indemnity in international oil and gas contracts
TRANSCRIPT
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INDEMNITY IN THE INTERNATIONAL OIL AND
GAS CONTRACTS: KEY FEATURES, DRAFTING
AND INTERPRETATION Timur Makarov ABSTRACT: Indemnity is one of the key provisions in the international contract that helps to allocate risk to the party who is in a better position to accept it. The concept has particularly great significance in oil and gas contracts due to the specific features of the industry. It is efficiently used as the contractual tool that lies outside traditional understanding of liability and risk management in the law. This in turn creates certain limitations and exclusions in different jurisdictions. The paper looks at the main elements of the concept and at the ways it is drafted and interpreted in different jurisdictions including some critical points that need to be taken into account by the parties to the contract. The author has 9 years practical experience in the international oil and gas Services Company in Kazakhstan, dealing with business development and support issues including sales contracts. He also consults with government (regulatory bodies) and the Kazakhstan National Oil Company. E-Mail: [email protected], [email protected]
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TABLE OF CONTENTS: ABBREVIATIONS ................................................................................................ iii
INTRODUCTION ................................................................................................... 1
1. DEFINITION, SCOPE AND DRIVERS ............................................................ 2
1.1 Definition ........................................................................................................ 2
1.2 Scope ............................................................................................................... 2
1.3 Drivers ............................................................................................................ 4
2. TYPES ................................................................................................................. 7
3. DRAFTING AND INTERPRETATION ............................................................ 9
3.1 English Law .................................................................................................... 9
3.2 The Laws of Texas ........................................................................................ 12
3.3 Other Jurisdictions ....................................................................................... 15
CONCLUSION ...................................................................................................... 16
BIBLIOGRAPHY: ................................................................................................ 18
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ABBREVIATIONS
AIPN Association of International Petroleum Negotiators
HSE Health Safety and Environment
JOA Joint Operating Agreement
LOGIC Leading Oil and Gas Industry Competitiveness
NOC National Oil Company
UKCS United Kingdom Continental Shelf
US United States
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INTRODUCTION
Oil and gas industry is complex, hazardous and capital intensive which makes it remarkably
different from other industries. From seismic shootout up to drilling and down to refining of
the final product numerous technologies are involved and various hazards are present like
high downhole pressure, toxic Hydrogen Sulfide or use of dangerous goods. Considerable
amounts of cash are required for the projects and $500,000 daily rental for the drilling rig is
just one example.1 These factors are multiplied times when operations take place offshore.2
Higher level of risks requires adjustment of contractual risk allocation matrix where
indemnity concept is one of the key elements. Parties to oil and gas contracts deviate from the
standard understanding of risk distribution as accepted in law in order to spread the risks to
the ones who can handle it more effectively. But contracts are interpreted by judges in
different countries and jurisdictions. Thus, it is important to understand how indemnity
provisions can be incorporated into a contract in order to be efficient and to make sense at all.
Indemnity is a diversified concept. It can be simple or mutual, examined separately or in
combination with insurance as a tool for risk management, function between two or more
parties, live in a Joint Operating Agreement (JOA) or a service contract. All these aspects do
not fit into the limit of the paper and will be touched upon very briefly while the main focus
will be on the key elements of the operator-contractor indemnity, looking at its drivers,
specific features and views of different legislations on the concept.
1 Phillips, D., Cost of Offshore Drilling Rising as Fast as Oil Prices, 2008-05-08, http://industry.bnet.com/energy/2008/05/08/cost-of-offshore-drilling-rising-as-fast-as-oil-prices/ (visited 2008-07-08) 2 Paterson, J., Health and Safety at Work Offshore in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007), p.115
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1. DEFINITION, SCOPE AND DRIVERS
1.1 Definition
Indemnity is defined as "protection against future loss" or "legal exemption from liability for
damages". It also has a material meaning of a sum of money paid in compensation for loss or
injury.3 A common element present in the definitions is that the indemnifying party
(indemnitor) agrees "to make good"4 any loss or damage incurred by the indemnified party
(indemnitee) and to "safeguard" and "hold harmless" the indemnitee from liability. These
definitions point at the protective meaning of indemnity, whereby the parties agree to defend
each other from liabilities. This makes it different from other contractual provisions and does
not always coincide with the official position of the law.
