Opinion

Audubon Indemnity Company, as Subrogee of Comanche Contractors, Inc. v. Custom Site-Prep, Inc.

Court: Texas Court of Appeals, 1st District (Houston)
Filed: Jul 28, 2011
Status: Published
Cited by: 0 cases
Authority: More cited than 42.2%

The opinion

Opinion issued July 28, 2011.

In The

Court of

Appeals

For The

First District

of Texas

————————————

NO. 01-10-00489-CV

———————————

Audubon Indemnity Company, As Subrogee of Comanche Contractors, Inc. , Appellant

Custom

Site-Prep, Inc. ,

Appellee

On Appeal from the 268th District Court

Fort Bend County, Texas

Trial Court Case No. 06DCV152935

O P I N I O N

This

appeal primarily concerns the enforceability of an indemnity clause in a written

construction contract between a general contractor, Comanche Contractors, Inc.,

and its subcontractor, CSP Site-Prep, Inc., signed after the completion of the

project. In a related arbitration

proceeding, the arbitrator concluded that Comanche breached its construction contract

with Fort Bend County Child Advocates, Inc. and, through CSP’s subcontracted

work, negligently performed work on that project. The arbitrator awarded Child Advocates over

$250,000 in actual damages. Audubon

Indemnity Company, acting as subrogee to Comanche, sued CSP to recover for

Comanche’s liability under an indemnity provision in the written subcontract

agreement. Both Audubon and CSP filed

traditional summary judgment motions.

The trial court granted CSP’s motion and denied Audubon’s motion.

Audubon contends that the trial

court erred in granting CSP’s motion because (1) Audubon had a valid indemnity

claim based on an indemnity clause that was supported by consideration and that

satisfied the fair notice requirements for indemnity provisions, (2) Audubon

had a valid breach of contract claim for CSP’s alleged failure to obtain

insurance, and (3) Audubon raised valid objections to CSP’s summary judgment

evidence. Audubon also contends that the

trial court erred in denying its traditional summary judgment motion because

the evidence demonstrates it was entitled to indemnity as a matter of law.

hold that the trial court could not have properly granted summary judgment on

the basis of CSP’s defense that the written subcontract lacked consideration. We also hold that the fair notice

requirements do not apply to Audubon’s indemnification claim. Because fair notice does not invalidate the

indemnity provision and a fact issue exists on consideration, the trial court

improperly granted summary judgment on all of Audubon’s indemnity claims. We also hold that the trial court improperly

granted summary judgment on Audubon’s breach of contract claim for failure to

obtain insurance.

We therefore reverse the judgment

of the trial court.

Factual Background

This lawsuit arises out of the alleged defective

construction of the Child Advocates’ office building and Child Advocates’

successful arbitration claim against Comanche.

Child Advocates hired Comanche as the general contractor on the project. Comanche, in turn, hired CSP as the

subcontractor to perform the earthwork to prepare the site pad before

beginning construction on the building. Comanche and CSP had

worked together on many projects in the past and about 75% to 80% of CSP’s

business came from Comanche.

Child

Advocates had originally hired an architect to prepare detailed plans and

specifications for the building. Those plans

and specifications called for a three-foot building pad and a certain quality

of materials to be used in the pad. Comanche and CSP submitted their bids on the

project based on those plans.

Comanche’s

contract with Child Advocates, however, was later modified because of cost

concerns. According to Comanche and CSP,

Jeff Nesmith at Child Advocates instructed Comanche to do an “abbreviated”

version of the pad and merely level the site as a result of budget concerns. [1] Under the terms of the oral agreement between

Comanche and Child Advocates, CSP was to level the building pad and keep track

of the amount of dirt necessary for the project and Child Advocates would

“reimburse” Comanche for the expenses.

