Oilfield Indemnity Contracts
Ryan M. GoudelockeDurio, McGoffin, Stagg & Ackermann(337) 233-0300December 2017
MSAs generally
Who are we talking about?OperatorsContractorsSuppliers/VendorsConsultants
MSAs generally, cont.
Why memorialize contract terms in the oilfield?“to equitably distribute the responsibilities and liabilities associated with the work”Allocation of risk among partiesFulfill formal requirements to bind third partiesInsurance policies: “as required by written contract”
What are we NOT talking about?
Not every oilfield contractual relationship should use a typical MSAConstructionCharters (vessels/aircraft)Drilling contractsNon-repetitive activities with shifting risk profiles
Let’s Back Up
MSAs (MSCs, other names) serve a wide variety of purposesGenerally, permit non-constant/non-contiguous relationships, thought through in advance (ideally!) without from-the-ground-up renegotiationMany provisions uncontroversialLots of “boilerplate”Many majors have “exceptions tables” for any variances to their contracts in order to manage their many vendorsOften include a template work order that supplements per job (though oral WOs are always permitted)
Backing Up, cont.
Speaking of operators, where do MSAs come from?Generally, oilfield contracts, like oil, flow down, not upVariety of reasons for thisLarger players have greater and more specialized resourcesParticipants with greater exposure more concerned about risk managementFirms managing many relationships want uniformity and predictabilityWhich is why many lock their PDFs and Word docs against editing
Backing Up, all the way
Various industry orgs offer basic (and not-so-basic templates)NAIOGC, for contractorsAIPN/PESAIADC templateOthers; many operators post their standard MSAs on their websitesStarting fromtemplates can be very cost-effective and ensure a comprehensive result
Backing Up, all the way
Don’tstop thereThrowing a template out there without sufficient eyeballs review is asking for troubleObvious reasons: Required insurance coverages, choice of law/forum issues, anti-indemnity issuesNon-obvious reasons: templates even from large orgs can have hidden issues
Digression:The Difference a Year Makes
One MSA template used by a few large operators (and a lot of smaller ones) contains the following language:“the parties agree that in the event that the indemnity obligations of[redacted]are subject to the limitations of Act 427 of the1982Louisiana Legislature, and so long as that act is in force:” (emphasis added)This is precedent to aMarcelprovision, which we’ll discuss shortly.There’s just one problem: they got the year wrong.
The Difference a Year Makes, cont.
Louisiana Oilfield Anti-Indemnity Act: LSA-R.S. 9:2780. “Added by Acts 1981, No. 427, §1.”See the problem? Yes, the Act came into force in 1982 – but it passed in1981.Act 427 of the1982legislative session addresses… notaries public. Not oil & gas.Is this a real-world problem? Maybe not, just a typo, doesn’t really justify questioning the parties’ intent?
The Difference a Year Makes, cont.
In risk management… why introduceadd’lrisk?!?Hundreds (thousands?) of MSAs with this mistake, in the field, right now.Takeaway: people make mistakes (even lawyers!). No one’s infallible, so even if you’re not checking minutiae like this, using templates without adequate review can mean trouble.
Back on Track:What MSAs do (agreeably)
Not specific to oil & gas, not usually contentious:Supersession: “Entire Agreement” clausesIndependence of parties (for WC and agency)SeverabilityNotice provisionsExclusion of consequentialsWaiver/Assignment/Force MajeurePayment terms (net-30, net-60,etc)
What MSAs do (agreeably), cont.
Issues often specific to oil & gas:The work, obviously. Warranty, audit rights, invoicing, incident reporting, permitting, taxes, standards, defects, dispute resolution (sometimes)Annoying: “retain documents as long as the relevant statute of limitations applies”Include subsidiaries as alternative counterpartiesApply to work done for any of parent’s childrenEthical conflicts, gifts“Don’t bribe my people”HSE/OSHA/EEO/drugs/weaponsCFR and EEOflowdownsubiquitous in majors’ MSAs; uncommon for smaller operatorsDoes your client need specialized compliance personnel/counsel?
