- Overview of the Allocation and Limitation of Liabilities Clauses in the Oil&Gas Industry
Considering that the oil&gas projects are capital-intensive and carry significant risks, it is quite common for the E&P companies (“Operators”) and oilfield service companies (“Contractors”) to contractually allocate and limit their liabilities.
Usually, Operators and Contractors use knock-for-knock indemnity provisions in their contracts, in which the parties reciprocally agree to defend, indemnify, release and hold harmless each other from and against liabilities regarding the: (i) loss or damage to any of its owned property or equipment; and (ii) personal injury or loss of life of any of its own personnel. The parties commonly choose to not apply such provisions in events of willful misconduct or gross negligence. However, sometimes such indemnities apply regardless of any form of fault.
The use of such mechanism for the allocation of liabilities is based on the assumption that the indemnitor has a greater capacity to manage the risks of loss or damage to its own equipment and properties through the proper use, maintenance and repair of them. In addition, such party is deemed to be more capable to mitigate the risks of accidents and deaths with their own personnel through proper trainings and good safety practices.
Taking into consideration that the pricing of the properties and equipment is easier to determine, the negotiation of the provisions regarding the allocation of liabilities of such items is usually easier than the ones in connection with the personnel, which damages may vary due to several circumstances and may result in a wide variety of consequences. Another sensitive issue is the liability before third parties, which may be limited depending on the relevant jurisdiction.
The parties also usually allocate their liabilities for pollution and contamination based on the origin of them. In case the pollution or contamination originates from the Contractor (and its Group) property and equipment, the Contractor (and its Group) shall indemnify the Operator (and its Group) from any claim and damage arising from the pollution occurring on the Contractor (and its Group) premises. On the other hand, in case the pollution or contamination results from the Operator’s (and its Group) equipment or property, Contractor (and its Group) will be indemnified by Operator (and its Group). In addition, Operator (and its Group) usually indemnifies Contractor (and its Group) from and against all claims and losses resulting from damages to the reservoir, blowout, fire, cratering, explosion or any other uncontrolled well conditions.
Alternatively, in order to avoid long negotiations, Operator may contractually assume more risks, but contracting a broad and sufficient insurance coverage.
In addition to the above mechanism of allocation of liabilities, the parties usually seek to limit their liabilities only to the direct damages and to establish a financial cap on it.
- Enforceability in Brazil
The allocation and limitation of liabilities clauses in Brazil have grounds on the principle of parties’ free will to contract. In any event, a deeper analysis of the enforceability of such provisions is necessary to be made.
The Brazilian legal system in respect to the damages in based on the division between financial (“danos patrimoniais”) and non-financial damages (“danos não patrimoniais”). As provided in the article 402 of the Brazilian Civil Code, the financial damages are divided in actual damages (“danos emergentes”), which is the amount that the party actually lost, and loss of profits (“lucros cessantes”), which is a reasonable expected future loss.
Indirect Damages. As provided in article 403 of the Brazilian Civil Code, even if the default is a result of a willful misconduct of the debtor, the damages and losses only include the actual damages and the loss of profits as a direct and immediate consequence of it. In case the indirect damages are not necessary direct and immediate consequences of the default or non-performance and result in the break of the chain of causation, they would not be necessarily covered under the Brazilian legal system.
In this sense, clauses mutually agreed by the parties that exclude the liability for indirect damages are usually deemed valid by the Brazilian courts. In any event, it is important to contractually define which types of damages would be considered as indirect.
Although there is only a few court decisions regarding the possibility of excluding the liability for loss of profit, they have considered valid this possibility (mainly in insurance matters).
Impossibility of Limitation of Liability in Case of Willful Misconduct or Gross Negligence. Considering that the obligation to indemnify under the Brazilian Legal System is based on fault and, as a consequence, on willful misconduct, as provided in article 186 of the Brazilian Civil Code, clauses that exclude or limit the liability for damages arising out of gross negligence or willful misconduct events may be deemed not enforceable in Brazil.
Time Limits. Clauses that impose a time limit through a reduction of the statute of limitations shall be considered unenforceable, due to the article 192 of the Brazilian Civil Code, which provides that the statutes of limitation may not be changed by the will of the parties.
Financial Caps. There are few court decisions in Brazil that determine that the financial cap on the liability may not result in a derisory or insignificant amount in relation to the caused damages.
Third Parties. It is important to be highlighted that the allocation and limitation of liabilities are only binding amongst the parties. Although such provisions are naturally not enforceable with respect to third parties, it is legal and enforceable amongst the parties to the contract.
Public Order Principle (Public Policy Doctrine). Under the Brazilian legal system the contractual freedom is not totally unrestricted, but rather limited to the public order principle (in other words, the social, moral and economic values that tie a society together). For such reason, the limitation of environmental liabilities before third parties is not possible. However, the allocation of environmental liabilities amongst the parties is legal and enforceable.
Limitation of Liabilities for Deaths and Damages to the Physical Integrity. Part of the Brazilian scholars argue that the principle of the human dignity, as provided in article 1, item III, of the Brazilian Constitution, prevents the possibility of limitation of liabilities for damages in connection with the life and physical integrity of an individual.