Consistent

with the two companies’ past practices, Comanche and CSP operated pursuant to

an oral agreement and did not have a written contract until after CSP completed

the earthwork on the building pad. It is

undisputed between Comanche and CSP that they both understood and agreed that

CSP’s work was not supposed to conform to the original plans and

specifications. Comanche and CSP did not

discuss indemnity or specify a set price at the time of the oral agreement. [2] Nor does the record show that they discussed

whether their oral agreement was subject to a subsequent written

agreement.

CSP

completed the earthwork. On May 21, CSP sent

an invoice to Comanche and on June 24, Comanche cut a check for the amount

invoiced. On June 25, CSP’s president,

James Stokley, executed a sworn application and certificate for payment in

which he stated that “the Work covered by this Application for Payment has been

completed in accordance with the Contract Documents.” Before Comanche tendered the check to CSP,

Comanche’s vice-president, Chris Parrack, signed and sent a written

“subcontract agreement” to CSP. The

subcontract agreement stated that Comanche would provide all of the materials,

equipment, and labor needed for the project’s earthwork “in accordance with the

Drawings and Specifications prepared by Jim Gwen Architects.” The agreement also required CSP to obtain any

insurance necessary or incidental to the completion of its work and contained

an indemnity clause which read:

7. [CSP] agrees to indemnify and hold [Comanche]

and [Child Advocates] wholly harmless from any damages, claims, demands or

suits by any person or persons, arising out of or resulting from the execution

of the work provided in this subcontract or occurring in connection therewith,

excluding liability for negligence of [Comanche] or [Child Advocates] except in

connection with general supervision of work performed by [CSP].

Finally, the agreement contained a

merger clause stating in capital letters, “ALL NEGOTIATIONS AND AGREEMENTS

PRIOR TO THE DATE OF THIS AGREEMENT NOT INCLUDED HEREIN ARE HEREBY

VOIDED.”

Stokely

signed the subcontract agreement on behalf of CSP on July 13. Comanche did not tender payment to CSP until

after Stokely signed the contract.

Stokley testified in his affidavit that Comanche informed him that “the

only purpose” for the written subcontract was so Comanche ‘had a written

document in its file relating to its payment” of CSP’s invoice. Both Parrack and Stokley testified that

Comanche typically required CSP to sign a written, form subcontract agreement

before Comanche paid for the work performed.

Both also testified that these written agreements were generally signed

after CSP completed its work. Parrack

testified that the form subcontract agreements always included an indemnity

provision of some kind.

Stokley

testified that he never read the entirety of the form agreements; he typically

only read the terms regarding the price.

He further testified that the parties had never discussed indemnity

until the issue arose in this dispute and that he does not understand how

indemnity operates.

Child Advocates sued Comanche over construction problems

discovered after the building was completed and the trial court directed the

parties to arbitrate. The arbitrator found that “[Comanche] breached

the agreement with Child Advocates to construct the under slab building pad in

accordance with the plans and specifications and Comanche, through its

subcontractor, [CSP], negligently constructed the under slab building pad

resulting in subsequent damage to tangible property of Child Advocates.” The arbitrator awarded construction costs,

attorney’s fees, prejudgment interest, and arbitration costs for Child

Advocates and against Comanche. Audubon,

as Comanche’s insurance carrier, paid $296,360 for Comanche’s construction

costs and prejudgment interest damages.

Audubon subsequently filed this action against Comanche’s subcontractor,

CSP, for contractual indemnity and breach of contract to recover the damages

paid.

Procedural Background

Audubon and CSP filed cross-motions for traditional summary

judgment. Audubon contended that it was

entitled to contractual indemnity as a matter of law. The trial court denied Audubon’s motion. CSP filed its summary judgment motion two

years after the denial, contending that the indemnity clause was unenforceable

because it was not supported by consideration, among other grounds. The trial court denied CSP’s motion in August

2009. Three months later, Audubon filed

its Sixth Amended Petition.

The trial court set the case for trial on March 9,

2010. The day before the trial setting,

Audubon non-suited several claims against CSP so that only the indemnity and

breach of contract claims remained. [3] At the March 9 trial setting, the trial court

requested additional briefing on the indemnity issue. CSP and Audubon submitted additional briefs,

and the trial court had another hearing on March 19. At the hearing, the trial court withdrew its 2009

denial of CSP’s traditional summary judgment motion and granted the motion. Audubon timely appealed the trial court’s

ruling on both summary judgment motions.

