Article

A Bird's Eye View of the Nation's Oilfield-Services Anti-Indemnity Acts

Apr 3, 2013
American Bar Association

Indemnity agreements are a common provision in contracts in nearly every industry. Four states have enacted anti-indemnity statutes to specifically address the oilfield-services industry: Texas, Louisiana, New Mexico, and Wyoming. The purpose behind these particular statutes is to promote fairness for owners and operators of oil and gas wells from delegating their duties to those with inferior bargaining power—namely, the well-service contractors. While the policy purposes of such statutes are similar, the precise language and judicial interpretation of each results in very different implementation.

In drafting, revising, or negotiating an oilfield-services agreement, one needs to identify the specific type of services work and the jurisdiction where the work is to be performed to achieve the intent of the parties and avoid potential legal bars. Attempting to tailor the indemnification to a particular state using a choice-of-law provision may have little advantage and ultimately fail to accomplish the drafter’s objective. Further, in certain jurisdictions, a construction anti-indemnity statute may create a second barrier to enforceability. The purpose of this article is to give a brief overview and comparison of the major oilfield-services anti-indemnity acts and to consider the effect of a choice-of-law provision in such agreements.

Texas

Texas has an oilfield anti-indemnity statute and recently enacted a construction anti-indemnity statute. Both of these anti-indemnity statutes void indemnity clauses that encompass the indemnitee’s own negligence, in whole or in part. While both statutes impede the ability to be indemnified for one’s own negligence, the Texas Oilfield Anti-Indemnity Act (TOAIA) provides an exception—applicable to both acts—when certain requirements are met.

Texas Oilfield Anti-Indemnity Act. The TOAIA applies to agreements pertaining to a well for oil, gas, or water, or to a mine for a mineral. Tex. Civ. Prac. & Rem. Code § 127.001. The TOAIA is broader than other oilfield anti-indemnity acts as it not only includes production activities at the well head, but also includes collateral services such as furnishing or renting equipment, incidental transportation, goods and services furnished in connection with such services, purchasing, gathering or storing of oil, water, etc. However, the TOAIA specifically excludes the construction, repair, and maintenance of pipelines. The TOAIA covers damages that arise from (i) personal injury or death; (ii) property damage; or (iii) any loss, damage, or expense resulting from either (i) or (ii).

Although the TOAIA voids an agreement to indemnify for the indemnitee’s own negligence, the TOAIA provides an exception where the parties agree in writing that the indemnity obligation will be supported by liability insurance furnished by the indemnitor. Id. at § 127.005. If the parties have mutual or reciprocal indemnity obligations, then the indemnity obligation is limited to the extent of the insurance coverage each party has agreed to provide in equal amounts as the other party. In the case of a unilateral indemnity obligation, the amount of required insurance is limited to $500,000. The TOAIA allows parties to name the indemnitee as an additional insured under the indemnitor’s insurance policy and also contract to have the indemnitor waive its rights of subrogation against the indemnitee. In this sense, the TOAIA is very different from the other oilfield anti-indemnity acts addressed below.

Additionally, to be a valid indemnity provision, the agreement must comply with the “fair notice” requirements. Dresser Indus., Inc. v. Page Petroleum, Inc. 853 S.W.2d 505, 511 (Tex. 1993). Specifically, this requires that (i) the contact clearly establish the indemnitor’s express intent to indemnify for the indemnitee’s own negligence (the “express negligence test”); and (ii) such language is conspicuous enough to attract the attention of a reasonable person to the fact that the indemnity provided includes the other party’s own negligence. Case law in Texas has led to a “conspicuousness” practice that agreements should explicitly identify the type of negligence indemnified—such as sole, joint, concurrent, active, or gross—and be noted by bold or capital wording. If the express negligence test and conspicuousness requirements are met, the parties are free to contract for the indemnification of one’s own negligence.