There is no procedure prescribed on how the indemnitor should protect or compensate the
indemnitee. But, for example in case of injury, options would be for indemnitor to
compensate injured person directly or to compensate the indemnitee. This would vary
depending on specific cases and contractual arrangements.
1.2 Scope
Scope of indemnity is a matter of contract negotiations when parties may agree on almost any
variations allowed outside the principles of the law.5 However, care should be taken when
defining a) the degree of fault that caused liability, b) liability towards the parties outside the
contract and c) extent of associated damages.
a) The underlying reason causing liability of the indemnitee may be different. Typically it
may be indemnitor's or indemnitee's or both parties' negligence, gross negligence, wilful
misconduct or breach of statutory duties. Gross negligence and wilful misconduct are
3 Definitions, Indemnity, http://wordnet.princeton.edu/perl/webwn?s=indemnity (visited 2008-07-07) 4 Black's Law Dictionary, 8th Ed. (West Group, 2004) 5 Daniels, R.G., Contractual Indemnities: To What Extent Are They Legally Enforceable and Insurable? https://www.schinnerer.com/risk_mgmt/design_firms/amia/indem.pdf (visited 20089-07-09)
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normally excluded from the scope of indemnity. It is argued, that these two categories are
normally excluded from oil company-to-oil company contracts6 and apart from that "some
(particularly some US)" companies have corporate policies to exclude gross negligence and
wilful misconduct from the scope of indemnity in operator-to-contractor contracts as well.7
Given that this is explained by the need of protection from deliberate sabotage or conduct
below the general standard of care expected in the industry, it is not surprising that such
exclusion is practiced not only by American companies and not only in oil company-to-oil
company contracts but by many Westerns companies, in the majority of contracts in the
countries with high risk profile, particularly developing countries. Indemnification of liability
for breach of statutory duty is related to the public policy and other concerns. Indemnification
of liability or the breach of statutory duties may be included8 but should be carefully
examined in the jurisdictions that may not allow such indemnification at all.
b) Liability for the third party's personnel injury or equipment damage should be qualified. In
this case indemnity is normally provided only for the injury or damage caused by the
negligence of the indemnitor.9 This is explained by the changes of the risk profile when it
comes to the third parties who normally lie outside the contractual scope. In such situations
parties prefer not to deviate from the formal law position. Third party presence may raise
different questions lying outside the context of the paper. For example, when the contractor's
liability (caused by his negligence) to the third party exceeded payments received by him for
the services provided and weather such contractor is entitled for the indemnity from the
customer (WesternGeco Ltd v ATP Oil & Gas (UK) Ltd – [2006] 2 Lloyd's Rep 535).
c) Finally, indemnity should be aligned with the exclusion of liability for consequential
damages. These provisions are normally included in a separate article of the contract but are
6Gordon, G., Risk Allocation in Oil and Gas Contracts in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007), p.348 7 Baker Hughes Inc., Master Service Agreements, www.bakerhughesdirect.com/resources/legal/contracts/MSA (visited 2008-07-11) 8 AIPN Mobile Offshore Drilling Unit Contact 1999, Art.18.1.3, 18.2.3, 18.8 9 Supra note 8, Art.18.1.3, 18.2.3
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closely related. The parties should define what "consequential damages" are. These may
include loss of production, loss of product, loss of revenue or profit (detailed definitions are
given in LOGIC10 or AIPN11 Model Contracts). Generally indemnitors indemnify only from
indemnitors' own consequential losses. This is due to the difficulty to foresee the extent of
such losses that can be significant and expensive to insure, thus, it was accepted in the
industry that such losses should "lie where they fall."12
In general, care should be taken when drafting and in particular defining all mentioned terms
(negligence, gross negligence, third party, consequential damages and others) in the contract.
1.3 Drivers
Contractual provision that one party agrees to indemnify the other for liability arising from
this other party's negligence looks quite controversial at first sight.13 Different reasons explain
why parties opt for such provisions, especially in the petroleum industry. This can be
explained by the hazardous, complex and capital intensive nature of the industry with higher
risk exposure and the need to think, how to avoid significant time and costs of something, that
is not related to the core of the business, for example litigation.
