Importance Of Conditions Precedent To Indemnification Demands Highlighted In Pipeline Case

In 1994, an oil and gas company (Company A) sold a pipeline to Company B, which has owned and operated it since.  During the sale, the companies entered into a Purchase and Sale of Assets Agreement whereby the parties agreed that any contamination occurring before the agreement’s closing date would be Company A‘s responsibility and any contamination after the closing date would be Company B‘s responsibility.  They also agreed that if the impact of any contamination occurring after the closing date exceeded a certain threshold, that Company B would bear responsibility for both the pre-closing and post-closing contamination.  Under the agreement, Company B also was required to promptly notify Company A of any new contamination and provide certain compliance information to Company A at Company A‘s request.

Company A brought suit against Company B alleging violation of various federal and state laws governing the discharge of petroleum and for various contract- and tort-based theories after Company A allegedly incurred more than $30 million in remediating the area.  On Tuesday, the U.S. District Court for the District of Maryland ruled on Company B‘s motion to dismiss.

The court dismissed Company A‘s cost recovery and contribution claims under the Oil Pollution Act because the oil was discharged into the groundwater and not a “navigable water.”  The court agreed with those courts holding that oil discharges into groundwater, even if potentially connected to navigable waters (as was the case here), do not give rise to claims under the Oil Pollution Act.   The court allowed the breach of contract claims to continue and rejected Company B‘s argument that Maryland’s three-year statute of limitations barred the claim.  The court concluded that the continuing harm doctrine applied where Company A alleged notice of oil discharges starting in 1997, then again in 1999, 2009, and 2011, and that the harm continues to be ongoing.  Of note, however, is that Company A‘s damages are limited to those occurring within the three-year period prior to filing the action.

Of note is the court’s ruling on Company A‘s claim for indemnification based on its remediation of the contamination.  The court stated that the parties’ agreement created a condition precedent to bringing an indemnity claim that Company A failed to meet.  Specifically, the agreement provided that a party seeking indemnification “shall notify the party obligated to provide indemnification . . . with reasonable promptness of its discovery of any matter.”  Based on the complaint, Company A discovered contamination starting in 1997 but did not provide Company B with any notice about the alleged contamination until July 2014.  The court, therefore, concluded that Company A‘s indemnification claim was potentially valid only for costs from July 2014 onward.

The court also dismissed the negligence claims because of the parties’ contractual relationship (the relationship did not fit within one of Maryland’s exceptions to allowing tort recovery where the parties’ relationship was based in contract).

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