What MSAs do (negotiated)(in reverse order of typical concern)
Precedence of documentsMSAs normally control over work orders – but not alwaysChoice of law/choice of forumBut don’t forget about OCSLA!And “rogue” judgesExpress statutory employer provisions (aka tort immunity)S/he’souremployee, butyoupay the premiumsNon-negotiable indemnities, not usually insurableNon-payment of subcontractorsMaterialmen’s/mechanics’ liens (this can, rarely, be qualified to allow vendors to lien the well for non-payment)Taxes
What MSAs do(Areas of common concern)
Confidentiality“information obtained in the performance of the work;” “information developed by”Includesindependentlydeveloped information?“information shared in the course of performance;” “information owned or supplied by”Clearer; fairerMSAs (especially larger operators) frequently will expressly assign newly-developed information as “work for hire,” “work product”Not necessarilyinequitable; but something very much to be aware of when contemplating any R&D work or field testing
What MSAs do, cont.
Negotiable (sometimes) indemnitiesIntellectual propertyPatentinfringementindemnity is the big deal hereIP infringement coverage is very expensive (patent litigation costs are uniquely high)Coverage rarely feasible/worthwhile for any but larger operations deploying their own IP“Negotiable” in terms ofallocation; operators often requireregardless of faultwhich should be unacceptable for this indemnityGenerally ends up naked indemnity for contractors
Negotiable Indemnities, cont.
Equipment damage/lossUsually only down-hole, since drillers take this onSimilar: “Operator’s” or “Driller’s” indemnities – often (but not always) explicitly assignedHole lossBlowoutFormation damageRe-drill
Negotiable Indemnities, cont.
PollutionGenerally an insurance exclusion; requires either limited buyback or (rarely) full-blown separate policy: environmental impairment liability (EIL)Sudden/accidental (typical) vs. gradual/broad formOften covered by operator/driller below the rotary table/surface, contractor aboveHowever, frequently “regardless of fault” – may or may not be covered by specific policies
Indemnities to Watch(Always)
Denial of AccessOperators generally require they have freedom to direct removal of contractor personnel for arbitrary reasonsGood reasons for thisAlso possiblybadreasons for this – which is where theiffinessof indemnity comes in. ADA, EEOC implicationsDiscriminatory removal raises EPL coverage concerns, which policies donotcover third-party faultTakeaway: never, ever acquiesce to personnel removal withoutwrittengood cause, in advance, and obviouslyneverconcerning suspect classifications or other discriminatory considerationsThis indemnity used to be more common, now rarely present
Indemnities to Watch(Always), cont.
Risk allocation generally, or, “beyond knock-for-knock”
First-party Indemnity:Claims by each party’s “Group”
Not all Groups are made equalCompany Group usually will be broader to include e.g. co-venturers, partners, joint-interest ownersOtherwise, generally includes each’s directors, officers, employees, members, agents, invitees, etc.Watch out for Company Group that containsinsurersIndemnified claims don’t include gross/willful/wanton negligence or intentional action (since these will be excluded by insurance)
First-party Indemnity:Claims by each party’s “Group”
Usually mutual, reciprocal regardless of fault, aka “knock for knock”Less frequently, “you break you pay”More frequently “you break you pay” when choice of law is unpredictableNever know when contractual choice of law may not be honoredMore important, when maritime law is chosen or offshore work puts OCSLA into play, same MSA may be interpreted under different states’ lawsOften just easier to saddle each party with its own fault than mess with predicting, and satisfying, multiple state regimes
What multiple regimes?Or, the Anti-Indemnity Acts
LouisianaMentioned briefly before, but simply stated: for personal injury (including death), cannot indemnify another oilfield party for that party’s negligenceDoesnotbar indemnity for property damage (cf. Texas’ statute)Fifth Circuit to the rescue:Marcel v. Placid Oil(1994), since frequently cited by federal courts and (at least implicitly) recognized by Louisiana courts as wellMarcel, in a nutshell: A pays B’s premiums, A’s MSA can insist that B indemnify A for A’s fault. Voila, no more LOAIA
Louisiana Anti-Indemnity, cont.
