Sometimes it is tempting for small to mid-size oil and gas service companies to sign any and all master service contracts that come their way without making a single change to the language, even though there may be real dangers lurking in the fine print. Risky business is better than no business . . . right? Wrong. The hidden perils in these agreements have the potential to bring even a thriving company to its knees, making even big business with big clients a big mistake. The good news is that even today big and small operating companies usually expect to negotiate (even with the small guys) and a few small requests can make the difference between meeting budget and bankruptcy. Below are just three red flags that you can be looking for when the next contract comes in:
- Insurance: Every contract that you sign (whether it be upstream or downstream) will likely contain insurance requirements. But making sure you have the right limits and the certificate of insurance is not enough. Often times, these agreements will require endorsements that such insurance be primary, waive subrogation and add other parties as additional insured for all purposes. By leaving these provisions unchanged, you are not merely promising to insure the risks that you assume in the contract, but also the risks assumed by every company on the job site. Though there is no guaranteed fix, adding language that limits these endorsements to risks that your specifically assume in the contract will help protect you and your insurance from getting cleaned-out based on others’ liabilities. [As a side note, it’s also important that your insurance policies match your agreements in this regard, so look at those too and get someone to explain the insurance language, if you need it!]
- Enforceable Indemnities: Every contract will also contain indemnities – where one party is agreeing to release, defend, and pay the other party when certain defined liabilities arise. This is the meat and potatoes of any contract, and there’s a lot to watch out for. When written properly, these provisions can save both sides a lot of time and money in litigation down the road, that is . . . if the language is enforceable. Whether or not such provisions will be enforceable is strictly controlled by statutes such as the Texas Oilfield Anti-Indemnity Act or the Texas Construction Anti-Indemnity Act and common law. Often times, even in contracts provided by sophisticated operators, the provisions will lack simple requirements that will make them worthless if challenged in a court of law. For example, Texas requires that when a party for that party’s own negligence, the language be clear and conspicuous. The fix for this problem can be as simple as changing the font size or type. By making sure that the part where the operator takes your risk (even if it’s your fault) is in BOLD AND ALL CAPS, you could potentially be avoiding millions of dollars in attorneys’ fees and payment of damages and shifting those to the operator. Again, small changes; potentially big rewards.
- Catastrophic Events: Make sure the contract addresses the “Elephant in the Room,” that is, what happens when the catastrophic events occur? These are the kind of events that everyone knows are out there – a wild well, a big pollution event, damage to the hole, damage to the reservoir — but that no one likes to think will happen to them. Even if the chance of it happening is small, if these kind of events do occur, it can sink a company fast, especially if the master service agreement doesn’t address who handles it (or, even worse, allocates the risk to you!). Don’t ignore the Elephant. Bring it up. These are the kind of risks that the operator is likely taking on in its contracts with the driller and other service companies, so there’s no harm in asking that these risks be limited for you, as well.
So next time, don’t just sign the bottom line. Instead, give the contract a good look and you may find that making even small changes have the potential to make a BIG difference.