refinery contaminated with solid and hazardous wastes.

Investigating the origins of the contaminatio n, Fina unearthed

evidence that the pollution was at least in part attributable to

the activities of BP and ARCO.

Fina reported its discovery to the State of Texas. The Texas

Natural Resource Conservation Commission ordered Fina to co nduct

several further investigations. Those investigations are still

on going. Fina has already incurred over $14 million in

investigatory and remedial response costs.

In 1996, Fina sued BP and ARCO seeking contribution and cost

recovery under the Comprehensive Environmental Response,

Compensation, and Liability Act (“CERCLA”), 42 U.S.C. § §9607 and

9613(f). 1 BP filed a declaratory judgment counterclaim against

Fina, arguing that Fina’s claims are covered by t he indemnity

provision in the BP/Fina agreement of sale. ARCO filed a similar

declaratory judgment cross-claim against BP.

All parties moved for summary judgment. The district court

granted the motions of BP and ARCO, ruling that (1) Fina’s claims

against BP are covered by the BP/Fina indemnity provision, (2)2 See, e.g.

, Bolding v. C.I.R.

, 117 F.3d 270, 273 (5 th Cir.

1997).

4 Fina’s cl aims against ARCO are covered by the ARCO/BP indemnity

provision, and (3) because ARCO is indemnified by BP which in turn

is indemnified by Fina, a “circuitous indemnity obligation” is owed

by Fina to ARCO, which obligation covers Fina’s claims against

ARCO.

II.

Analysis

A. Standard of Review

The proper interpretation of a contract is a question of law

subject to de novo review. 2

B. Issues

We are called on to interpret and determine the enforceability

of two related yet distinctly different indemnity provisions. The

BP/Fina and ARCO/BP indemnity provisions both allocate

responsibility between the contracting parties for liabilities

arising from the ownership or operation of the refinery. The two

provisions differ, however, in two significant respects. First,

whereas the BP/Fina agreement of sale includes a choice of law

provision designating D elaware law as the governing law, the

ARCO/BP agreement of sale does not contain a choice of law5

provision . Second, the ARCO/BP indemnity provision, unlike its

BP/Fina counterpart, states that it cover s all claims “except to

the extent that any such claim... shall arise from the gross

negligence of ARCO.” We must therefore analyze the two indemnity

provisions separately.

1. The BP/Fina Indemnity Provision

Fina contends that the BP/Fina indemnity provision does not

indemnify BP for retroactive CERCLA liability. Under the indemnity

provision, Fina’s obligations t o BP extend only to those

l iabilities that accrue after the closing date of the BP/F ina

agreement of sale. Fina contends that, although CERCLA was not

enacted until 1980, the CERCLA liability “accrued” at the time that

BP and ARCO polluted the refinery grounds

—— well before the

closing date of the BP/Fina agreement of sale. Fina argues in the

alt ernative that, even if the BP/Fina indemnity provision does

purport within its broad terms to cover the CERCLA liability in

question, the provision is unenforceable with respect to that

liability because governing Delaware law requires that, to

indemnify a party for prospective strict liability claims, an

indemnity provision must “clearly and unequivocally” state that it

covers such claims. As we conclude that the indemnity provision is

unenforceable under Delawar e law with respect to the CERCLA

liability at issue here, we need not reach the question whether the3 St. Paul Mercu ry Ins. Co. v. Lexington Ins. Co. , 78 F.3d

202, 205 (5 th Cir. 1996).

4 D eSantis v. Wackenhut Corp. , 793 S.W.2d 670, 677-78 (Tex.

1990).

6 liability “accrued” prior to closing, within the meaning of the

agreement.

a. Choice of Law

In as s essing the enforceability of the BP/Fina indemnity

provision, we must first determine which state’s choice-of-law

provisions govern. “A federal court must follow the choice-of-law

rules of the state in which it sits.” 3 T he instant case was filed

in the United States District Court for the Eastern District of

Texas. We will therefore follow Texas choice-of-law rules in

determining the governing state law.

The BP/Fina agreement of sale specifies that it is governed by

Delaware law. Texas honors contractual choice-of-law provisions

unless the designated law is contrary to a “fundamental policy” of

Texas. 4

The relevant principle of Delaware law holds that “i n order

for a party to be entitled to indemni fication for the results of

its own negligence the contract must be crystal clear or

sufficiently une quivocal to show that the contracting party

intended to indemnify the indemnitee for the indemnitee’s own5 Sweetman v. Strescon Industrie s, Inc. , 389 A.2d 1319, 1321

(Del. Super. 1978).

