Rexnord v. RHI - A Lesson On The Successors And Assigns Clause
The first district has upheld an arbitrator’s decision regarding the implication of an indemnity provision and given us a useful reminder that some rote contract language is actually important.
Undoubtedly in your contracts you’ve seen language binding or implicating those subsidiaries, affiliates, successors and assigns – some have argued that the language be removed from agreements or given their own clauses. In Rexnord Industries, LLC v. RHI Holdings, and The Fairchild Corporation (1st Dist, Doc. No. 1-08-0562) it turned out to make quite a bit of difference.
In Rexnord, two parties agreed to an arbitration of the percentage of a $1.8 million settlement each was responsible for. The settlement was for an environmental claim against Rexnord. Rexnord had previously been owned by RHI, was sold to another company (A), which was acquired by yet another company (B) and was sold before the arbitration to yet another company (C).
The original sale agreement between RHI and company A obliged RHI to indemnify:
“[company A] its affiliates, subsidiaries, successors and assigns from "any and all losses, liabilities, claims, damages, *** costs, etc." relating to RHI's ownership and operation of the property before the spinoff date, "so long as these ‘Losses' arise out of or are in any way related or connected to any Environmental Law; result from any claim by any governmental or private party arising out of or in any way related or connected to any Environmental Law; or result from the generation, use, handling, storage, transport, disposal, release or threatened release of any Materials of Environmental Concern." The indemnity obligation created by the agreement applied "only to the excess of (x) Losses over (y) the sum of amounts collected by Purchaser or Rexnord from third parties." (Slip Op. at 2. emphasis added.)
An arbitrator determined that RHI was responsible for 90% and ordered that it pay Rexnord for that 90% and some other damages. It also determined that company B was an indemnitee under the agreement between RHI and company A. RHI asked a circuit court to vacate the award and the circuit court declined to do so. RHI then appealed.
On appeal, RHI argued that because company B had paid the $1.8 million it was not obliged to pay because company B was a “third party” by virtue of being a subsequent purchaser of company A and by having sold to company C prior to the arbitration. RHI also argued that the arbitrator should not have considered the position of company B as an indemnitee because company B was not a party to the arbitration.
The appellate court disagreed and upheld the award. In doing so, it found that:
- The arbitrator was correct in considering company B as an affiliate or successor.
- The clause for indemnification did not exclude amounts reimbursed by owners or affiliates.
- The arbitrator had the power to consider company B’s status because the issue was raised by Rexnord and RHI in the arbitration.
- Company B was a “successor” under the agreement even though it had subsequently sold Rexnord to company C.
This is a lesson for contracting parties. Even though some language may appear rote or inapplicable, understanding the effect of that language in the context of the deal and knowing the obligations it imposes may help in your transactions and knowing what a court will do can add certainty to the language you are choosing. The inclusion or exclusion of any contractual clause is a determination best made by the parties after considering the eventualities, risks and obligations they wish to plan for.
