To clarify divergent case law, Texas courts should adopt good faith as the necessary standard governing indemnity agreements. Texas court decisions limiting settlement of bond claims by sureties can be split into three categories: (1) those cases where indemnity agreements fail to vest authority in the indemnitee to settle claims or require a good faith standard; (2) those expressly stating indemnitees have authority to settle claims in good faith; and (2) those expressly vesting a surety with exclusive rights to determine which bonded claims should be settled. Under the first line of cases courts apply common law indemnity principles requiring the indemnitee show settlements are both in good faith and reasonable considering the involved risk. In the second view, courts recognize a standard allowing surety discretion limited by fraud only. The final view abandons common law principles by limiting sureties only by improper motives and bad faith. Under the second and third views courts shield sureties by granting broad discretion in settling debts over the rights of defaulting principals. In these two scenarios, sureties could potentially disregard available facts that prove conduct by principals was justified in failing to complete contractual obligations by prioritizing claim settlement over the best interest of the principal. The Texas Supreme Court does not recognize that indemnity agreements alone create a fiduciary duty and do not impose a blanket common law duty of good faith in the surety context. Surety and principal rights are far from clear and potentially severe consequences may accompany a default. Parties need clear standards to operate, and Texas could eliminate confusion by recognizing a good faith standard in settlements extraneous of the language found in the indemnity agreement.
St. Mary's University School of Law
John C. Warren,
Setting the Limits in Texas Construction Law: A Look at the Surety's Limitations under Indemnity Agreements and Equitable Subrogation Comment.,
St. Mary's L.J.
Available at: https://commons.stmarytx.edu/thestmaryslawjournal/vol39/iss2/5
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