Sanchez Oil v. Crescent Drilling ( 2021 )

Case: 20-20304 Document: 00515960066 Page: 1 Date Filed: 07/30/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
July 30, 2021
No. 20-20304
Lyle W. Cayce
Clerk
Sanchez Oil & Gas Corporation,
Plaintiff—Appellant,
versus
Crescent Drilling & Production, Inc.,
Defendant—Appellee.
Appeal from the United States District Court
for the Southern District of Texas
USDC No. 4:18-CV-2840
Before Jones, Clement, and Graves, Circuit Judges.
Edith H. Jones, Circuit Judge:
Sanchez Oil & Gas Corporation (“Sanchez”) was sued by a
subcontractor (claiming to be an “employee”) of a contractor for alleged
violations of the Fair Labor Standards Act. Such claims are becoming
ubiquitous in the oil patch. After unsuccessfully requesting indemnification
from Crescent Drilling & Production, Inc. (“Crescent”), which hired the
subcontractor, Sanchez filed a third-party complaint alleging breach of
contract for Crescent’s failure to indemnify Sanchez and failure to comply
with the FLSA. The district court denied Sanchez’s motion for summary
judgment and granted Crescent’s. We find material fact issues as to whether
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Langen was an “independent contractor” or otherwise exempt from the
FLSA, and as to whether Crescent unreasonably withheld consent to the
settlement. Accordingly, we REVERSE and REMAND.
I. Background
Though it arises out of a suit under federal labor law, the present
dispute is over the scope and meaning of a contract between two
sophisticated entities. Sanchez, a private company engaged in the
management of oil and natural gas properties, engaged Crescent to provide
wellsite consulting services relating to some of its operations. Accordingly,
the parties executed a Master Services Agreement (“MSA”) effective
August 26, 2016. The MSA was intended to “control[] and govern[]” all
services performed by Crescent for Sanchez. Having agreed, among other
things, to provide skilled labor, Crescent entered contracts with various
individuals for their consulting services, and dispatched them to the Sanchez
wellsites. Sanchez paid Crescent for services rendered and, in turn, Crescent
paid these subcontractors a percentage of that fee. 1
The MSA allocated risks and expenses between the parties.
Specifically, pursuant to Section 3.1, Crescent “at its own cost” was obliged
to “provide all labor [and] services . . . necessary to perform the Work.” 2
Sections 4.1.1 and 4.1.6 required Crescent, at its sole cost, risk, and expense,
to “[e]xamine and become familiar with the Site and all conditions and
1
For example, Sanchez may pay Crescent $500 for a day’s worth of labor by one
of its contractors. Crescent then pays that contractor $450 for the same day’s labor,
retaining 10% for itself.
2
Under MSA Section 2, the “Work” is “everything to be provided or performed
by [Crescent] from time to time under a particular Work Order.” A “Work Order” is
defined as “the direction from [Sanchez] to [Crescent] . . . to provide [Sanchez] with goods
or services at a specific time, place, and cost.”
2
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circumstances concerning such Work” and pay “for all labor and materials
furnished . . . for the Work.” Crescent also “warrant[ed] that the Work will
be completed in strict compliance with . . . applicable law.” MSA Section
6.1. Additionally, in Section 14.2, Crescent “represent[ed] and warrant[ed]
that it will comply with and will cause the Contractor Group to comply with
all Federal, State and local laws” including the Fair Labor Standards Act of
1938 (“FLSA”), 3 and agreed to “protect, defend, indemnify, and hold
harmless [Sanchez] from any and all claims resulting from [Crescent’s]
breach of this article.” 4 MSA Section 13.1 dictated that Crescent “shall at
all times be an independent contractor with respect to the Work, and no
member of the Contractor Group will be deemed to be the employee, agent,
servant, representative or invitee of [Sanchez].”