6 See Dorchester v. American Petrofina, Inc.

, 710 S.W.2d 541,

543 (Tex. 1986).

7 See Ethyl Corp. v. Daniel Const. Co.

, 725 S.W.2d 705 (Tex.

1987).

8 Id at 708.

9 DeSantis , 793 S.W.2d at 680.

7 negligence.” 5 Prior to 1987, Texas followed an identical rule. 6

In 1987, however, the Texas Supreme Court adopted the stricter

“express negligence” standard. 7 This standard holds that “parties

s eeking to indemnify the indemnitee from the consequences of its

own negligence must express that intent in specific terms.” 8

Although the Texas and Delaware rules do differ, it can hardly

be said that De laware’s “clear and unequivocal” test violates a

fundamental policy of Texas. “[T]he focus is on whether the law in

question is part of state policy so fundamental that the courts of

the state will refuse to enforce an agreement contrary to that law,

despite the parties’ original intentions.” 9 Texas does not, as a

matter of public policy, refuse to enforce all indemnity provisions

that purport to cove r the indemnitee’s own negligence. Texas

merely requires that, to merit enforcement as to such claims, an

indemnity provision must expressly state that its coverage extends

to the negligence of the indemnitee. The “clear and unequivocal”

test is not inconsistent with a fundamental policy of Texas.

Delaw are law will therefore be applied in interpreting and10 We do not decide whether a reasonable interpretation of the

phrase “all claims” would include claims that were merely

prospective at the time the indemnity provision was signed.

11 See Powell v. Interstate Vendaway, Inc. , 300 A.2d 241, 243

(Del Super. 1972); Laws v. Ayre Leasing

, No. 92C-07-254, 1995 WL

465334, at *2 (Del. Super. July 31, 1995).

12 See La ws , 1995 WL 465334, at *2; Clark C. Johnson, Note,

Collapsing the Legal Impediments to Indemnification , 69 Ind. L.J.

867, 878 (1994).

8 assessing the enforceability of the BP/Fina indemnity provision.

b. Application of Delaware law

Fina has indemnified BP for “all cl aims, actions, demands,

losses or liabilities arising from the use or operation of the

Assets... and accruing from and after Closing.” Assuming, without

d eciding, that the CERCLA liability at issue “accrued” after the

closing date of the BP/Fina agreement of sale, the indemnity

provision clearly purports to cover CERCLA l iability within its

broad terms: The phrase “all claims” certainly encompasses claims

arising under CERCLA. 10

The analysis, however, does not stop ther e. Under Delaware

law, contracts to indemnify a party against the consequences of its

own negligence are strictly construed against the indemnitee. 11 The

purpose of this rule is to ensure that the indemnitor is fully

cognizant of the extraordinary risk that it is assuming. 1 2 The

rule functions as a “penalty default”; any entity that wishes to

contract away liability for the consequences of its own negligence13 Cumberbatch v. Bd. of Trustees of Del. Tech. & Community

College

, 382 A.2d 1383, 1386 (Del. Super. 1978). S ee also Blum v.

Kauffman

, 297 A.2d 48, 49 (Del. 1972); All-State Investigation and

Security Agency v. Turner Constr. Co. , 301 A.2d 273, 274-75 (Del.

1972).

14 James v. Getty Oil Co.

, 472 A.2d 33, 36 (Del. Super. 1984)

(citing Sweetman , 389 A.2d 1319).

The sophistication of the contracting parties is irrelevant;

the vast majority of the cases in which Delaware courts have

applied the clear and unequivocal test have invol ved contracts

between large, sophisticated entities. See

, for example

, Powell

, 300 A.2d 241 (contract between Interstate Vendaway, Inc. and

Chrysler Corp.); Paoli v. Dave Hall, Inc.

, 462 A.2d 1094 (Del.

Super. 1983) (contract between a construction contractor and a

subcontractor); James v. Getty Oil Co.

, 472 A.2d 33 (Del. Super.

1984) (contract between Getty Oil Co. and Catalytic, Inc.).

15 See James

, 472 A.2d at 37; Laws

, 1995 WL 465334, at * 2

(citing Rock v. Delaware Elec. Coop., Inc.

, 328 A.2d 449 (Del.

Super. 1974)).