"Watch your own side"
If one of the contractor's employees was injured at the rig he can sue any party that is
potentially liable for the injury. It can be an operator, another contractor, another contractor's
subcontractor, the contractor itself or combination of all or any of these parties. It may be
extremely difficult to determine the liability level in this situation. Even if it is identified,
there may be various appeals, counterclaims and other time and cost consuming procedures.
That is why parties agree that each employer accepts responsibility for his own employees
10 LOGIC Model Contract for Supply of Major Items of Plant and Equipment, Cl. 24, 2nd Ed., December 2005 11 Supra note 8, Art.20 12 Supra note 6, p.378 13 Smith, E.E., Service Contracts, Technology Transfers and Related Issues, in International Petroleum Transactions, 2nd Ed. (Rocky Mountain Mineral Law Foundation 2000), p.492
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and indemnifies his counterparts from any related claims. This position was widely supported
in different opinions, including London Bridge, related to Piper Alpha disaster – one of the
most prominent, complex and time taking series of litigations where indemnity was one of the
central points.14 The same principle applies to equipment. This driver is supported by the idea,
that every company is more familiar with and in a better position to control its employees and
equipment. He knows the employees' qualifications and the equipment parameters better than
any other party, so that it is more practical for him to bear responsibility.
In some countries, especially where National Oil Companies (NOCs) are involved, deals
between operator and contractor assume appointment by the operator of employees to work
for the contactor – it can be permanent employees or, more often, trainees or interns who are
supposed to inherit experience. Dangerously, such employees are more exposed to different
risks. They are less aware of safety requirements, less experienced and often look "lost" at the
worksite15. In such cases contactors normally insist that indemnity provisions apply only to
situations involving their "genuine" employees. Care should be taken in this situation with
definition of "Contractor employee".
Insurance
Insurance is used in order for the indemnitor to have a risk cushion in a situation when he is
responsible for his own employees and equipment. It is argued that insurance in fact is the
underlying driver in this case rather than ancillary tool for risk management.16 This is
particularly natural for super-majors, who tempt to self-insure and minimize transaction
costs.17 But this reason is hardly applicable to smaller companies as they cannot afford self-
insurance.
14 Caledonia North Sea Ltd. v British Telecommunications Plc same v Kelvin International Services Ltd. same v London Bridge Engineering Ltd. same v Norton (No. 2) Ltd. (In Liquidation) same v Pickup No. 7 Ltd. same v Stena Offshore Ltd. same v Wood Group Engineering Contractors Ltd. - [2002] 1 Lloyd's Rep 553 15 Some companies "mark" them with extra-bright coveralls and have New Worker Support rules in place. 16 Supra note 6, p.344 17 BP Annual Report and Accounts 2007, p.39
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Costs
Another driver is related to costs; for instance, those arising from possible litigations. Apart
from legal and administrative fees these may include rig downtime costs for statutory
investigations, personnel extra working hours and other costs that could be avoided if parties
have taken a "hold harmless" approach. These drivers point at one key feature of the oil and
gas business – practicality. Oilmen work in the intensive and venturesome industry and use
every opportunity simplify everything that is not related to the core of this business.
Multiple Contractors and Briefly on Back-to-Back Indemnity
Petroleum operations involve numerous contractors. Many people live on the offshore
platform working for an operator, a drilling contractor its subcontractors and other
contractors. Some companies employ many employees some have only one at the platform. In
this situation risk exposure is uneven. In addition, contacts between work processes and
people are very intensive and a person can be injured by the tool of the party that his
employer has no contractual relations with. It looks more practical in this case that every
party is responsible for its own people or equipment.
But how can the risk profile be evenly distributed? Risk can be spread through the chain of
mutual indemnity agreements. In this chain, operator would indemnify all parties below the
contractual line (as there is nobody on top of him) and respectively would get indemnity from
these parties via contractor. Such contractor would indemnify operator up the line and
subcontractors down the line. The same way subcontractor would indemnify contractor and
sub-subcontractors.18 In practice there would be several lines and "branches" involved
creating the matrix rather than a simple chain and requiring extra efforts to support indemnity.