The MSA included detailed indemnity procedures in Sections 11.1–
10, which supplemented the indemnification duty related to the FLSA. To
obtain indemnification, Section 11.10 required the prospective indemnitee to
notify the other party about the underlying claim, relating specific details
about the claim and the provision(s) of the MSA implicated. In the event
indemnification stemmed from a third-party claim, notice was to be delivered
“as soon as practicable” and include copies of all papers served according to
that claim. Id. Section 11.10.1 offered the indemnitor the right to assume the
defense of the underlying claim, but failure to do so would require the
indemnitor to pay “such claims (including, reasonable costs of defense
incurred and any costs paid in connection with settlement or final judgment
3
Codified at 29 U.S.C. §§ 201–19.
4
The MSA’s Section 2 defines “claims” as “any and all claims, losses, damages,
demands, causes of action, judgments, lawsuits, proceedings, fines, penalties, awards,
costs, obligations, and liabilities of every kind and character . . . and all costs, expenses, and
fees related to investigation, settlement, defense, and litigation, including court costs,
attorney fees, and expert fees, arising out of, or related to, this Agreement.”
3
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with respect to such claims) that the Indemnified Party pays or becomes
liable for.” Notwithstanding the foregoing provision, the parties agreed, in
Section 11.10.3, not to settle or compromise any claims “without prior
written consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed.” But, if consent was unreasonably
withheld or delayed—“including as a result of the Indemnifying Party’s
belief that it has no indemnification obligations”—the claim could be settled
and the indemnified party could initiate litigation to determine whether
consent was, in fact, unreasonably withheld. Id.Against this backdrop, Kevin Langen became a subcontractor through
Crescent and provided services to Sanchez from September 2016 through
October 2017. 5 Langen performed a variety of roles, ranging from Production
Foreman to Flowback Supervisor. Crescent initially billed for Langen’s time
at a rate of $728 per day and incrementally increased to $900. 6 On
October 31, 2017, Langen was released “for poor job performance.” 7
On August 16, 2018, Langen sued Sanchez in federal court “to
recover unpaid overtime wages and other damages owed under the [FLSA]”
for himself and other workers like him. Langen alleged that he was
improperly classified as an independent contractor and that Sanchez was
actually his employer for purposes of the FLSA. Before filing, Langen
contacted Sanchez regarding the potential suit. Sanchez in turn notified
5
Langen initially began providing services for Sanchez in 2015 through another
company. After Sanchez and Crescent executed the MSA and Crescent became the prime
contractor, Langen contracted with Crescent and continued his work with Sanchez.
6
The parties do not dispute that Sanchez dictated the rate at which it would pay
Crescent for Langen’s work. Crescent, however, maintained some flexibility in the portion
of that rate passed on to Langen. At one point, Crescent reduced its fee from 12% to 11% in
an effort to keep the consultants happy.
7
During his term with Crescent, Langen earned well over $200,000.
4
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Crescent, “making a claim for indemnification under the relevant MSAs for
defense costs and any amounts paid in connection with settlement . . . or a
judgment in his favor.” Sanchez notified Crescent again on August 29,
shortly after Langen’s suit was filed, and “demand[ed] prompt and specific
payment from Crescent in accordance with its indemnification obligations to
Sanchez.”
Crescent refused to indemnify. Sanchez next filed a third-party
complaint against Crescent on September 14 in which it sought indemnity
and asserted that Crescent violated the MSA. Specifically, Sanchez alleged
in Count I that “Crescent [] agreed to indemnify Sanchez against any and all
claims resulting from its failure to comply with the FLSA . . . [and] [t]his
indemnification obligation extends to the claim asserted by Langen against
Sanchez.” Count II claimed that “Langen’s allegations implicate Crescent,
which allegedly breached the MSA by failing to comply with the FLSA with
respect to payments to Langen and other consultants.”
After some initial skirmishing, Crescent answered and disavowed any
duty to defend or indemnify, a position it has maintained throughout this
litigation. In the meantime, however, Langen and Sanchez entered into a
confidential settlement agreement, which the district court approved, and
Langen’s suit was dismissed with prejudice. The settlement acknowledged
a “bona fide and contested dispute,” and neither party conceded liability.
Crescent requested access to the terms of the settlement agreement, despite
continuing to deny any duty to indemnify, but was refused on the ground that
the terms were confidential. Nonetheless, progressing through discovery,
the litigation between Sanchez and Crescent continued. 8
8
Sanchez sought indemnification not only for the Langen settlement but also for
substantial attorneys’ fees it incurred defending the suit.
