Second Circuit Case Demonstrates Importance of Proper Contracts

Our previous post discussed the various principles of contract law at work in the Mendoza case, which can be viewed here. This case involved a dispute between an injured worker’s employer and another company with which that employer had a contract. A provision of this contract provided for indemnification, the assuming by one entity of the liability of another.

Companies often assume the liabilities of other entities with which they hold contracts. This is seen as a cost of doing business. Indemnification makes up part of or the entirety of the consideration for some corporate contracts. Contracting away your liability can be extremely valuable. The dispute in this case was when the contract actually became effective. The court used various principles discussed in its opinion and the previous post on this topic to determine that the trial court was correct in denying summary judgment to one party and granting it to the other. Mid South, Mr. Mendoza’s employer, was to be indemnified and held blameless by EXCO as per their 2008 agreement.

In general, this dispute really came down to an issue of timing. The two companies in question signed an agreement in December 2008. The incident that created Mr. Mendoza’s cause of action occurred in October 2007. He filed suit in August of 2008. Mid South did not file an answer to the complaint until July of 2009. After this filing Mid South demanded defense from EXCO; this defense was promptly denied. Mid South again attempted to illicit indemnification and defense from EXCO in September 2009 based on a 2004 contract that Mid South held with Anadarko, a company whose interests were subsequently absorbed by EXCO. EXCO did not respond until after Mid South filed a cross-claim against EXCO. EXCO filed an exception and answer in April 2010 along with a motion for summary judgment. In July 2010, Mid South filed its cross-motion for summary judgment. The former motion for summary judgment was denied and the latter granted in August of 2010. When the trial court denied EXCO’s motion to designate the judgment as appealable, EXCO sought aid from a higher court. The Court of Appeal for the Second Circuit of Louisiana granted EXCO’s writ application but ultimately sided with the trial court.

The crux of the appellate court’s decision was its interpretation of the “Effective Date” provision of the contract which indicated that the agreement was in full force and effect “on the date first above written or on the date on which CONTRACTOR (Mid South) first commenced the performance of any services for COMPANY (EXCO) or first provided goods, equipment or facilities to COMPANY, whichever first occurred, and even though this Agreement may not then have been reduced to writing.” There was conflict among the parties whether this clause or the type-written date “December 16, 2008″ should take precedence. The court determined after its de novo review of the trial court record that EXCO should have known that it was assuming liability for events earlier than December 16, 2008 because it drafted the 2008 Agreement. EXCO also alleged error because the type-written date was not given precedence over the pre-printed contract language. The court found this allegation to be without merit. The “Effective Date” provision of the contract was drafted with the potential of the occurrence of a situation like this one in mind. It specifically contemplates an incident like Mr. Mendoza’s in its language. It was the opinion of the appellate court he phrase “December 16, 2008″ being type-written was not as important as influential as the type-written provisions in the precedential cases making up the common law in this area.

A court’s interpretation of a contract can make a crucial difference to the parties involved. EXCO tried to get out of a contract that it had drafted itself. This is a difficult position from which to argue. Almost all of the interpretation tools that a court may use will caution against giving undue deference to the drafter of the contract. Companies must strive to write contracts containing language by which they intend to be bound. Courts must strive to fairly and equitably interpret contracts but they do not have to interpret them according to unexpressed intentions for which the contracts contain no basis.