Prominent initiative was taken in the UKCS and is called Industry Mutual Hold Harmless
18 Comprehensive schematic explanation in Supra note 6, Figure 13.1, p.347
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scheme.19 In other regions, operators may request all contractors and subcontractors working
at the well site to sign mutual hold harmless agreement.
A few important points should be mentioned. First is that there shouldn't be any holes in the
arrangement, i.e. all contractors and subcontractors should be inside the matrix. Next is that
indemnity provisions should be aligned in the direct contracts between the participants –
back-to-back principle. Another point is problematic – what if different contracts between the
participants are governed by different laws treating indemnity concept differently? But this
question deserves a separate discussion.
2. TYPES
Indemnity may function in different contracts. But operator-contractor agreements seem to be
the most interesting ones. They are characterized by higher degree of commercial interactions
and tensions compared to JOA which does not assume provision of goods or services as a
central part of an agreement.20 JOA is more a contract "within" rather than a contract
"between" and is more designated to achieve common goals and objectives of parties.
Indemnities provided by JOA partners to an operator against losses incurred by a Joint
Venture are justified by the fact that operator is in charge of major commercial activities21 and
relative risks should be mitigated or spread over to partners. In purely commercial terms,
there is no party on top of an operator in a contractual line as license or concession is signed
with a government and this is a different part of the overall picture. Thus, a risk mitigating
cushion is created by JOA partners (see Figure 1). Another question deserving further
separate discussion would be how this is managed if a state is participating in JOA via NOC.
19 Industry Mutual Hold Harmless Scheme, http://www.imhh.com/ (visited 2008-07-10) 20 Another interest is purely practical: being a non-lawyer the author of this paper is still involved in negotiations with oil companies who often have a very little knowledge of the indemnity. 21 Kramer B.M. and Conine G.B., Joint Development and Operations in Smith E.E. et al, International Petroleum Transactions, 2nd Ed. (Rocky Mountain Mineral Law Foundation, 2000), p.564
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Indemnity can also be unilateral provided only by one party. For example, operator provides
indemnity to contractor for any losses below rotary table even if they are caused by
contractor's negligence.22 This is because such losses may be so high that it would be
economically unfeasible and extremely risky for a contractor to assume responsibility or
provide insurance. However, this provision is subject to the right of an operator to request re-
drilling of the well which is explained by the high drilling costs. But as a general rule,
everything below rotary table is considered to be operator's "domain". Though, in some
Former Soviet Union countries it is often argued by operators that contractor shall be
responsible for absolutely everything he is doing. This may be due to the formal approach
applicable in other industries or the "old school" socialist view to the economics and risks of
the project.
The subject can be examined depending on what liability is indemnified. It can be liability for
damages to people or equipment or it can be fiscal or environmental liability, normally going
hand-in-hand with relative statutory requirements and limitations. Consequently contract
provisions vary depending on the type of indemnity. In this paper the concept is mainly
viewed against the background of indemnity for liability for damages to people or equipment.
22 Supra note 8, Art.18.5-18.6
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Figure 1: Basic Structure of Risk and Indemnity Flow in Oil and Gas Industry
3. DRAFTING AND INTERPRETATION
As it was mentioned earlier, whatever the contractual indemnity arrangements between the
parties are, if it comes to the litigation, they would be examined and interpreted by judges
serving in different jurisdictions and having different views on indemnity. This means that
due care should be taken when drafting choice of law provision of the contract. This part of
the paper is looking at how different legal systems treat contractual indemnity.
3.1 English Law
Traditional approach of the English Law, probably as well as of many other legal systems,
can be summarized as "the party who is in breach is liable".23 But contractual arrangements
may deviate from this approach. Interpretation of the contractual indemnity clause was
discussed in EE Caledonia Ltd v Orbit Valve Co24 - the case that raised many questions about
clashes between enforcement of indemnity agreements with important public policy concerns.