5
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Both sides moved for summary judgment. Sanchez sought summary
judgment, first, because Crescent agreed to pay for all labor at its sole risk
and expense yet violated numerous terms of the parties’ contract after
Sanchez incurred a “labor” cost related to defending and settling the FLSA
dispute. 9 Second, Sanchez claimed indemnity because Crescent “warranted
that it would comply with all applicable laws, specifically including the FLSA,
and agreed to indemnify [Sanchez] for claims arising from its failure to do
so.” Conversely, Crescent argued that summary judgment should be granted
in its favor because Crescent never violated the FLSA (though Sanchez may
have done so, according to Crescent); thus, the indemnity provision was
never triggered. Moreover, even if Langen was Crescent’s “employee,” he
fell within the FLSA’s highly compensated employee exemption, which
meant that Crescent was not required to pay him overtime wages. Crescent’s
coup de grâce was the allegation that Sanchez failed to comply with the
settlement procedures, obviating Crescent’s duty to indemnify.
The district court denied Sanchez’s motion and granted summary
judgment for Crescent. First, the court held that Sanchez’s claims for breach
under MSA sections 3.1, 4.1.6, 6.1, and 13.1 did not satisfy the Federal Rule
of Civil Procedure 8 standard because the Third-Party Complaint failed to
state specific allegations under those provisions of the MSA and instead
limited the breach of contract claim to the FLSA-related provision. The
pleadings thus failed to provide adequate notice to Crescent that the breach
of contract claim reached those other provisions. The court continued,
however, that even if those provisions had been properly pleaded, they would
still fail under the principle that specific contractual provisions control over
general ones. All four provisions describe Crescent’s duties in general terms
9
Sanchez further alleges that Crescent breached § 13.1 by taking the position that
Langen was Sanchez’s employee.
6
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while MSA § 14.2 directly addresses the FLSA, the key to this dispute. But
with respect to § 14.2, the court held, Sanchez failed to present evidence that
Crescent’s compensation of Langen violated the FLSA. Accordingly, the
court granted Crescent’s motion with respect to the breach of Section 14.2.
Rejecting the indemnity claim, the court also held that Sanchez
“failed to give Crescent notice of the proposed settlement with Langen and
failed to grant Crescent an opportunity to consent or object to that
settlement.” Subsequently, the court awarded Crescent, as prevailing party
under the MSA, “$391,544.50 in reasonable attorneys’ fees and $15,176.05
in recoverable costs.” Sanchez timely appealed.
II. Standards of Review
This court reviews a grant of summary judgment de novo. Renwick v.
PNK Charles, LLC, 901 F.3d 605, 611 (5th Cir. 2018). Summary judgment is
only appropriate if the pleadings and record demonstrate no genuine issue of
material fact, construing all justifiable inferences in favor of the nonmovant.
TIG Ins. Co. v. Sedgwick James, 276 F.3d 754, 759 (5th Cir. 2002) (citing
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249–50, 106 S. Ct. 2505, 2511
(1986)). A fact is “material” if it “might affect the outcome of the suit under
governing law.” Anderson, 477 U.S. at 248, 106 S. Ct. at 2510. An issue is
“genuine” if the evidence could allow a reasonable jury to return a verdict
for the nonmovant. TIG Ins., 276 F.3d at 759. If the moving party makes this
initial showing, “the nonmovant must come forward with ‘specific facts’
showing a genuine factual issue for trial.” Id. (citations omitted).
“The interpretation of a contract—including whether the contract is
ambiguous—is a question of law” and this court reviews it de novo. McLane
Foodservice, Inc. v. Table Rock Rest., L.L.C., 736 F.3d 375, 377 (5th Cir. 2013).
If the contract is ambiguous, “the district court’s findings of fact as to the
intent of the parties are reviewed for clear error.” Id.7
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III. Discussion
Sanchez contends on appeal that the district court erred in (1) limiting
the breach of contract claim exclusively to MSA § 14.2; (2) finding no
material fact question regarding Crescent’s alleged breach of § 14.2; and
(3) concluding that no indemnification was owed because Sanchez failed to
provide notice of the settlement. We address each argument in turn.
