Law360, New York (February 13, 2014, 1:07 PM ET) -- Indemnity provisions are a common feature of many a contract in Texas, and oilfield services contracts are no exception. Four oil-producing states, including Texas, have felt it necessary to enact statutory provisions that limit the scope of these indemnity provisions. In particular, these statutes will, at times, render unenforceable an indemnification provision that purports to require indemnification for the indemnitee’s own negligence.
These anti-indemnity statutes originate from the perceived bargaining inequities between the oil-well operators and the generally smaller oilfield services contractors. Because, at least historically, the operator controls the contract language, it was felt that the operator would unfairly insist that the services company indemnify it for the operator’s own misconduct, thus leaving the services company responsible for both its own negligence and the negligence of the operator.
In response to this supposed inequity, the Texas Legislature in 1985 passed the Texas Oilfield Anti- Indemnity Act (“TOAIA”). The statute provides that an agreement to indemnify a person against liability that is caused by their own negligence is void and unenforceable as against public policy. The statute proceeds to carve out exceptions and exclusions to this general principle.
Exceptions and Exclusions in Texas
Despite the statute’s breadth, it is limited in two important respects. First, TOAIA only applies to certain oil and gas contracts. Second, the act does allow for “own negligence” indemnification if certain conditions are met.
By its own terms, TOAIA applies only to contracts related to wells for oil, gas, water or to mines for other minerals. Courts tend to construe TOAIA somewhat narrowly and usually hold that it applies only to those contracts with a close relationship to an actual well, rather than to more general oil and gas activities. Furthermore, TOAIA itself specifically identifies certain situations to which it does not apply, including: personal or property injury or death resulting from radioactivity; property injury arising from pollution or reservoir damage; or injury (personal or property), death or costs related to wild well control. A “wild well” is defined as “a well from which the escape of oil or gas is not intended and cannot be controlled by equipment used in normal drilling practice.”
As to the second exception, “own negligence” indemnification provisions will not be rendered void if certain insurance obligations are met. If the contract calls for cross-indemnification between the parties (a “mutual indemnity obligation” as defined in § 127.001(3)), the “own negligence” indemnity obligation is capped only by the amount of insurance obtained to cover the obligation. § 127.005(b). If the contract calls for a unilateral indemnity obligation (so that only one side to the contract is required to indemnify
for the other’s negligence), the indemnification obligation cannot exceed $500,000. § 127.005(c).
Naturally, TOAIA requires such indemnification provisions to be in writing. As with any contractual indemnity provision, a practitioner should make sure the provision is both express and conspicuous — in accordance with the "fair notice" requirements as prescribed by the Texas Supreme Court in Dresser Industries Inc. v. Page Petroleum Inc., 853 S.W.2d 505 (Tex. 1993). Most often the fair notice requirement of conspicuousness is met through the use of all caps and/or bolding.
Nevertheless, after the passage of TOAIA, disputes arose between operators and service contractors over these exceptions, usually in cases where the contract required only one party to obtain insurance. Lower courts in Texas were eager to void such contract provisions under the statute, even if the outcome harmed the contractor, rather than the operator.
The Texas Supreme Court opted for a broader reading of the exception, upholding an indemnity provision even where the parties agreed to provide insurance in differing amounts, enforcing the indemnity obligation only “to the coverage and dollar limits that applied equally to both parties.” Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 346 (Tex. 2000). The court further held that that the statute does not require the dollar amounts be specified in the contract. Id.
Other States with Anti-Indemnity Statutes
Texas is not alone in passing an oilfield anti-indemnity statute: Louisiana, New Mexico and Wyoming have one as well.
Each of these state’s statutes — and their respective courts’ interpretations — varies from TOAIA in important respects. Louisiana courts have interpreted broadly that state’s Oilfield Indemnity Act of 1981 (“LOIA”), La. R.S. 9:2780, to cover any agreement between parties that involves virtually every activity at a well site, as long as the activity is essential to the “exploration, development, production, or transportation for oil, gas, or water, or drilling for minerals.” La. R.S. 9:2780(C). Significantly, covered events are limited to loss or liability for damages resulting in death or personal injury, but not property damage. Id.
In one case, however, the Third Circuit Court of Appeal held the LOIA to be inapplicable to a contract with an indemnity provision in a saltwater disposal well subcontract because: (1) the contractor “had equal, if not superior, bargaining power,” and (2) the saltwater was not a ‘source of energy’ that the [l]egislature stated was the purpose for enacting LOIA, but a waste byproduct that was collateral to natural gas production. Lanclos v. Crown DBL Inc., 08-813 (La. App. 3 Cir. 12/10/08) 1 So.3d 685, 688-89.
Unlike the statutes in Texas and Louisiana, New Mexico’s Oilfield Anti-Indemnity Act, N.M. Stat. Ann. § 56-7-2, does not limit the types of damages covered by the indemnity provision (presumably covering death, personal injury and property damage as well as situations involving radioactivity, pollution and wild-well control).
In another important respect it is more restrictive: the statute applies only to production activities at the well head, as opposed to distribution, processing, or transportation activities. Because those activities are not listed in the statute, courts will hold them to be outside the scope of the statute. See Holduin v Fulco Oil Servs., LLC, 245 P.3d 42, 47-48 (N.M. App. 2010).
Likewise, the Wyoming anti-indemnity statute, Wyo. Stat. Ann. §§ 30-1-131 through 30-1-133, is restricted to work “closely related to well drilling,” and not services with a remote or indirect connection to those enumerated in the statute. Reliance Ins Co. v. Chevron USA Inc., 713 P.2d 766, 770 (Wyo. 1986) (holding that a contractor who dug pits to collect waste fluids from a fire at a separation plant was not rendering services in connection with an oil well for purposes of applying the anti-indemnity statute); see also Union Pac Res Co. v. Dolenc, 86 P.3d 1287, 1293 (Wyo. 2004) (welding services at a water plant on an oilfield is not considered work “in connection with any well” under the statute); Gainsco Ins Co. v. Amoco Prod Co., 53 P.3d 1051, 1077 (Wyo. 2002) (“delivering oil by truck to a tank battery is not an activity closely related to well drilling”).
The differing statutory provisions and interpretations enumerated above make it imperative for contract drafters to review oilfield anti-indemnity statutes in the states where their clients intend to drill, even if the contract calls for application of another state’s law. While courts usually defer to parties’ choice of law provisions, that is not always the case when an oilfield anti-indemnity statute is involved. See, e.g., Pina v Gruy Petroleum Mgmt. Co., 139 P.3d 1029 (N.M. App. 2006); Roberts v. Energy Dev. Corp., 235 F.3d 935 (5th Cir. 2000).
As long as the possibility exists that a court will uphold the anti-indemnity provisions of its own state as a matter of public policy — and disregard the choice of law provision in a contract if it allows for “own negligence” indemnification — drafters should take care to fashion an indemnity provision that adheres to a particular state’s statutory requirements.