23 Treitel G.H., The Law of Contract, 11th Ed. (Sweet & Maxwell, 2003), p.926 24 EE Caledonia Ltd v Orbit Valve Co, Court of Appeal [1995] 1 All ER 174, [1994] 1 WLR 1515, [1994] 2 Lloyd's Rep. 239
Indemnity flow within JOA as per AIPN model Art. 4.6(a) and (b) subject to optional (c) (black colour) Risk dissemination within JOA (grey colour) Indemnity flow between Operator and other Parties (black colour) Risk flow between Operator and other Parties (grey colour)
Unilateral indemnities (black colour)
Operator
Contractors and subcontractors
JOA partner JOA partner
JOA partner JOA partner
State (Government)
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The defendant's (Orbit) employee lost his life in Piper Alpha fire. Dependents of the
employee sued the plaintiff (EE Caledonia Ltd), the claim being based on the breach of the
common law duty of care and breach of statutory duties. Liability arouse assuming that
plaintiff's (operator's) engineer in charge was responsible for the fire and various breaches of
statutory duty took place. The plaintiff settled the claims and was looking to be indemnified
by the defendant as per the indemnity agreement.25
Questions for the court were if indemnified liability had been caused by the operator's
negligence, if it had been caused by breach of statutory duty by the operator as well as his
negligence and if injury and death had occurred in connection with the performance of the
agreement.
It was noted by the court that it doesn't matter what intentions of the parties were when they
signed the contract but what matters is to understand what words of the article mean. This is
in line with predictability requirements of the English Law – whatever is meant when a
contract is drafted it must be clearly expressed as a judge will be looking at the contract
language but not at the parties' intentions. If a negligent party wants to be indemnified, the
text of the contract must contain express reference to negligence of the indemnitee or words
equivalent to such negligence. In Orbit Valve it is difficult to understand the meaning of
indemnity clause and its connection to the negligence of the "potential" indemnitee, neither
there is a reference to the breach of statutory duty. To understand the meaning of the clause
the court applied Lord Morton's test from Canada Steamship Lines Ltd v R26 that can be
summarized as follows:
a) If indemnity from liability due to negligence is expressly stated such clause is effective;
b) If it is not stated, the court must decide if other words mean such indemnity;
25 Indemnity provisions of the contract are in Supra note 21, p.574 26 Canada Steamship Lines Ltd v R, [1952] 1 Rep 1, p 8; [1952] AC 192, p 208
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c) If other words are not enough, the court must look for the original grounds ("the head of
damage") of liability and these grounds must be connected to the subject ("not fanciful or
remote"), for e.g. it could be gross negligence or breach of statutory duty and if such grounds
are other than negligence the indemnitee is not to be indemnified.
The judge concluded that even if the language of the contract was wide enough to cover
indemnitee's negligence, it didn't pass the part of the test in terms that the words of the same
article could have been intended to exclude other "heads of claim", in this case breach of
statutory duty27. Thus the claim was dismissed.28
There was an attempt to deviate from the strict to more contextual view on the interpretation29
but in general, contra proferentem30 approach assuming that ambiguous term of the contract is
construed against the interests of the party who imposed it is prevailing.
It should be mentioned that Lord Morton's approach was criticized in some other common
law jurisdictions31 where it was stated that absence of ambiguity in the indemnity clause
should be sufficient to cover negligence and part (c) of the Canada Steamship "test" was not
effective in the absence of ambiguity.32
In general, if the parties choose English Law to govern their contract they should first of all
consider predictability, and think that they primarily draft the clause not for themselves but
for a judge or an arbitrator who will interpret it. Definitions should be clearly refined and
statutory limitations taken into account. Parties' intentions should be express and
unambiguous to avoid misunderstanding.
27 Supra note 6, p.359 28 The court also stated that death was connected with the contract performance even if the engineer was not working at that time. This is a reasonable decision especially if the one takes into account confined working conditions offshore. The claim was dismissed 29 Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 30 Latin for "against (contra) the one bringing forth (the proferens)", http://en.wikipedia.org/wiki/contra_proferentem (visited 2008-07-11) 31 Panicker V., Sinking the Steamship, Building & Construction News, October 2007, http://www.piper-alderman.com.au/media/files/3145.pdf (visited 2008-07-07) 32 BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173
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3.2 The Laws of Texas
Indemnity provisions under the laws of Texas flow from Ethyl case33 and focus on "express
negligence doctrine" and "fair notice" requirements.