A. Scope of the Breach of Contract Claim
The district court held that Sanchez failed to adequately plead breach
of the MSA’s sections 3.1, 4.1, 6.1 and 13.1, and that the parties’ dispute must
be channeled through the FLSA-specific § 14.2. Sanchez contends it should
be allowed to litigate breaches of the broader provisions. We hold that
Sanchez’s pleadings adequately encompass all relevant contract provisions
in this case. But as the district court also noted, basic rules of contract
interpretation prevent the other sections from affording Sanchez relief.
Federal procedure requires “a short and plain statement of the claim
showing that the pleader is entitled to relief; and . . . a demand for the relief
sought.” FED. R. CIV. P. 8(a)(2)–(3). “The purpose of this requirement is
‘to give the defendant fair notice of what the . . . claim is and the grounds
upon which it rests.’” Wooten v. McDonald Transit Assocs., Inc., 788 F.3d
490, 498 (5th Cir. 2015) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,
555, 127 S. Ct. 1955, 1964 (2007) (internal quotations omitted)). While
litigants should, when possible, identify specific contractual provisions
alleged to have been breached, Rule 8 does not require that level of
granularity. 10 “So long as a pleading alleges facts upon which relief can be
10
See, e.g., Innova Hosp. San Antonio, Ltd. P’ship v. Blue Cross & Blue Shield of Ga.,
Inc., 892 F.3d 719, 731–32 (5th Cir. 2018) (rejecting the district court’s conclusion that “to
8
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granted, it states a claim even if it ‘fails to categorize correctly the legal theory
giving rise to the claim.’” Homoki v. Conversion Servs., Inc., 717 F.3d 388,
402 (5th Cir. 2013) (quoting Dussouy v. Gulf Coast Inv. Corp., 660 F.2d 594,
604 (5th Cir. 1981)).
Sanchez pled sufficient facts to satisfy Rule 8 with respect to claimed
breaches of several material MSA contract provisions. The Third-Party
Complaint states that “[t]he MSA . . . would control and govern all services
performed by Crescent,” and “Sanchez retained Crescent to perform work
in exchange for Sanchez’s promise to pay for those services.” The pleading
further states that Crescent was obliged “to act as an independent contractor
to Sanchez” and assured Sanchez “that none of its subcontractors or
employees ‘will be deemed to be the employee, agent, servant,
representative, or invitee of [Sanchez].’” It states that Langen performed
services for Sanchez on behalf of Crescent and Sanchez paid Crescent for
Langen’s services. Finally, Count II incorporates all previous allegations and
declares that Crescent “allegedly breached the MSA by failing to comply
with the FLSA with respect to payments to Langen and other consultants.”
The Third-Party complaint provided sufficient notice that Crescent’s alleged
failure to comply with the FLSA may have breached one or more provisions
of the MSA, and Crescent was not prejudiced by the fact that the complaint
specifically referenced Section 14.2 but only generally alleged other MSA
provisions. 11
properly plead a breach of contract claim, a plaintiff must identify a specific provision of
the contract that was allegedly breached”).
11
That the pleading was sufficient in this contract dispute, governed by an
agreement neither exceedingly long nor rife with addenda, exhibits, and multiple parts,
does not mean that Rule 8 would necessarily be satisfied by general allegations involving
more complex contracts.
9
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That Crescent was not prejudiced is reinforced by the facility with
which the district court interpreted the parties’ contract. This MSA is
governed by Texas law. “In construing a contract under Texas law, courts
must examine and consider the entire writing and give effect to all provisions
such that none are rendered meaningless.” 12 Gonzalez v. Denning, 394 F.3d
388, 392 (5th Cir. 2004) (internal quotations and citations omitted). “[N]o
one phrase, sentence, or section [of a contract] should be isolated from its
setting and considered apart from the other provisions [and] a specific
contract provision controls over a general one.” Pathfinder Oil & Gas, Inc. v.
Great W. Drilling, Ltd., 574 S.W.3d 882, 889 (Tex. 2019) (internal quotations
omitted).
