"chlorides, sulfates, phosphates and carbonates" into plaintiff's waste water containment ponds. Notwithstanding the permit, plaintiff released prohibited chemicals into its ponds during the process of formulating defendants' compounds. On March 14, 1985, the Water Quality Board found that plaintiff had violated its permit. The Water Quality Board ordered plaintiff to conduct an investigation to determine the extent of contamination and to remediate the site of illegal disposal. Plaintiff alleges that it has spent in excess of $ 2 million in complying with this order.
The Court, at a status conference held on April 20, 1990, requested that the parties submit cross-motions for summary judgment on two issues. First, the Court requested that the parties brief the issue of whether the indemnity clause bars plaintiff's action. If defendants are entitled to indemnification from plaintiff for any liability under CERCLA, plaintiff's suit against defendants for contribution is meaningless. Second, the Court requested that the parties brief the issue of whether defendants fall within the ambit of the statute -- that is, whether defendants "arranged for the disposal of hazardous substances." 42 U.S.C. § 9607(a)(3). Because the Court holds that the indemnity clause bars plaintiff's action, the Court need not address the issue of whether defendants "arranged for the disposal of hazardous substances."
Plaintiff contends that the indemnity clause does not bar plaintiff's action for three reasons. First, plaintiff argues that defendants may not be indemnified for liability under CERCLA because indemnification for strict liability is contrary to the public policy of California. Second, plaintiff argues that the indemnity clause does not apply to CERCLA liability because the clause's language does not expressly anticipate "CERCLA-type liability" and because the parties drafted the clause ten years before CERCLA's enactment. Third, plaintiff argues that defendants' "active negligence" bars indemnification. After briefly discussing the source of applicable law, the Court addresses each of these issues in turn.
A. Applicable Law
California contract law governs the Court's interpretation of the indemnity clause. The Ninth Circuit has held that state law should provide the general content of federal law with respect to interpreting a contract that releases a party from CERCLA liability. Mardan Corp. v. C.G.C. Music, Ltd., 804 F.2d 1454, 1458-59 (9th Cir. 1986). A court should apply uniform federal law to the interpretation of such a contract only when the outcome under state law would be hostile to federal interests. Id. at 1460. The indemnity clause at issue is part of an agreement that was executed in California. The parties were to perform their obligations under the agreement in California. As set forth below, interpretation of the indemnity clause under California law does not lead to an outcome which is hostile to federal interests. Accordingly, the law of contracts in California governs the interpretation of the indemnity clause.
However, plaintiff's argument that one may never be contractually indemnified for CERCLA liability is a threshold public policy issue. Congress has specifically addressed this issue. See 42 U.S.C. § 9607(e)(1). The Court must therefore look to the provisions of CERCLA to determine whether Congress intended to absolutely bar such agreements. See Mardan, 804 F.2d at 1458 ("In a case . . . which implicates a federal statute, the predominant consideration must be Congressional intent . . . . ").
B. Liability Under CERCLA and Contractual Indemnification
Contractual indemnification among private parties is not contrary to public policy. Plaintiff argues that defendants are barred from indemnification because CERCLA is a strict liability scheme and one cannot be indemnified by agreement for strict liability under California law. Plaintiff cites Widson v. International Harvester Co., 153 Cal. App. 3d 45, 60, 200 Cal. Rptr. 136, 147 (1984), for the proposition that "it would thwart basic public policy behind strict liability to permit indemnification of a strictly liable defendant under a general indemnity clause." Widson, however, considered the application of an indemnity agreement to the law of products liability in California. Id. at 49, 200 Cal. Rptr. at 139. Although CERCLA, like California products liability law, is a strict liability regime, see, e.g., New York v. Shore Realty Corp., 759 F.2d 1032, 1044 (2d Cir. 1985), CERCLA and California products liability law do not necessarily embrace identical public policies. The California legislature has specifically provided that agreements which seek to indemnify a party for strict products liability are "void and unenforceable" because they are "against public policy." Widson, 153 Cal. App. 3d at 60-61, 200 Cal. Rptr. at 147 (quoting Cal. Civ. Code § 2782). To determine the public policies which underlie CERCLA, however, the Court need not and should not examine the pronouncements of the California legislature with respect to products liability, but rather must determine the intent of Congress as expressed in the language of CERCLA itself.
Section 107(e)(1) of CERCLA provides:
No indemnification, hold harmless, or similar agreement or conveyance shall be effective to transfer from the owner or operator of any vessel or facility or from any person who may be liable for a release or threat of release under this section, to any other person the liability imposed under this section. Nothing in this subsection shall bar any agreement to insure, hold harmless, or indemnify a party to such agreement for any liability under this section.