Note that “clear and unequivocal” applies here, as always in risk allocation, similar to conspicuousness requirement of the “express negligence” ruleThus lots ofbold printandunderliningAnyway:Marcelfrequently addressed in MSAs which contemplate either work in Louisiana, application of Louisiana law, or bothAlternatively, some MSAs go with “knock for knock” generally but switch to “you break, you pay” in anti-indemnity states (Louisiana, Texas, New Mexico, Wyoming)By the way, decent overview of various states’ anti-indemnity regimes:https://www.munsch.com/Newsroom/93429/A-Bird39s-Eye-View-of-the-Nation39s-Oilfield-Services-Anti-Indemnity-Acts
Louisiana Anti-Indemnity, cont.
One thing usuallynotdone (which I’d argue is a mistake):MarcelreciprocityFirst, operators which bargain for the benefit of theMarcelexception – in practice, rarely pay it. Disconnect between legal and A/P?Anyway, from the contractor’s point of view,Marcelis something of a trap!LOAIA doesnotdistinguish between “certain contractors and their employees” and the Big Oil bad guys “foisting inequities” on themSo, is an operator’s mutual indemnity for the contractor’s fault enforceable when thecontractordoesn’t pay theoperator’sadditional premium?
Louisiana Anti-Indemnity, cont.
Maybe not!See King v. I.E. Miller of Eunice, Inc., 970 So.2d 703 (La.App. 3rdCir. 2007) for some dicta suggestingMarcelpayment must be reciprocalEven more on point:Silverman v. Mike Rogers Drilling Co., Inc., 34 So.3d 1099 (La.App. 2ndCir. 2010),writ denied, 45 So.3d 1099: “Rogers maintains that it—not an oil company like Bass—is one of the “certain contractors” that the LOAIA was designed to protect.” Wrong! Second Circuit refused to assume LOAIA treated differently-situated parties… differentlyOperators generally willnotagree toMarcelreciprocityI have been purposefully misunderstood when requesting this, even after citing case lawAs of 2017,Silvermanstill not cited by any other case. I keep waiting…
Louisiana Anti-Indemnity, cont.
Remember that table?(Back up to it)“Pass-through”/”round-robin” third-party indemnityRelatively recent in oilfield indemnity contracts (those templates die hard) but now largely ubiquitousHere’s the scenario: operator’s at the head of the octopus, has all these reciprocal indemnities with each of its contractors
Round-Robin Indemnity
What relationship does each of those contractors have with each other?Historically,noneWho do plaintiffs sue?Everyone(if they can)Drillers normally require operators to indemnify the driller against claims by other contractorsSets up a situation where the operator can take the fall for one contractor’s fault when that contractor’s negligence injures another’s employee
Round-Robin Indemnity, cont.
Let’s get concrete:Foreman v. Exxon Corp., 770 F.2d 490 (C.A.5, 1985)Exxon (platform owner) contracted with Diamond M (rig owner) and Offshore (casing crew)Offshore’semployee (Foreman) sued Exxon and Diamond M (LHWCA precluded suing Offshore); Exxon third-partied OffshoreWhile Exxon had agreed to indemnify Diamond M for the latter’s liability, Exxon’s contract with Offshore did not includeOffshore’sliability for Exxon’s contractual indemnityResult: Even though the jury assessed all three defendants at fault, Offshore owed no contractual liability to Exxon (and no tort liability to Foreman under LHWCA), so Exxon and Diamond M were assessedOffshore’sshare of fault (which was 35%) in proportion to their own fault as assigned by the jury
Round-Robin Indemnity, cont.