Under Texas law, the more general provisions Sanchez now seeks to
rely on are foreclosed by the rule that the specific Section 14.2 controls over
other provisions’ more general application. Section 6.1, for instance,
warrants that Crescent’s work “will be completed in strict compliance with
the requirements or specifics in this Agreement . . . and applicable law.” The
detailed requirements of Section 14.2, however, govern Crescent’s duty to
comply with the FLSA and to indemnify Sanchez for failing to do so. Section
14.2 therefore supersedes § 6.1 with respect to the FLSA. 13
Sections 3.1 and 4.1.6 require Crescent to “furnish all labor” at its own
cost and pay “for all labor and materials furnished by the Contractor Group
12
See, e.g., Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994) (“When
construing a contract, the court’s primary concern is to give effect to the written expression
of the parties’ intent. This court is bound to read all parts of a contract together to ascertain
the agreement of the parties. The contract must be considered as a whole. Moreover, each
part of the contract should be given effect.” (internal citations omitted)).
13
Even assuming Sanchez could proceed under § 6.1, the only law alleged to have
been violated is the FLSA, rendering § 6.1 and § 14.2 coextensive. Finding a breach of one
would necessitate finding a breach of the other.
10
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for the Work and the charges of all subcontractors” “at its sole cost, risk and
expense.” In this regard, Sanchez asserts that “[i]n defending and settling
Langen’s FLSA overtime claims . . . [it] incurred expenses and costs of
labor.” But Section 14.2 precludes such a broad reading. “Claims” are
defined by MSA Section 2 to include “all costs, expenses, and fees related to
investigation, settlement, defense and litigation . . . arising out of, or related
to, [the MSA].” Effectively, Sanchez attempts to recast as a “labor cost”
what the MSA more relevantly defines as a “claim.” In regard to its duty to
assure FLSA compliance, Crescent is required to “protect, defend,
indemnify, and hold harmless [Sanchez] from any and all claims resulting
from [Crescent’s] breach of [§ 14.2].” These two more general provisions,
when examined, do not create additional claims beyond that authorized by
Section 14.2.
Section 13.1 yields to similar textual analysis. Addressing the legal
relationship between the contracting parties, it states that Crescent “shall at
all times be an independent contractor” and “no member of the Contractor
Group will be deemed to be an employee, agent, servant, representative or
invitee of [Sanchez].” Crescent’s “Contractor Group” includes, among
others, its “subcontractors of every tier.” This section plainly has broad
application beyond FLSA compliance. 14 For present purposes, however, the
provision replicates Crescent’s assurance that it will maintain the
“independent contractor” status of its “subcontractors,” one of whom was
14
Further, contrary to Crescent’s argument, the syntax of § 13.1 does not render
the provision merely “aspirational.” The first clause of § 13.1 expressly uses the duty
creating language of “shall,” which places an obligation on Crescent to ensure its own
independent contractor status. And the second clause also contains duty creating
language—“will be deemed.” See BRYAN A. GARNER, GARNER’S DICTIONARY OF LEGAL
USAGE 954 (3d ed. 2011) (noting that “‘will’ may express both parties’ obligations”).
11
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Langen, and such status means that Langen should have been exempt from
the FLSA.
From the standpoint of breach, however, Sections 13.1 and 14.2
address different grounds to protect Sanchez. For Sanchez’s defense and
settlement of Langen’s FLSA suit, Section 14.2 prescribes the precise
remedy: costs of defense and indemnification based on proof that Langen’s
claims “result[ed] from [Crescent’s] breach of this article.” This specific
provision supersedes the more general Section 13.1. A claim by Sanchez
under Section 13.1 would reach a different scenario. Suppose Crescent had
misclassified Langen’s status and, following a lawsuit, been required to pay,
e.g., double damages for overtime pursuant to the FLSA. And then suppose
Crescent had attempted to bill Sanchez for the entire debacle. In that case,
Sanchez could sue (or counter-sue) Crescent for breach of Section 13.1.
The district court, in sum, construed Sanchez’s pleading too
narrowly, but its alternative exposition of the implicitly pled contractual
provisions was correct. Sanchez is limited to the indemnification remedy for
breach of Section 14.2.