Standard of Review

We review a trial

court’s ruling on a summary judgment de novo.

Travelers Ins. Co. v. Joachim , 315 S.W.3d 860, 862 (Tex. 2010) . If a trial court grants summary judgment

without specifying the grounds for granting the motion, we must uphold the

trial court’s judgment if any of the grounds are meritorious. Beverick

v. Koch Power, Inc. , 186 S.W.3d 145, 148 (Tex. App.—Houston [1st Dist.]

2005, pet. denied). When, as here, the parties file cross - motions for summary

judgment on overlapping issues,

and the trial court grants one motion and denies the other, we review the summary

judgment evidence supporting both motions and “render the judgment that the

trial court should have rendered.” FM

Props. Operating Co. v. City of Austin , 22 S.W.3d 868, 872 (Tex. 2000).

Under the traditional standard for summary judgment, the movant

has the burden to show that no genuine issue of material fact exists and that

the trial court should grant judgment as a matter of law. See Tex. R. Civ. P. 166a(c); KPMG Peat

Marwick v. Harrison Cnty. Hous. Fin. Corp. , 988 S.W.2d 746, 748 (Tex. 1999). The motion must state the specific grounds

relied upon for summary judgment. See Tex.

R. Civ. P. 166a(c) . A defendant moving for traditional

summary judgment must conclusively negate at least one essential element of

each of the plaintiff’s causes of action or conclusively establish each element

of an affirmative defense. When

reviewing a summary judgment motion, we must (1) take as true all evidence

favorable to the nonmovant and (2) indulge every reasonable inference and

resolve any doubts in the nonmovant’s favor.

Valence Operating Co. v. Dorsett , 164 S.W.3d 656, 661 (Tex. 2005); Provident Life Accid. Ins.

Co. v. Knott , 128 S.W.3d

211, 215 (Tex. 2003).

Valid and Enforceable

Subcontract Agreement

In its first issue,

Audubon contends that the trial court erred in granting CSP’s traditional

summary judgment motion because the subcontract agreement was valid and

enforceable. CSP asserts that the

subcontract agreement was unenforceable because it had already completed

performance when the parties signed the contract, and therefore, the written

agreement and its additional terms were not supported by consideration. Audubon responds that CSP’s lack of

consideration defense is barred by the parol evidence rule and merger doctrine

and, alternatively, that the subcontract agreement was supported by

consideration. [4]

A. Parol Evidence Rule

Audubon contends that the parol evidence rule and the related

doctrine of merger prevent this court from considering CSP’s lack of

consideration claim because it would require looking outside the four-corners

of the written subcontract agreement. “ The parol evidence rule provides that the

terms of a written contract cannot be contradicted by evidence of an earlier,

inconsistent agreement.” Baroid Equip., Inc. v. Odeco Drilling, Inc. ,

184 S.W.3d 1, 13 (Tex. App.—Houston [1st Dist.] 2005, pet. denied). The application of

the parol evidence rule is a question of law that we review de novo. DeClaire

v. G & B McIntosh Family Ltd. , 260 S.W.3d 34, 45 (Tex. App.—Houston

[1st Dist.] 2008, no pet.). The rule particularly applies when the

written contract includes a merger clause or similar language. Baroid

Equip. , 184 S.W.3d at 13 .