Construction Anti-Indemnity Act. On January 1, 2012 the Texas construction anti-indemnity act became effective and voided prospective agreements providing indemnity for the other party’s own negligence. Tex. Ins. Code § 151.102. However, the statute allows an exception where the construction contract is subject to the TOAIA—such as a contract relating to a well. As this statute is relatively new, one concern is that the construction anti-indemnity act may be applicable in pipeline services that, as discussed above, are not currently covered by TOAIA. Despite this potential expansion of restricting the freedom to contract in the oilfield-service industry, a possible loophole is that the statute does not prevent waivers of subrogation—which may enable parties to achieve the same effect as providing indemnity for one’s own negligence.

Effect of the Texas Oilfield Anti-Indemnity Act. If an indemnity provision is held to violate the TOAIA, then the entire provision is null and void. This means that even where the indemnitor is partly negligent, the indemnitee is estopped from seeking any indemnity from the indemnitor.

Louisiana

Under Louisiana law, an indemnitee can be indemnified against the consequences of its own negligence as long as the indemnity agreement is expressed in unequivocal terms. Polozola v. Garlock, Inc., 343 So. 2d 1000, 1003 (La. 1977). The unequivocal-terms test is a different and less stringent standard than Texas’s Express Negligence Rule, but the provision will be construed strictly to determine if the parties intended to provide indemnity for all types of negligence, including the indemnitiee’s sole negligence. Miller v. La. Gas Serv. Co., 680 So. 2d 52, 55 (La. Ct. App. 5th Cir. 1996). However, Louisiana’s Oilfield Indemnity Act (LOIA) also limits the ability to indemnify for one’s own negligence. Although Louisiana has a construction anti-indemnity act, the act is only applicable to public contracts.

The Louisiana Oilfield Indemnity Act. The LOIA specifically prohibits an indemnitee from being indemnified for his or her own negligence or fault—strict liability—that causes death or bodily injury to another in agreements pertaining to a well. La. R.S. 9:2780. Unlike Texas, the LOIA does not apply to property damage. The LOIA also restricts parties from agreeing to include waivers of subrogation or name the other party as an additional insured on the indemnitor’s insurance policy where the effect is to circumvent the purpose of the LOIA. Despite this prohibition, the Fifth Circuit has carved out an exception when the indemnitee pays the additional cost associated with naming the indemnitee as an additional insured on the indemnitor’s policy—known as the “Marcel exception.” Marcel v. Placid Oil Co., 11 F.3d 563, 569–70 (5th Cir. 1994). If the Marcel exception applies, then the LOIA will not void the indemnity agreement despite the inclusion of the indemnitee’s own negligence. The Marcel exception has been applied by Louisiana courts and appears to require that the party seeking indemnity pay the actual increase in premium of the insurance as opposed to simply paying the associated expense of the additional insurance.

While Louisiana courts have found LOIA to be broader than the TOAIA—thus finding it applicable in more cases—historical judicial interpretation yields inconsistent results on how the LOIA should actually be interpreted. Getty Oil Co. v. Ins. Co. of N. Am., 845 S.W.2d. 794, 805 (Tex. 1992). In determining whether the LOIA applies, Louisiana courts use a two-step approach. The first inquiry is a fact-based analysis of whether the contract pertains to a well. Transcon. Gas Pipe Line Corp. v. Transp. Ins. Co., 953 F.2d 985, 991 (5th Cir. 1992). The second is whether the contract relates to the “exploration, development, or transportation of oil, gas or water.” Id. However, while some courts place more emphasis on first inquiry, other courts place a stronger focus on the second inquiry. See G. Roth Kehoe II, Comment, “The Louisiana Oilfield Indemnity Act: A Necessary Limit to Contract Freedom or Paternalism for Roughneck Contracts?” 70 Tul. L. Rev. 1097, 1102–04 (1996). The result is that the application of the statute is not consistent. To add to this inconsistency, federal courts have historically read the LOIA more narrowly, making the LOIA inapplicable under similar facts where a state court may have found that it applied. Id. Consequently, how the LOIA is actually interpreted may depend on where the case is filed rather than the legislative intent.