9 is put on notice by the rule that, to be enforceable, any indemnity

provision that it signs must state with specificity the types of

risks that it is transferring to the indemnitor. If an indemnity

provision is not sufficiently specific, Delaware courts simply will

refuse to enforce the risk transfer.

Delaware law thus requires that, to be enforceable, “the

intent to indemnify must be clear and unequivocal” on the face of

an indemnity provision. 13 “To be enforceable, the provision must

specifically focus attention on the fact that by the agreement the

indemnitor was assuming liability for [the] indemnitee’s own

negligence.” 14 The Delaware courts have often stated that there are

no particular words that must be used to render an indemnity

provision enforceable. 15 But “[n]o Delaware case has allowed16 S ee Jordan v. E.I. duPont de N emours and Co. , 1986 WL

11553, at *3 (Del. Super. Aug. 8, 1986); Paoli v. Dave Hall, Inc.

, 462 A.2d 1094, 1098 (Del. Super. 1983). For examples of indemnity

provisions that have been upheld as applied to claims arising from

the indemnitee’s own negligence, see All-State

, 301 A. 2d at 274

(enforcing a provision indemnifying for “any claims... whether or

not such claims are based on Turner’s alleged active or passive

negligence”); Noble J. Dick, Inc. v. Warburton , 321 A.2d 345, 346

(Del. 1975) (enforcing a provision indemnifying for “all claims...

whether or not such injur y is due to or chargeable to any

negligence of the Contractor”); Cumberbatch

, 382 A.2d at 1385

(enforcing a provision indemnifying for “all claims... regardless

of whether or not it is caused in part by a party indemnified

hereunder”); F ountain v. Colonial Chevrolet Co.

, 1988 WL 40019

(Del. Super. Apr. 13, 1988) (enforcing a provision indemnifying for

“all loss or damages... even if said losses arise out of the

negligence of Company”).

17 See Marshall v. Maryland, D. & V. Ry. Co.

, 112 A. 526 (Del.

Super. 1921) (refusing to enforce as applied to a claim arising

from the indemnitee’s own negligence an indemnity covering “damages

of what soever kind of nature arising in any manner or under any

circumstances”); P aoli , 462 A.2d at 1098 (refusing to enforce as

applied to the indemnitee’s own negligence an indemnity covering

“all suits”); Hitchens v. Cannon & Cannon

, 1987 WL 17440 (Del.

Super. Sept. 16, 1987) (refusing to enforce as applied to a claim

arising from the indemnitee’s own negligence an indemnity covering

“all... claims... howsoever arising or incu r red”); Kreider v.

Schumacher & Co.

, 816 F.Supp. 957, 962 (D. Del. 1993) (stating that

“the < all claims’ phrase is modified by Delaware case law to exclude

from indemnification claims which arise from [the indemnitee’s] own

negligence”); Blum v. Kauffman , 297 A.2d 48 (Del. 1972).

10 indemnification of a party for its own negligence without making

specific refe rence to negligence of the indemnified party.” 1 6

Moreover, Delaware courts have consistently r efused to enforce

indemnity provisions that use broad, catch-all language but fail to

make a specific reference to claims arising from the indemnitee’s

own negligence. 17

Thus, to merit enforcement under Del aware law, an indemnity

provision must at a minimum demonstrate on its face “that the18 Rizzo v. John E. Healy and Sons, Inc.

, 1990 WL 18378, at *2

(Del. Super. Feb. 16, 1990).

19 See

, e.g

, Purolator Products v. Allied Signal, Inc.

, 772

F.Supp. 124, 131 n.3 (W.D.N .Y. 1991) (“While CERCLA liability is

strict, and is not based on negligence, I believe that the policy

behind the rule regarding negligence is also applicab le here”);

Houston Lighting & Power Co. v. Atchison, Topeka & Santa Fe Ry.

, 890 S.W.2d 455, 458 (Tex. 1994).

11 subject of negligence of the indemnitee was expressly considered”

by the parties in the drafting of the agr eement. 1 8 The BP/Fina

indemnity provision gives no indication that the parties considered

the issue of indemnifying BP for the consequences of its own

negligence: There is no reference in the indemnity to BP’s own

negligence, and its use of the phrase “all claims, actions,

demands, losses or liabilities” is insufficient as a matter of

Delaware law to satisfy the clear and unequivocal test. Thus, the

B P/Fina indemnity provision is unenforceable as applied to th e

prospective CERCLA liability at issue in this case.