In Ethyl, a contractor's (Daniel) employee was injured during the work at the owner's (Ethyl)
worksite. It was determined that Owner was 90 per cent responsible for the injury and
Contactor was 10 per cent negligent in causing the injury. The contract indemnity clause read
as follows:
"Contractor [Daniel] shall indemnify and hold Owner [Ethyl] harmless against any loss or
damage to persons or property as a result of operations growing out of the performance of this
contract and caused by the negligence or carelessness of contractor, contractor's employees,
subcontractors, and agents or licenses."
Ethyl argued that this clause was sufficient to seek for indemnity under the contract.
Express negligence doctrine assumes that "a party seeking to indemnify the indemnitee from
the consequences of its own negligence must express that intent in specific terms" and such
intent "must be specifically stated within the four corners of the contract."34
The court rejected Ethyl's arguments that the indemnity provision was in line with the express
negligence test and held that contractual language of “any loss” and “as a result of
operations” did not expressly state that Daniel Construction was indemnifying Ethyl for
Ethyl's own negligence.
33 Ethyl Corp. v Daniel Construction, 725 S.W.2d 706 (Tex 1987) 34 Ibid, 708
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It was further enhanced in Dresser case where the clause passed express negligence test, as it
was stated that effect of the contract was "to "exculpate" each party from the consequences of
its own negligence and transfer that risk to Page the better policy is to cut through the
ambiguity of those provisions and apply an express negligence rule".35 To compare with Ethyl
language, the contract between Page and Dresser reads as follows:
"[Page] shall indemnify [Dresser] and hold [Dresser] free and harmless from all claims for
subsurface damage or injury to the well including claims that injuries or damages were caused
by [Dresser's] negligence, whether such claims are made by [Page], by [Page's] employees, or
by third parties."
The difference is obvious. But this is only one part of the "fair notice requirements" for the
clause to be effective. The clause didn’t pass conspicuousness part of the test whereby it must
be clearly visible and explicit,36 put in capital letters or any other conspicuous way or when
the language of the clause is located in an extremely short document.37
Fair notice requirements were scrutinised in different ways after Green case38 which raised
certain questions about Texas Supreme Court's position.39 But the most important statement
of the Supreme Court to keep in mind is that these requirements only apply to the clauses
which “operate to shift risk in an extraordinary way, such as exculpating a party from the
consequences of its own negligence."40 Indemnification is definitely covered by such clauses.
35 Dresser Indus. v Page Petroleum, 821 S.W.2d 359 (Tex. App.—Waco 1992), 368 36 Murphy P.S., The Contract You Thought You Made: The Express Negligence Doctrine (Part 1), Thompson & Knight LLP, Publications, 2003 37 Supra note 35, 511 38 Green International, Inc v Solis, 951 S.W.2d 384 (Tex. 1997) 39 Fox T.R., Risk Shifting from Ethyl to Green: Fork in the Road or New Path?, Int. I.L.R. 1998, 6(7), 231-237 40 Supra note 38, 387
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Texas Oilfield Anti-Indemnity Act41
Important statute was adopted in Texas having effect on oil and gas operator-contractor
relations. Texas Oilfield Anti-Indemnity Act says that any “agreement pertaining to wells for
oil, gas or water or to a mine for a mineral” envisaging indemnity to a person against liability
caused by its own negligence and arising from personal injury or death, property injury, or
any loss, damage or related expense is unenforceable.42
It is argued that the Act helps to remove unfair conditions and undue financial burden from
smaller contractors who were forced by operators' bargaining powers to indemnify them not
only from the contractor’s negligence, but from their own negligence as well.43
The scope of the Act is huge and expands to all major upstream and midstream operations
mainly excepting surface operations (for example, construction of pipelines).44 Apart from
that it doesn't cover JOAs as they are deemed, inter alia, to be commonly understood,
accepted, and desired by the parties, encourage mineral development and to be not against the
public policy.45 If thoroughly examined operations covered by and excluded from the Act
appear to have different risk profile.