Effect of the Louisiana Oilfield Indemnity Act. Like the TOAIA, if an indemnity provision is held to violate the LOIA, then the entire provision is null and void. Thus, the indemnitee is not entitled to seek indemnity even for the indemnitor’s negligence. Meloy v. Conoco, Inc., 504 So. 2d 833, 839 (La. 1987).

New Mexico

New Mexico has enacted both an oilfield anti-indemnity statute and a construction anti-indemnity statute. Both statutes preclude indemnity provisions that include a party’s own negligence in whole or in part. In interpreting anti-indemnity statutes, New Mexico courts will first analyze the statute in view of favoring the public policy embedded in the statute and then in view of the freedom to contract. Holguin v. Fulco Oil Servs. L.L.C., 245 P.3d 42 (N.M. Ct. App. 2010), cert. dismissed, 289 P.3d 1254 (N.M. 2011).Additionally if the contract does not define the type or services or work to be performed, a court will look beyond the contract at the actual service or work to determine if the anti-indemnity statute is triggered.

Oilfield Anti-Indemnity Act. The New Mexico Oilfield Anti-Indemnity Act (NMOAIA) precludes indemnity provisions that allow the indemnitee to be indemnified for his or her own negligence. N.M. Stat. Ann. § 56-7-2. While the NMOAIA applies to oilfield services, its application is limited to production activities at the well head and does not cover all services rendered in connection with the well. Specifically, New Mexico case law has provided that the NMOAIA does not apply to the distribution, processing, or transportation of oil or gas because such activities are omitted from the enumerated list in the statute. Holguin, at ¶ 23. Moreover, the statute prohibits a party from including waivers of subrogation rights in the other party’s insurance policy if the effect would be to provide indemnity for the other party’s negligence.

Construction Anti-Indemnity Act. Like the NMOAIA, the New Mexico Construction Anti-Indemnity Act also prohibits indemnity agreements that include the indemnitee’s own negligence. While in one situation, the NMOAIA may not apply to certain services rendered in connection with the well, the New Mexico Construction Anti-Indemnity Act has the potential to limit an indemnity provision not rendered void under the NMOAIA. The New Mexico Construction Anti-Indemnity Act covers contracts “relating to construction, alteration, repair or maintenance of any real property in New Mexico and includes agreements for architectural services, demolition, design services, development, engineering services, excavation or other improvement to real property, including buildings, shafts, wells and structures, whether on, above or under real property.” N.M. Stat. Ann. § 56-7-1 (emphasis added). Accordingly, many services provided in oil and gas operations may trigger the New Mexico Construction Anti-Indemnity Act.

Effect of the New Mexico Anti-Indemnity Acts. Under both New Mexico anti-indemnity statutes, courts have held that the statutes do not prohibit providing indemnity for the indemnifying party’s own negligence. Thus, unlike the Texas and Louisiana acts, the party seeking indemnity is still able to have negligence adjudicated and to compel the indemnifying party to pay the allocable share of its negligence. Holguin, at ¶38–44.

Wyoming

Wyoming allows the indemnity of an indemnitee’s own negligence where it is clearly and conspicuously stated, except in agreements that pertain to a well of oil, gas, or water, or a mine for minerals.

Oilfield Anti-Indemnity Act. Under Wyoming’s Oilfield Anti-Indemnity Act (WOAIA), any agreement that seeks to indemnify an indemnitee for its own negligence is void and unenforceable to the extent of the indemnitee’s negligence. Wyo. Stat. § 30-1-131. The scope of the WOAIA applies only to work directly related to the well. In other words, the services performed must be similar to “drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, altering, [or] plugging . . .” as provided in the statute. Unlike the Louisiana and New Mexico Acts, the WOAIA does not include language expressly prohibiting the contracting party’s right to include language regarding waivers of subrogation or including the indemnitee as an additional insured on the indemnitor’s insurance policy. However, at this time, no case law is directly on point as to whether such language would be enforceable to achieve the effect of indemnifying the indemnitee for the indemnitee’s own negligence.