BP attempts to av oid this result on two grounds. BP first

argues that the clear and unequivocal rul e is inapplicable here

because it only applies to claims based on negligence, whereas

CERCLA claims are based on strict liability. No Delaware case has

addressed t he applicability of the clear and unequivocal test to

claims based on strict l iability. Several other jurisdictions,

however, have held that the clear and unequivocal test is fully

applicable to claims based on strict liability. 19 The transfer of

liability for any prospective legal claim, whether based on12

negligence or on strict liability, invo lves an extraordinary

shifting of risk. We perceive no reason why Delaware would choose

to differentiate between the two types of claims for purposes of

this rule. We therefore hold that Delaware’s clear and unequivocal

rule is equally applicable to indemnification for strict liability

claims.

Second, BP argues that the clear and unequi vocal test is

applicable only to indemnification for that subset of prospective

liabilities that is given rise to by future acts of the indemnitee.

All of Fina’s claims against BP are predicated on actions taken by

BP prior to the signing of the BP/Fina indemnity provision. Thus,

if BP’s argument were correct, the BP/Fina indemnity provision

should be interpreted according to normal contract interpretation

principles —— rather than the “clear and unequivocal” rule —— and

would preclude Fina’s recovery against BP.

No Delaware case has directly addressed the applicability of

the clear and unequivocal test to indemnification for prior acts

giving rise to potential future liability (with “past” and “future”

being determined by reference to the time at which the indemnity

provision was signed). Indeed, it does not appear that any

Delaware case has ever distinguished between past and future

conduct or past and future liability in applying the clear and

unequivocal test to an inde mnification provision. BP’s argument

appears to be predicated on Texas law, which specifies that “[the

express negligence te st] is explicitly limited to releases and20 Green Int’l, Inc. v. Solis

, 951 S.W.2d 384, 86-87 (Tex.

1997).

21 Two Texas courts

—— neither of which appears to have been

aware of the unusual posture of the case before it

—— have decided

cases involving such a fact pattern. One court held that the

express negligence rule was applicable, but the ca se is

distinguishable because it involved not only an indemnity but also

13 indemnity clauses in which one party exculpates itself from its own

future negligence.” 20 BP relies on this and other similar

statements in Texas cases in concluding that, under Texas law, at

lea st, the express negligence test is inapplicable to

indemnification for past conduct giving rise to potential future

liability.

Even as to Texas law, it is not at all clear that BP’s

conclusion is correct. The language used by the Texas courts is

ambiguous: “Future negligence” might refer to f uture negligent

conduct

, but it also might refer to future claims based on

negligence

. True, the Texas rule does clearly distinguish between

(1) indemnification for past conduct for which claims have already

been filed at the time the indemnity provision is signed and (2)

indemnification for future conduct for which claims could not

possibly have been filed at the time the indemnity provision was

signed. Still, no Texas case has addressed the applicability of

the rule to the rare situation in which a party attempts to invoke

the protection of an indemnity against a claim filed after the

indemnity was signed but arising from conduct that occurred prior

to the signing of the indemnity. 21a warranty. S ee Dorchester Gas Co. v. American Petrofina, Inc.

,

710 S.W.2d 541 (Tex. 1986), overruled on other grounds

, Ethyl Corp.

v. Daniel constr. Co.

, 725 S.W.2d 705 (Tex. 1987). The other court

held th at the express negligence rule was inapplicable, but that

case is also distinguishable because the court found that, although

the claim was not filed until after the signing of the indemnity,

the dispute that gave rise to the claim arose before the signing of

the indemnity and was within the contemplation of the parties when

they signed it. Lexington Insurance Co. v. The W.M. Kellogg Co.

, 976 S.W.2d 807 (Tex.App. 1 Dist. 1998). In conclusion, Texas law

concerning indemnification for past acts giving rise to potential

future liability is at best unclear.

14 T he purpose of Delaware’s clear and unequivocal test is to

ensure that indemnitors are fully cogniza nt of the extraordinary

risks that they are assuming. This rationale is consistent with

distinguishi ng between those claims that have been filed at the

time that an indemnity is signed and those that are merely

prospective: Claims that have already been filed are not an

extraordinary risk, as they are a known and calculable quan tity.