Allowance is made in the Act for the indemnity agreements if they are backed up by liability
insurance coverage in accordance with the outlined requirements (different for mutual and
unilateral indemnity)46. This, however, raised certain debates and litigations.47
In general, drafters of the indemnity provision governed by the Laws of Texas should
consider doctrines of fair notice and express negligence and be careful if the contract is
41 Tex. Civ. Prac. & Rem. Code §§127.001–127.007 42 Ibid., §127.003 43 Texas Oilfield Anti-Indemnity Statute, http://images.jw.com/com/publications/203.pdf (visited 2007-07-07) 44 Supra note 41, §127.001 45 Supra note 41, §127.002 46 Supra note 41, §127.005 47 Redfearn R., Oilfield Anti-Indemnity Acts and Their Impact on Insurance Coverage, 2005-08-22, http://www.insurancejournal.com/magazines/southcentral/2005/08/22/features/59583.htm (visited 2008-07-10)
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related to oil and gas well services, taking into account the Texas Oilfield Anti-Indemnity
Act. Apart and its insurance requirements.
3.3 Other Jurisdictions
The main problem may arise when parties work in the countries outside the domain of
English Law or The Laws of Texas, even if they properly drafted the indemnity clause but
put, for example, Kazakh or Russian Law as the governing law of the contract. Many
jurisdictions do not uphold indemnity concept.48
In Kazakhstan, in the case of injury or damages a party in breach would be sued in
accordance with the Civil Code provisions49. Where tort is involved, it is very unlikely that
judges would exercise any freedom of the contractual provisions. Unfortunately it is quite
difficult to find judicial decisions of Kazakh courts but most probably, formal approach of
"party in breach is liable" would be taken and there is a very small chance that indemnity
agreements, especially the ones where a party is indemnified for its own negligence, would be
enforceable. The judges will refer to legislation that is often ambiguous and has many cross-
references to various decrees, related to the offshore safety50 the safety of oilfield
operations51, general industrial safety rules52 and if the case is about damage to equipment, to
hundreds of technical requirements (GOST's). This is the fundamental difference with
Common Law approach.
The parties working outside common law jurisdictions should pay attention to the governing
law clause and try to have common law as a governing law if they use indemnity clause in the
contract.
48 Civil Code of the RoK, General Part, Ch.20-21, 1994-12-27 (as of 2007-08-07); Civil Code of Russian Federation, Part I, Section III, Sub-section I, 1994-11-30 (as of 2008-06-30) 49 Civil Code of the RoK, Particular Part, Ch. 47 §§2-3, 1994-12-27 (as of 2007-08-07) 50 Offshore Safety Rules of the RoK No.RND-99 (as of 1999-06-28) 51 Decree No.745 of the RoK on Oilfield Operations (as of 1996-06-18) 52 Law of the RoK No.314-II on Industrial Safety (as of 2002-04-03)
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CONCLUSION
Indemnity is a complex but very effective concept. It allows deviating from formal views of
the law on risk allocation and has remarkably developed in oil and gas industry. This is
because risk management in the industry is one of the key points due to high risk profile,
complexity and considerable cash involved. On the other hand, the industry is driven by
practicability and with the help of the party autonomy rule the clash of risk and practicability
can be mitigated in the contracts. Indemnity and insurance arrangements aligned with general
limitation of liability provisions53 are the key parts of this mitigation.
Parties exercising indemnity provisions should expressly and unambiguously draft what
liabilities they intend to indemnify and to what extend. Under the Laws of Texas the clause
must also be conspicuous and all people involved in negotiations, drafting and reviewing
should be aware of it.54
Definitions of every element of the clause should be clear. Care must be taken in terms of
indemnity from liability caused by gross negligence, wilful misconduct and breach of
statutory duty as "extra" to indemnity from liability caused by negligence. When used,
liability capping should be aligned and cross-checked with insurance and other provisions.
During negotiations, statutory requirements shall be taken into account and governing law
provisions considered so that the indemnity clause would have sense at all. When parties can
choose between English Law and the Laws of Texas, they must consider Texas Anti-
Indemnity Act limitations and its insurance requirements.