Effect of the Anti-Indemnity Acts. The WOAIA specifically states that provisions that violate WOAIA are only “void and unenforceable to the extent that such contract of indemnity by its terms purports to relieve the indemnitee from loss or liability for his own negligence.” Thus, similar to the New Mexico Act, the indemnitee is still able to seek indemnity for the indemnitor’s negligence. Cities Serv. Co. v. N. Prod. Co., 705 P.2d 321, 329 (Wyo. 1985).

Choice of Law Unlikely to Avoid Effects of the Oilfield Anti-Indemnity Statutes

In Texas, in “a contract with an express choice of law, indemnity is governed by the law chosen by the parties unless (1) there is a state with a more significant relationship to the transaction . . ., (2) applying the chosen law would contravene a fundamental policy of that state, and (3) that state has a materially greater interest in the determination of the particular issue.” Chesapeake Operating v. Nabors Drilling U.S., 94 S.W.3d 163, 169–70 (Tex. App.-Houston [14th Dist.] 2002) (determining that claims arising out of a contract—containing a choice-of-law provision subjecting claims to Texas law—should be analyzed under Texas law despite that the injury occurred in Louisiana because “the interest in freedom of contract . . . outweighs any interest Louisiana has in voiding a contract between foreign companies regarding foreign litigation”). While it appears that Texas courts will at least analyze whether the choice of law provided in the agreement should apply, there is no guarantee that the choice-of-law provision will prevent application of the TOAIA or other anti-indemnity statute.

Louisiana courts will not enforce a choice-of-law provision if the terms of the contract are against Louisiana’s public policy. In two cases, courts have stated that a choice-of-law provision that nullifies the effect of LOIA is contrary to Louisiana’s public policy. See Lirette v. Union Tex. Petroleum Corp., 467 So. 2d 29, 32 (La. App. 1 Cir. 1985) and Clarkco Contractors, Inc. v. Tex. E. Gas Pipeline Co., Div. of Tex. E. Transmission Corp., 615 F. Supp. 775, 778–79 (M.D. La. 1985); see also Roberts v. Energy Dev. Corp., 235 F.3d 935 (5th Cir. La. 2000) (invalidating a Texas choice-of-law provision because such application would circumvent the public policy under LOIA).Thus, it is unlikely that a choice-of-law provision subjecting the claim to the laws of another jurisdiction will be applicable to prevent the applicability of the LOIA.

Similarly, New Mexico holds that providing a choice-of-law provision will not invalidate the New Mexico anti-indemnity provisions where the other state’s law undermines New Mexico’s public policy. When a contract is performed in New Mexico, courts have held that the New Mexico anti-indemnity acts apply, despite a contrary choice-of-law provision. See Pina v. Gruy Petroleum Mgmt. Co., 136 P.3d 1029 (N.M. Ct. App. 2006). Likewise, Wyoming will disregard a choice-of-law provision if the indemnity agreement offends Wyoming law or its public policy related to indemnity. R&G Elec., Inc. v. Devon Energy Corp., 53 Fed. Appx. 857, 860 (10th Cir. 2002).

Conclusion

Given that Texas, Louisiana, New Mexico, and Wyoming each have distinct indemnity limitations that affect a party’s potential liability, it is crucial that drafters are aware of what type of work is going to be performed and in what jurisdiction. As shown above, it is unlikely that a choice-of-law provision will protect certain indemnity language from being struck or the indemnity provision from being voided in its entirety. Situations where the work will be performed in multiple jurisdictions may require separate indemnity provisions to ensure that the agreement of the parties is achieved in the event of litigation. While it is impossible to know the exact outcome in every situation, it is possible to take precautionary measures to reduce the risk of a result that was not intended when drafting the oilfield-services agreement.

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