42 U.S.C. § 9607(e)(1). This inartfully drafted provision seems internally inconsistent. The first sentence of section 107(e)(1) appears to prohibit indemnification agreements under all circumstances while the second sentence of section 107(e)(1) appears to permit indemnification under all circumstances. Plaintiff, in its briefs and at oral argument, has never argued that the first sentence of section 107(e)(1) prohibits indemnification agreements. Rather, plaintiff has relied on California products liability law in arguing that CERCLA indemnification agreements are contrary to public policy. While the Court rejects plaintiff's argument that California's public policy of disallowing contractual indemnification for strict products liability prohibits contractual indemnification for CERCLA liability, the Court finds it necessary to consider sua sponte the issue of whether the language of CERCLA itself bars contractual indemnification.
A majority of federal courts that have considered the issue have held with minimal discussion that the second sentence of section 107(e)(1) completely negates the first sentence, thereby permitting parties to bargain over indemnification for CERCLA liability under all circumstances. See, e.g., American Nat'l Can Co. v. Kerr Glass Mfg. Corp., 1990 U.S. Dist. LEXIS 10999, p. 32 (N.D. Ill. 1990); Versatile Metals, Inc. v. Union Corp., 693 F. Supp. 1563, 1573 (E.D. Pa. 1988) Chemical Waste Management v. Armstrong World Indus., Inc., 669 F. Supp. 1285, 1293 (E.D. Pa. 1987); FMC Corp. v. Northern Pump Co., 668 F. Supp. 1285, 1289 (D. Minn. 1987), appeal dismissed, 871 F.2d 1091 (8th Cir. 1988). None of these courts have cited the legislative history of CERCLA. Rather, the majority interpretation of section 107(e) appears to be predicated on a public policy that parties should be able to distribute the risk of CERCLA liability as they see fit because liability under CERCLA is far reaching.
The Ninth Circuit and a minority of courts have taken another approach. Under the Ninth Circuit's rule, "all responsible parties will be fully liable to the government regardless of the indemnification contracts they have entered into." Mardan, 804 F.2d at 1459; see also Rodenbeck v. Marathon Petroleum Co., 742 F. Supp. 1448, 1456, 1990 U.S. Dist. Lexis 9850, p. 22 (N.D. Ind. 1990); Central Ill. Pub. Serv. Co. v. Indus. Oil Tank, 730 F. Supp. 1498, 1507 (W.D. Mo. 1990). At the same time, under the Ninth Circuit rule, private parties are free to contract among themselves with respect to indemnification and contribution. Mardan, 804 F.2d at 1459. In other words, parties are jointly and severally liable with respect to the government in order to insure that the taxpayers are not forced to bear the cost of responding to the illegal disposal of hazardous substances. Private parties, however, are free to contractually distribute the risks of liability among themselves as they see fit. The Ninth Circuit, like the majority of courts, did not cite the legislative history of CERCLA. The Ninth Circuit rule, however, has great appeal in that it assures that responsible parties rather than taxpayers will bear the cost of responding to the illegal disposal of hazardous substances without unduly limiting the freedom of private parties to contractually distribute the risk of liability.
A third and final rule was recently articulated by the Northern District of Ohio in the case of AM International, Inc. v. International Forging Equipment, 743 F. Supp. 525, 1990 U.S. Dist. LEXIS 9023 (N.D. Ohio 1990). Under that court's rule, the first sentence of section 107(e)(1) "forbids giving effect to releases between tortfeasors in CERCLA contribution suits" while the second sentence of section 107(e)(1) "only give[s] effect to contracts binding parties otherwise not liable, to indemnify or insure liable parties." Id. 743 F. Supp. at 529, 1990 U.S. Dist. LEXIS 9023 at p. 12. That is, under the rule of AM International, indemnity agreements are prohibited to transfer liability among parties which are statutorily liable but are permitted to transfer liability to otherwise non-liable parties such as insurance companies.
The AM International court examined the legislative history of CERCLA more extensively than any court which has thus far considered this issue. See Id. 743 F. Supp. at 528-29, 1990 U.S. Dist. LEXIS 9023 at pp. 10-13. The AM International court cited a colloquy between Senator Randolph, a sponsor of the bill, and Senator Cannon which supports that court's interpretation of section 107(e)(1). See Id. 743 F. Supp. 528-529, 1990 U.S. Dist. LEXIS 9023 at pp. 11-12. Mr. Randolph agreed with the following characterization by Senator Cannon:
Mr. Cannon: Section 107(e)(1) prohibits transfer of liability from the owner or operator of a facility to other persons through indemnification, hold harmless, or similar agreements or conveyances. Language is also included indicating that this prohibition on the transfer of liability does not act as a bar to such agreements, in particular to insurance agreements.
The net effect is to make the parties to such an agreement, which would not have been liable under this section, also liable to the degree specified in the agreement. It is my understanding that this section is designed to eliminate situations where the owner or operator of a facility uses its economic power to force the transfer of its liability to other persons, as a cost of doing business, thus escaping its liability under the act all together.