53 Supra note 6, p.335 54 One translator formatted the contract governed by the Laws of Texas and changed all "ALL CAPS" to normal font; nobody reviewed formatting of the final version of the contract, so it was signed "as formatted".
17
Parties can negotiate and include in the contract almost everything subject to certain
exceptions55 but they need to think if such arrangements will make sense and if they will be
efficient and enforceable.
55 Supra note 5
18
BIBLIOGRAPHY:
PRIMARY SOURCES
Statues Civil Code of Russian Federation, Part I, 1994-11-30 (as of 2008-06-30)
Civil Code of the Republic of Kazakhstan, 1994-12-27 (as of 2007-08-07)
Decree No 745 of the Republic of Kazakhstan on Oilfield Operations (as of 1996-06-18)
Law 314-II of the Republic of Kazakhstan on Industrial Safety (as of 2002-04-03)
Offshore Safety Rules of the Republic of Kazakhstan RND-99 (as of 1999-06-28)
Tex. Civ. Prac. & Rem. Code §§127.001–127.007
Cases
BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173
Caledonia North Sea Ltd. v British Telecommunications Plc same v Kelvin International Services Ltd. same v London Bridge Engineering Ltd. same v Norton (No. 2) Ltd. (In Liquidation) same v Pickup No. 7 Ltd. same v Stena Offshore Ltd. same v Wood Group Engineering Contractors Ltd. - [2002] 1 Lloyd's Rep 553
Canada Steamship Lines Ltd v R, [1952] 1 Rep 1, p 8; [1952] AC 192
Dresser Indus. v Page Petroleum, 821 S.W.2d 359 (Tex. App.-Waco 1992)
EE Caledonia Ltd v Orbit Valve Co, Court of Appeal [1995] 1 All ER 174, [1994] 1 WLR 1515, [1994] 2 Lloyd's Rep. 239
Ethyl Corp. v Daniel Construction, 725 S.W.2d 706 (Tex 1987)
Green International, Inc v Solis, 951 S.W.2d 384 (Tex. 1997)
Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
19
WesternGeco Ltd v ATP Oil & Gas (UK) Ltd – [2006] 2 Lloyd's Rep 535
SECONDARY SOURCES
Books
Gordon, G., Risk Allocation in Oil and Gas Contracts in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007)
Kramer, B.M. and Conine, G.B., Joint Development and Operations in Smith E.E. et al, International Petroleum Transactions, 2nd Ed. (Rocky Mountain Mineral Law Foundation, 2000)
Paterson, J., Health and Safety at Work Offshore in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007)
Smith, E.E., Service Contracts, Technology Transfers and Related Issues, in International Petroleum Transactions, 2nd Ed. (Rocky Mountain Mineral Law Foundation 2000)
Treitel, G.H., The Law of Contract, 11th Ed. (Sweet & Maxwell, 2003)
Articles Daniels, R.G., Contractual Indemnities: To What Extent Are They Legally Enforceable and Insurable? https://www.schinnerer.com/risk_mgmt/design_firms/amia/indem.pdf (visited 20089-07-09)
Fox, T.R., Risk Shifting from Ethyl to Green: Fork in the Road or New Path?, Int. I.L.R. 1998, 6(7), 231-237
Murphy, P.S., The Contract You Thought You Made: The Express Negligence Doctrine (Part 1), Thompson & Knight LLP, Publications, 2003
Panicker, V., Sinking the Steamship, Building & Construction News, October 2007, http://www.piper-alderman.com.au/media/files/3145.pdf (visited 2008-07-07)
Phillips, D., Cost of Offshore Drilling Rising as Fast as Oil Prices, 2008-05-08, http://industry.bnet.com/energy/2008/05/08/cost-of-offshore-drilling-rising-as-fast-as-oil-prices/ (visited 2008-07-08)
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Other sources AIPN Mobile Offshore Drilling Unit Contact 1999
20
Baker Hughes Inc., Master Service Agreements, www.bakerhughesdirect.com/resources/legal/contracts/MSA (visited 2008-07-11)
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BP Annual Report and Accounts 2007
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