B. Sanchez’s Claims for Breach of Contract & Indemnification
The court held that, based on the language of Section 14.2, Sanchez is
entitled to indemnification only if it first “establish[es] that Langen’s
services were provided in violation of the FLSA.” But according to the court,
there had been no showing “that either party violated the FLSA with respect
to Langen,” and “Sanchez . . . presented no evidence that Crescent failed to
comply with the FLSA in violation of Section 14.2 of the MSA.” The court
went on to reject Sanchez’s claim for the additional reason that it failed to
comply with the MSA’s procedural terms of indemnity. Sanchez challenges
both grounds for summary judgment.
12
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1. Crescent’s Alleged Breach of § 14.2
Crescent agrees that the MSA requires it to comply with the FLSA
and to cause the Contractor Group to comply. Crescent claims that it
satisfied this obligation when it “properly” characterized Langen as an
independent contractor of Crescent and did not pay him overtime wages.
Section 14.2, as the district court explained, provides Sanchez with
indemnification from Crescent only “from any and all claims resulting from
[Crescent’s] breach of [its FLSA compliance duty].” Crescent would be
immunized from this provision if Langen’s compensation did not violate the
FLSA.
More boldly, Crescent contends, if there was any failed compliance
with the FLSA, it was Sanchez’s doing. Sanchez responds, reasonably, that
pursuant to the contract, Langen must either be an independent contractor
with respect to both Crescent and Sanchez, or of neither company; Sanchez
alone cannot have violated the FLSA.
“When a contract’s meaning is disputed, [the] primary objective is to
ascertain and give effect to the parties’ intent as expressed in the
instrument.” URI, Inc. v. Kleberg County, 543 S.W.3d 755, 763 (Tex. 2018).
The instrument is construed as a whole “‘according to its plain, ordinary,
and generally accepted meaning unless the instrument directs otherwise.’”
Pathfinder Oil & Gas, 574 S.W.3d at 888 (quoting URI, 543 S.W.3d at 764
(internal quotations omitted)).
In clarion terms, the MSA places the duty of paying Langen upon
Crescent. The parties’ agreement structures their relationship as follows:
Sanchez places a “Work Order” and Crescent completes the work and
invoices Sanchez at the agreed rates; Crescent pays for all labor and expenses
necessary to handle that work. MSA Sections 3.1, 4, 5. The MSA plainly
requires that the wages paid for the “Work” must comport with the FLSA,
13
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and Crescent is responsible to ensure this happens. 15 Accordingly, to
determine whether Langen’s claim “result[ed] from [Crescent’s] breach” of
Section 14.2, the inquiry is only whether Langen was entitled to overtime
wages paid by Crescent. 16 If he was not, then there was no breach.
Believing that Sanchez had produced no relevant evidence that
Crescent violated the FLSA, the district court denied summary judgment to
Sanchez. This was error. Sanchez offered evidence that Crescent took no
actions to comply with the FLSA besides classifying Langen internally as an
independent contractor. According to Sanchez, Langen was an “employee”
of Crescent for FLSA purposes based on the “economic reality” test, and
Crescent failed to make the legally required overtime payments. Sanchez’s
fact-intensive response to Crescent’s motion for summary judgment
15
Crescent argues that shifting Sanchez’s liability for the FLSA to Crescent
violates the “fair notice (or express negligence) doctrine.” This court has held that actual
knowledge of the indemnity provisions nullifies the fair notice doctrine. See Cleere Drilling
Co. v. Dominion Expl. & Prod., Inc., 351 F.3d 642, 647 (5th Cir. 2003) (discussing Dresser
Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 n.2 (Tex. 1993) (“The fair notice
requirements are not applicable when the indemnitee establishes that the indemnitor
possessed actual notice or knowledge of the indemnity agreement.”)). Here, the MSA
required Crescent to furnish and pay all labor, comply with the FLSA, and indemnify
Sanchez for any breach of its covenant to comply. Crescent doesn’t claim lack of actual
knowledge of these provisions. Further, the indemnity clause in § 14.2 is bolded and offset
in all capital typeface. Together, these undercut any argument that FLSA indemnity is void
under the fair notice doctrine.