We may consider parol evidence, however, “to show want or

failure of consideration, and to establish the real consideration given for an

instrument.” DeLuca v. Munzel , 673 S.W.2d 373, 376 (Tex. App.—Houston [1st

Dist.] 1984, writ ref’d n.r.e.). See also Restatement (Second)

of Contracts §§ 213 cmt. d, 214(d) (1981). We may consider parol evidence to

determine if consideration exists “even though the parties have reduced their

agreement to a writing which appears to be a completely integrated

agreement.” Restatement (Second) of Contracts §

218(2). We may also consider parol

evidence to determine whether the parties intended a written agreement as a

memorialization of their agreement (and therefore only had one contract) or a

modification of the prior oral contract (and therefore had two contracts, each

of which needed independent consideration as discussed below). See id.

at § 210(3) (“Whether an agreement is completely or partially integrated is to

be determined by the court as a question preliminary to determination of a

question of interpretation or to application of the parol evidence rule.”); Mark K. Glasser & Keith A. Rowley, On Parol: The Construction and

Interpretation of Written Agreements and the Role of Extrinsic Evidence in

Contract Litigation , 49 Baylor L.

Rev. 657 , 705–707 (1997).

We therefore reject

Audubon’s assertion that we cannot consider parol evidence for the limited

purpose of determining CSP’s lack of consideration defense.

B. Consideration

Audubon contends

that it presented evidence showing that the subcontract agreement was in fact

supported by consideration. Audubon

specifically asserts, among other grounds, that the course of dealing between

the parties demonstrates that the execution of a subsequent written subcontract

agreement was a term of all the oral agreements between the parties through

their many years of collaboration.

CSP and Audubon disagree

on what the subcontract agreement represents — a modification of the oral agreement

between Comanche and CSP requiring independent consideration or a written

memorialization of the parties’ oral agreement fully contemplated as an

accepted part of their transactions over the years. If the terms of a subsequent written contract

differ from what the parties intended in their original oral agreement — i.e., if the

written contract modified the agreed upon terms — the written contract requires new

consideration. Hathaway v. Gen. Mills, Inc. , 711 S.W.2d 227 , 228–29 (Tex. 1986); Walden v. Affiliated Computer Servs. , 97 S.W.3d 303, 314 (Tex.

App.—Houston [14th Dist.] 2003, pet. denied).

Whether a contract has been modified depends on the parties’ intentions

and is a question of fact. Hathaway , 711 S.W.2d at 228–29; Ghidoni v. Stone Oak, Inc. , 966 S.W.2d

573 , 580–81 (Tex. App.—San Antonio 1998, pet. denied) (holding whether document

constituted modification of prior lease agreement was fact issue properly

presented to jury); Williams v. L.M.S.C.,

Inc. , No. 01-03-00924-CV, 2005 WL 2469876 , at *6 (Tex. App.—Houston [1st

Dist.] Oct. 6, 2005, pet. denied).

On the other hand, if

the written contract is merely the parties’ written memorialization of their

oral agreement, or if the other “form” terms are to be included in the written

memorialization based on the parties’ understanding and intent, no separate

consideration is required. Parties may

enter into an oral contract with the understanding that they will later execute

a formal writing that memorializes their agreement. See

Foreca, S.A. v. GRD Dev. Co. , 758 S.W.2d 744, 745 (Tex. 1988); Murphy v. Seabarge, Ltd. , 868 S.W.2d

929 , 933–34 (Tex. App.—Houston [14th Dist.] 1994, writ denied) (“Actions may

manifest an intent to be bound to an agreement, even though the parties may

expressly provide a formal contract will be executed in the future.”); Cothron Aviation, Inc. v. Avco Corp. ,

843 S.W.2d 260 , 263–64 (Tex. App.—Fort Worth 1992, writ denied). Whether they intend to be bound, with or

without the execution of a final written contract, is normally a question of

fact for the jury. Foreca ,

758 S.W.2d at 745 (quoting A. Corbin, Corbin on Contracts

§ 30 at 97 (1963)).

See also Murphy , 868 S.W.2d at 933–34 (“ Whether the parties intended to be bound in the absence

of the execution of a contemplated final written agreement is a question of

fact”) ; Cothron , 843 S.W.2d at 263–64 (“Parties rarely

express a direct intention as to the moment when

they conceive themselves to be bound by a contract . . . . As a consequence intention is usually an

inference to be drawn by the fact finder from other facts and circumstances in

evidence.”) (quoting Simmons & Simmons

Constr. Co. v. REA , 286 S.W.2d 415, 417 (Tex. 1995)) .

