Disputing Blog by Karl Bayer, Victoria VanBuren, and Holly Hayes
The United States Fifth Circuit Court of Appeals has held that the terms of two parties’ Merger and Cooperation Agreements were not incorporated into a Master Settlement Agreement entered into by only one of the parties. In Alford v. Kuhlman Electric Corporation, No. 11-60728, (5th Cir. May 24, 2013), BorgWarner, Inc. purchased Kuhlman Corporation (“Kuhlman”) and all the company’s subsidiaries, including Kuhlman Electric Corporation (“KEC”). In a Merger Agreement governed by Illinois law, BorgWarner agreed to indemnify and hold KEC harmless for any environmental matters that occurred prior to the sale. Not long after BorgWarner purchased KEC, a number of plaintiffs filed suit against the company for alleged environmental contamination.
Later, BorgWarner, KEC and Kuhlman entered into a joint defense Cooperation Agreement that was governed by Illinois law. In that agreement, KEC agreed to allow BorgWarner to settle any environmental contamination lawsuits on the company’s behalf in exchange for a waiver of any claims BorgWarner may have against KEC. After the instant case was filed, BorgWarner entered into a Master Settlement Agreement (“MSA”) with plaintiffs. The MSA was governed by Mississippi law.
Three years later, BorgWarner and Kuhlman filed a lawsuit claiming KEC violated provisions of the parties’ Merger Agreement. As a result, the companies argued that they were no longer required to indemnify and hold KEC harmless over the environmental contamination claims. KEC then filed a motion for specific performance. After a trial court denied KEC’s motion, the company filed an appeal with the Fifth Circuit.
Applying Mississippi law, the Fifth Circuit stated,
Courts applying Mississippi law have found a contract incorporates terms from another agreement where the contract explicitly adopts the entire agreement or explicitly references particular terms in the agreement. See, e.g., Galey, 510 F.3d at 532; Perry v. U.S., 146 F.2d 398, 400 (5th Cir. 1945) (“[A] reference in subcontract to the provisions, plans and specifications of a general contract imports them into the subcontract where not inconsistent with its terms. . . .”). In Galey we held an arbitration agreement incorporated the entirety of the National Association of Securities Dealers rules by reference where agreement provided for “arbitration in accordance with the rules then in effect of the National Association of Securities Dealers, Inc. (NASD). Such arbitration shall follow the procedures as set forth by a national arbitration committee of the NASD.” Id. The language in the MSA referencing the Merger Agreement is far more limited in scope than the language we held sufficient to incorporate the NASD rules in Galey. The MSA does not reference the “provisions, plans and specifications of” the Merger Agreement.
According to the appeals court,
At the very least the MSA’s mere reference to BorgWarner’s obligation to make settlement payments “pursuant to” the Merger Agreement does not, without more, incorporate the Merger Agreement’s requirement that BorgWarner hold KEC harmless.
The court also stated,
KEC’s contention that the MSA incorporated the Cooperation Agreement’s terms through MSA Article 11.1 strains credulity. Article 11.1 states that nothing in the MSA’s contents “should be construed to impair, change, or modify any separate agreement among BorgWarner and Kuhlman Corporation . . . on the one hand, and [KEC] and its affiliates on the other hand.” Merely because the MSA does not change the terms of the separate agreements between the parties provides no basis for incorporating the terms of those separate agreements into the MSA. KEC has provided no authority for its position that this language suffices to incorporate the terms of the Cooperation Agreement into the MSA. As such, the terms of the Cooperation Agreement are not incorporated into the MSA.
Finally, the court said,
Our holding does not, of course, prevent KEC from litigating its claims of breach of the Merger Agreement or the Cooperation Agreement in the Illinois proceeding.
Because the terms of the parties’ Merger and Cooperation Agreements were not incorporated into the MSA, the Fifth Circuit affirmed the trial court’s decision.