16
Crescent argued at summary judgment that even if Langen was an employee, he
still was not entitled to overtime wages because he fell within the FLSA’s highly
compensated employee exemption. 29 C.F.R. § 541.601(a); see also Faludi v. U.S. Shale
Sols., L.L.C., 936 F.3d 215, 219 (5th Cir. 2019). Thus, Crescent never breached the MSA.
The district court did not rule on that issue, which is currently pending before this court en
banc. See Hewitt v. Helix Energy Sols. Grp., Inc., 983 F.3d 789 (5th Cir. 2020), reh’g en banc
granted, opinion vacated, No. 19-20023, 2021 WL 869058 (5th Cir. Mar. 9, 2021).
14
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thoroughly addresses each factor of that test 17 and identifies material fact
disputes. Crescent vigorously defends an independent contractor
relationship with Langen under the same test. The parties’ clash illustrates
an obviously fact-intensive inquiry, which the district court failed to explore.
See Hobbs v. Petroplex Pipe & Constr., Inc., 946 F.3d 824, 829 (5th Cir. 2020)
(reviewing a bench trial determination of employee status and explaining that
a “district court’s findings as to the [economic realities test] factors are
‘based on inferences from fact and thus are questions of fact’” (citation
omitted)). Because Crescent’s obligation to indemnify Sanchez turns in part
on Langen’s FLSA status, material questions of fact remain as to whether
Langen’s suit “resulted from” Crescent’s “breach” of its FLSA obligations,
as provided in Section 14.2.
2. Crescent’s Indemnity Obligation
Having failed to examine the fact disputes underlying the FLSA issue,
the district court granted summary judgment for Crescent on the basis that
Sanchez did not comply with the MSA’s indemnification procedures.
Section 11.10.3, the court held, includes a condition precedent to indemnity,
such that Sanchez could only unilaterally settle Langen’s claim if Crescent
“unreasonably withheld or delayed its consent.” Since Sanchez never gave
Crescent access and an opportunity to consider the Langen settlement’s
terms, the court reasoned, “Crescent did not ‘withhold[] or delay[] its
consent’” unreasonably.
17
“Those ‘five non-exhaustive factors’ include: ‘(1) the degree of control
exercised by the alleged employer; (2) the extent of the relative investments of the worker
and the alleged employer; (3) the degree to which the worker’s opportunity for profit or
loss is determined by the alleged employer; (4) the skill and initiative required in
performing the job; and (5) the permanency of the relationship.’” Parrish v. Premier
Directional Drilling, L.P., 917 F.3d 369, 379 (5th Cir. 2019) (quoting Hopkins v. Cornerstone
Am., 545 F.3d 338, 343 (5th Cir. 2008)).
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No. 20-20304
Sanchez challenges this ruling on three grounds: (1) the court
improperly construed § 11.10.3 as a condition precedent instead of a “mere
covenant”; (2) Crescent suffered no prejudice and therefore cannot avoid its
indemnity obligations due to lack of notice; and (3) Sanchez provided
Crescent with sufficient notice and opportunity to participate in the
settlement. We need only consider the first ground.
Generally, “[c]onditions are not favored in the law; thus, when
another reasonable reading that would avoid a forfeiture is available, [the
court] must construe contract language as a covenant rather than a
condition.” PAJ, Inc. v. Hanover Ins. Co., 243 S.W.3d 630, 636 (Tex. 2008).
“But if . . . a legitimate condition precedent exists, it must be either met or
excused before the obligation that hinges on the condition may be enforced.”
Conn Credit I, L.P. v. TF LoanCo III, L.L.C., 903 F.3d 493, 502 (5th Cir.