The parties may enter into an oral agreement regarding certain preliminary

terms, but intend to be bound only if they reach an agreement on a final

written document. Foreca , 758 S.W.2d at 745 .

The parties’ intent to be bound, or lack thereof, determines whether a

contract existed before the writing. See also Murphy , 868 S.W.2d at 933–34.

If Comanche and CSP

intended to be bound by their oral agreement and that agreement did not

contemplate the terms included in the parties’ subsequent written agreement,

the written subcontract modified the oral agreement and is not supported by

consideration. Alternatively, if the

parties entered into an oral agreement regarding certain preliminary terms but

intended to be bound only if they reached an agreement on a final written

document, or if the parties intended that their agreement incorporated the

terms in the “form” subcontract historically used by the parties, the written

subcontract was their only agreement and is supported by consideration.

The summary

judgment record does not establish the parties’ intentions as a matter of

law. Comanche and CSP had an extensive

course of dealing in that they worked together for over 10 years with Comanche supplying

75% to 80% of CSP’s business at the time of the Child Advocates’ project. Representatives of both CSP and Comanche

testified in their respective depositions that, before the Child Advocates

construction project, the parties routinely executed a written subcontract

agreement after CSP completed performance.

They used the form contract many times before the Child Advocates’

project and for years after the project.

Parrack, as Comanche’s vice-president,

further testified that the subcontract written agreements included indemnity

provisions similar to the one at issue here. [5] CSP did not dispute this evidence.

As the summary

judgment movant, CSP had the burden of conclusively showing that the written

subcontract constituted a modification requiring independent

consideration. It did not satisfy that

burden. The parties’ regular practice of

executing written contracts containing indemnity provisions after CSP’s

performance is some evidence that, at the time of their oral agreement, the

parties intended that they would memorialize their agreement in a written

contract containing an indemnity provision, and therefore no additional

consideration was necessary. The only

evidence CSP advanced was the uncontested testimony that the parties did not

discuss the indemnity provision at the time of the oral contract. But that evidence alone does not conclusively prove that, at the time

of the oral agreement, the parties intended that their oral agreement would be

binding and did not intend that it include the “form” contract terms adopted by

the parties in previous transactions. CSP also did not conclusively prove the

parties’ subjective intentions, and the circumstances here are not so

compelling that we can conclude that intent as a matter of law. CSP therefore did not prove that it was entitled

to judgment as a matter of law on the grounds of lack of consideration.

We sustain

Audubon’s first issue regarding lack of consideration.

C. Fair Notice

In the remainder of

its first issue, Audubon contends that the trial court erred in granting CSP’s

summary judgment motion because the indemnity clause is valid and

enforceable. CSP responds that the fair

notice requirements bar Audubon’s claim and that the language of the provision

excludes indemnity for claims by Child Advocates. [6] CSP further asserts that Audubon must

demonstrate fault on CSP’s part to trigger indemnity under the language of this

provision and no legal or factual basis exists to find CSP at fault.

1. Was Fair Notice Properly Before the Trial

Court?

Before we address

the merits of CSP’s fair notice contention, we must first address whether this

ground for summary judgment was before the trial court. This ground for summary

judgment is not contained in CSP’s summary judgment motion. It is, however, contained in its response to

Audubon’s summary judgment motion. Fair

notice also appears in its supplemental brief on indemnity filed three days

before the final summary judgment hearing.

Audubon responded to this contention in its own supplemental brief filed

two days before the summary judgment hearing.

Over six months later, two briefs were filed by the parties in response

to the trial court’s request at the pretrial conference on March 9.

We conclude that

the issue of fair notice was properly before the trial court. Pursuant to Texas Rule of Civil Procedure 166,

a trial court may dispose of legal issues during a pretrial conference. Walden , 97 S.W.3d at 322 .