The rationale behind the Delaware rule is not consistent, however,

with distinguis hing between prospective claims that are based on

past conduct and prospective clai ms that are based on future

conduct. Both types of prospective claims constitute unknown

quantities. Virtually all prospective claims are in fact

unknowable quantities to an indemnitor unless the indemnitee brings

the prospective claims to the indemnitor’s attention: An

indemnitor can always determine whether claims have already been

filed against an indemnitee, but it is nearly impossible for an

indemnitor to determine whether an indemnitee has engaged in

conduct that is likely to give rise to claims in the future.15

It is consistent with the “penalty default” nature of the

Delaware rule to place the burden on an indemnitee both to inform

potential indemnitors that it has engaged in conduct that may give

rise to future liability and to ensure that any indemnity provision

that is signed clearly states that the indemnification extends to

such future claims. Only by applying the “clear and unequivocal”

rule to indemnification for all claims that were merely prospective

at the time that an indemnity provision was signed can the courts

be sure that the indemnitor w as fully cognizant of the

extraordinary risk that it was assuming. We are convinced that the

Delaware courts would apply the clear and unequivocal rule to BP’s

claim for indemnification by Fina.

We hold, therefore, that (1) the BP/Fina indemnity provision

is subject to the clear and unequivocal test under Delaware law as

applied to Fina’s CERCLA claims against BP; (2) the BP/Fina

indemnity provision fails to satisfy the clear and unequivo cal

test ; and (3) the indemnity provision consequently does not bar

Fina’s claims against BP.

2. Fina’s “circuitous indemnity obligation” to ARCO

The district court held that because ARCO is indemnified by BP

whic h in turn is indemnified by Fina, a “circuitous indemnity

obligation” is owed by Fina to ARCO. As we hold that Fina does not

owe an indemnity obligation to BP with respect to the CERCLA22 Ethyl Corp. , 725 S.W.2d at 708.

23 Houston Lighting & Power Co. , 890 S.W.2d at 459.

24 See id

.

16 liability in question, Fina necessarily does not owe a “circuitous

indemnity obligation” to ARCO. Consequently, Fina is not barred by

the indemnity provisions in question from pursuing its claims

against ARCO.

3. The ARCO/BP indemnity provision

The ARCO/BP agreement of sale does not contain a choice-of-law

provision. ARCO and BP agree, however, that the contract is

governed by Texas law. Since 1987, Texas has applied the “express

negligence” test in lieu of the “clear and unequivocal” test. The

“express negligence” test holds that “parties seeking to indemnify

the indemnitee from the consequences of its own negligence must

express that intent in specific terms.” 22 This rule is applicable

to claims based on strict liability. 23 A nd, because the rationale

behind the Texas rule is the same as the rationale behind the

Delaware rule, 2 4 we are satisfied that Texas would apply the

“express negligence” test to all claims that were merely

prospective at the time the indemnity provision was signed.

The ARCO/BP provision indemnifies ARCO for “a ll claims...

arising from the ownership or the operation of the Assets... and

accruing from and after Closing... except to the extent that any25 Houston Lighting & Power Co. , 890 S.W.2d at 458-59.

26 See Rizzo

, 1990 WL 18378, at *2; Laws

, 1995 WL 465334, at

*2-*3.

27 Houston Lighti ng & Power Co. , 890 S.W.2d at 458 (refusing

to enforce as applied to a strict liability claim an indemnity

provision that expressly covered ordinary negligence claims).

17 such claim... shall arise from the gross negligence of ARCO.” It

makes no ment ion of claims based on BP’s own negligence or on

strict liability. The Texas Supreme Court has held that an

indemnification provision is not enforceable as applied to claims

based on strict liability unless that p rovision expressly states

the indemnitor’s intent to co ver such claims. 2 5 Even if the

exclusion of gross negligence fromthe indemnity’s coverage is

interpreted as indicating that BP int ended to indemnify ARCO for

ordinary negligence, 26 claims based o n strict liability are of

quite a different nature. Texas law requires that each type of

claim be separately referenced by an indemnity provision:

“Indemnification against strict liability is an exception to usual

business practices in the same manner as indemnifying against

someone else’s negligence.

... [F]airness dictates against imposing

liability on an indemnitor unless the agreement clearly and

specifically expresses t he intent to encompass strict liability

claims.” 27 Thus, the ARCO/BP indemnity provision is not enforceable

under Texas law as applied to claims based on strict liability.

Consequently, ARCO may not seek indemnification from BP for any

amounts recovered against it by Fina based on strict liability.18 III.

Conclusion

For the reasons discussed above, the district court’s grant of

summary judgment is reversed and the case is remanded for further

proceedings consistent with this opinion.

REVERSED and REMANDED