2018) (citing Texas cases). To determine whether a condition precedent
exists, the entire contract must be interpreted to ascertain the intent of the
parties. Criswell v. European Crossroads Shopping Ctr., Ltd., 792 S.W.2d 945,
948 (Tex. 1990). “In order to make performance specifically conditional, a
term such as ‘if’, ‘provided that’, ‘on condition that’, or some similar phrase
of conditional language must normally be included.” Id. If that conditional
language is lacking, the terms will “be construed as a covenant in order to
prevent a forfeiture.” Id.Section 11.10.3 of the MSA states that:
Each Indemnified Party agrees that it will not settle or
otherwise compromise any claims to be indemnified under this
Agreement without prior written consent of the Indemnifying
Party, which consent shall not be unreasonably withheld or
delayed. If the Indemnifying Party unreasonably withholds or
delays its consent (including as a result of the Indemnifying
Party’s belief that it has no indemnification obligations under
this Agreement), then the Indemnified Party may settle or
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otherwise compromise the applicable claims in its sole
discretion, and the Indemnified Party shall be entitled to
initiate litigation against the Indemnifying Party to determine
whether the Indemnifying Party unreasonably withheld
consent . . . .
We agree with Sanchez that, by its terms, no conditional language in
this provision frames a precondition for Sanchez’s recovery. This paragraph
principally obliges the indemnifying party, Crescent, not unreasonably to
withhold or delay its grant of prior written consent. The “if” clause speaks
to what Sanchez, the indemnified party, may do if the indemnifying party
unreasonably withholds consent. Sanchez may then settle unilaterally and
file suit for a definitive decision on the indemnifying party’s
unreasonableness. This is the opposite of setting up a condition precedent
against Sanchez. It is a structure for permitting reasonably settled claims to
be indemnified only after a lawsuit. Moreover, the prospective indemnitor
may be guilty of unreasonably having withheld or delayed consent even if it
believes “that it has no indemnification obligations under this Agreement.”
Nowhere does the MSA state that indemnity is owed only “if” or
“provided that” or “on condition that” the party claiming indemnification
adheres to the listed protocols; nowhere does it foreclose Sanchez’s right to
indemnity solely or expressly because of Sanchez’s failure to inform Crescent
of the settlement terms. The absence of such language is “probative of the
parties[’] intention that a promise be made, rather than a condition
imposed.” Criswell, 792 S.W.2d at 948. “When no conditional language is
used and another reasonable interpretation of the contract is possible, ‘the
terms will be construed as a covenant in order to prevent a forfeiture.’” Solar
Applications Eng’g, Inc. v. T.A. Operating Corp., 327 S.W.3d 104, 109 (Tex.
2010) (quoting Criswell, 792 S.W.2d at 948). The district court erred in
construing Section 11.10.3 as a condition precedent. Instead, that provision
must be read as a covenant. “Breach of a covenant may give rise to a cause
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of action for damages, but does not affect the enforceability of the remaining
provisions of the contract unless the breach is a material or total breach.” Id.
at 108.
In this case, it is undisputed that Sanchez notified Crescent of
Langen’s claim before Langen filed suit; it notified Crescent immediately
after Langen filed suit; and it declined to inform Crescent of the settlement
terms only after Crescent had demanded to be informed while also steadfastly
denying any liability under the MSA. 18 Contrary to the district court’s
implication that Crescent was “deprived” of fair notice of the settlement
(thus abrogating its duty to indemnify), it seems quite plausible that Crescent
“unreasonably withheld or delayed” assent based solely on a belief that it had
no liability, which is not a basis under the MSA for rejecting indemnity.
There is a material fact issue concerning Crescent’s liability under
Section 11.10.3 governing its procedural duty to indemnify. This issue
requires further exploration in light of remand on the question whether
Crescent breached its FLSA duty to Sanchez under § 14.2.
IV. Conclusion
Our reading of the parties’ MSA holds that, for Sanchez to obtain
indemnification for the Langen settlement and its defense costs for that
lawsuit, Sanchez has to prove that Langen’s suit “resulted from” Crescent’s
“breach” of its duty to pay Langen in accord with the FLSA. It is also
necessary to decide whether Crescent unreasonably withheld consent to the
Sanchez-Langen settlement. Material fact issues exist as to both of these
aspects of the relevant FLSA indemnity provisions.
18
Exactly why the settlement was held confidential is not explained in this record.
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Based upon these conclusions, and for the reasons further stated
above, the judgment is REVERSED and the case REMANDED for
further proceedings.
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