InForeman, Exxon had to pay a portion of its own contractor’s fault because its MSA withthatcontractor did not “clearly and unequivocally” include indemnity for Exxon’s contractual obligations toothercontractorsConfused yet?Further cases on this issue:Wallace v.OceaneeringInt’l, 727 F.2d 427 (C.A.5, 1984);Corbittv. Diamond M Drilling Co.,654 F.2d 329 (C.A.5, 1981)
Round-Robin Indemnity, cont.
So what’s Exxon’s (or any other operator’s) solution?Two major approaches“Cross Indemnity” – explicit indemnity to “other contractors which have executed a contract with Company… containing cross indemnity provisions substantially similar to this provision”Generally calls on “Action Over” GL endorsementSometimes insurance requirements will include specific “cross-indemnity” endorsementBroadened “Company Group” to include other subcontractorsAlso “action over” claims, but generally much easier to deal with from an insurance standpoint since “Company Group” is the named additional insured
Cross-Indemnity: Specifics
Contractor agrees to… indemnify… Company'sAND COMPANY’S AFFILIATES’ other Contractors which have executed a Contract with Company OR ONE OF COMPANY’S AFFILIATES containing Cross Indemnity provisions substantially similar to this provision ("Cross-Indemnified Contractors") from and against any and all claims suffered WITH RESPECT TO:a. PERSONALINJURY… OF MEMBERS OF CONTRACTOR GROUP;ORb.… PROPERTYOWNED OR HIRED BY CONTRACTOR GROUP,ARISINGin connection with the Contract,howsoever caused,i)whether or notcaused… bythenegligence… ofany party, including Cross-Indemnified Contractors, or their respective employees or invitees, orii)whether by defects or unfitness of any equipment, building or structure, or otherwise. The parties intend this indemnity to apply to all such claims and losses described above based on any theory of liability, including negligence, negligence per se, gross negligence, statutory, premises or strict liability of any party, including Cross-Indemnified Contractors.The parties INTEND that this Cross Indemnity apply to and be for the benefit of Company's AND COMPANY’S AFFILIATES’ other Contractors who have included substantially similar Cross Indemnity provisions in their respective Contracts with Company OR COMPANY’S AFFILIATES. For the application of this Cross Indemnity to such other Contractors, Company will ACT ONLY as A FACILITATOR for the benefit of such other Contractors, who will be entitled to enforce this Cross Indemnity directly against Contractors in addition to Company's right to enforce
Texas Anti-Indemnity
Disclaimer: Not a Texas lawyerThat said, the statute is at least simpler than Louisiana’s. Restricts oilfield indemnity, but permits if explicitly supported by insurance (either unilateral up to $500k or reciprocal to the agreed-upon amount)Texas law probably most commonly chosenFollowed by law of operator’s domicile (if not TX)Forum is always operator’s domicile
Insurance Terms
And speaking of additional insureds, our final subjectRequired coverages generally need to be tailored to the job, may need to be specific to particular contractorse.g. when aircraft are involved you want a very large umbrella up thereAdditional-insured status, primary-coverage designation, waiver of subrogation all standard and non-negotiableNot all certificates of insurance are created equal!SomeCoIsmay limitadd’linsured rights; some operators require their own
Insurance Terms, cont.
Reciprocity of additional-insured statusRarely acceptable. Why?Accepting no additional-insured status forces reliance on theupstream’snaked indemnityContractor may end up paying for its own defense, at least initially, and eroding its limitsAlso introduces uncertainty into e.g. Texas enforceability of indemnitiesNotice of coverage modificationMany insurers now charge additional premiums per additional insured to extend coverage in this manner (typically 30 days)Upstreamsusually amenable either to “as soon as is practicable” or, failing that, shifting the prior-notice burden to the Contractor from the insurer
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