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Oilfield Indemnity Contracts Ryan M. Goudelocke Durio, McGoffin, Stagg & Ackermann Oilfield Indemnity Contracts Ryan M. Goudelocke Durio, McGoffin, Stagg & Ackermann

Oilfield Indemnity Contracts Ryan M. Goudelocke Durio, McGoffin, Stagg & Ackermann - PowerPoint Presentation

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Oilfield Indemnity Contracts Ryan M. Goudelocke Durio, McGoffin, Stagg & Ackermann - PPT Presentation

Oilfield Indemnity Contracts Ryan M Goudelocke Durio McGoffin Stagg amp Ackermann 337 2330300 December 2017 MSAs generally Who are we talking about Operators Contractors SuppliersVendors Consultants ID: 761638

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Oilfield Indemnity Contracts Ryan M. Goudelocke Durio, McGoffin, Stagg & Ackermann (337) 233-0300 December 2017

MSAs generally Who are we talking about? Operators Contractors Suppliers/Vendors Consultants

MSAs generally, cont. Why memorialize contract terms in the oilfield? “to equitably distribute the responsibilities and liabilities associated with the work” Allocation of risk among parties Fulfill formal requirements to bind third parties Insurance policies: “as required by written contract”

What are we NOT talking about? Not every oilfield contractual relationship should use a typical MSA Construction Charters (vessels/aircraft) Drilling contracts Non-repetitive activities with shifting risk profiles

Let’s Back Up MSAs (MSCs, other names) serve a wide variety of purposes Generally, permit non-constant/non-contiguous relationships, thought through in advance (ideally!) without from-the-ground-up renegotiation Many provisions uncontroversial Lots of “boilerplate” Many majors have “exceptions tables” for any variances to their contracts in order to manage their many vendors Often include a template work order that supplements per job (though oral WOs are always permitted)

Backing Up, cont. Speaking of operators, where do MSAs come from? Generally, oilfield contracts, like oil, flow down, not up Variety of reasons for this Larger players have greater and more specialized resources Participants with greater exposure more concerned about risk management Firms managing many relationships want uniformity and predictability Which is why many lock their PDFs and Word docs against editing

Backing Up, all the way Various industry orgs offer basic (and not-so-basic templates) NAIOGC, for contractors AIPN/PESA IADC template Others; many operators post their standard MSAs on their websites Starting from templates can be very cost-effective and ensure a comprehensive result

Backing Up, all the way Don’t stop there Throwing a template out there without sufficient eyeballs review is asking for trouble Obvious reasons: Required insurance coverages, choice of law/forum issues, anti-indemnity issues Non-obvious reasons: templates even from large orgs can have hidden issues

Digression:The Difference a Year Makes One MSA template used by a few large operators (and a lot of smaller ones) contains the following language: “ the parties agree that in the event that the indemnity obligations of [redacted] are subject to the limitations of Act 427 of the 1982 Louisiana Legislature, and so long as that act is in force :” (emphasis added) This is precedent to a Marcel provision, which we’ll discuss shortly. There’s just one problem: they got the year wrong.

The Difference a Year Makes, cont. Louisiana Oilfield Anti-Indemnity Act: LSA-R.S. 9:2780. “Added by Acts 1981, No. 427, §1.” See the problem? Yes, the Act came into force in 1982 – but it passed in 1981 . Act 427 of the 1982 legislative session addresses… notaries public. Not oil & gas. Is this a real-world problem? Maybe not, just a typo, doesn’t really justify questioning the parties’ intent?

The Difference a Year Makes, cont. In risk management… why introduce add’l risk?!? Hundreds (thousands?) of MSAs with this mistake, in the field, right now. Takeaway: people make mistakes (even lawyers!). No one’s infallible, so even if you’re not checking minutiae like this, using templates without adequate review can mean trouble.

Back on Track:What MSAs do (agreeably) Not specific to oil & gas, not usually contentious: Supersession: “Entire Agreement” clauses Independence of parties (for WC and agency) Severability Notice provisions Exclusion of consequentials Waiver/Assignment/Force Majeure Payment terms (net-30, net-60, etc )

What MSAs do (agreeably), cont. Issues often specific to oil & gas: The work, obviously. Warranty, audit rights, invoicing, incident reporting, permitting, taxes, standards, defects, dispute resolution (sometimes) Annoying: “retain documents as long as the relevant statute of limitations applies” Include subsidiaries as alternative counterparties Apply to work done for any of parent’s children Ethical conflicts, gifts “Don’t bribe my people” HSE/OSHA/EEO/drugs/weapons CFR and EEO flowdowns ubiquitous in majors’ MSAs; uncommon for smaller operators Does your client need specialized compliance personnel/counsel?

What MSAs do (negotiated)(in reverse order of typical concern) Precedence of documents MSAs normally control over work orders – but not always Choice of law/choice of forum But don’t forget about OCSLA! And “rogue” judges Express statutory employer provisions (aka tort immunity) S/he’s our employee, but you pay the premiums Non-negotiable indemnities, not usually insurable Non-payment of subcontractors Materialmen’s/mechanics’ liens (this can, rarely, be qualified to allow vendors to lien the well for non-payment) Taxes

What MSAs do(Areas of common concern) Confidentiality “information obtained in the performance of the work;” “information developed by” Includes independently developed information? “information shared in the course of performance;” “information owned or supplied by” Clearer; fairer MSAs (especially larger operators) frequently will expressly assign newly-developed information as “work for hire,” “work product” Not necessarily inequitable ; but something very much to be aware of when contemplating any R&D work or field testing

What MSAs do, cont. Negotiable (sometimes) indemnities Intellectual property Patent infringement indemnity is the big deal here IP infringement coverage is very expensive (patent litigation costs are uniquely high) Coverage rarely feasible/worthwhile for any but larger operations deploying their own IP “Negotiable” in terms of allocation ; operators often require regardless of fault which should be unacceptable for this indemnity Generally ends up naked indemnity for contractors

Negotiable Indemnities, cont. Equipment damage/loss Usually only down-hole, since drillers take this on Similar: “Operator’s” or “Driller’s” indemnities – often (but not always) explicitly assigned Hole loss Blowout Formation damage Re-drill

Negotiable Indemnities, cont. Pollution Generally an insurance exclusion; requires either limited buyback or (rarely) full-blown separate policy: environmental impairment liability (EIL) Sudden/accidental (typical) vs. gradual/broad form Often covered by operator/driller below the rotary table/surface, contractor above However, frequently “regardless of fault” – may or may not be covered by specific policies

Indemnities to Watch (Always) Denial of Access Operators generally require they have freedom to direct removal of contractor personnel for arbitrary reasons Good reasons for this Also possibly bad reasons for this – which is where the iffiness of indemnity comes in. ADA, EEOC implications Discriminatory removal raises EPL coverage concerns, which policies do not cover third-party fault Takeaway: never, ever acquiesce to personnel removal without written good cause, in advance, and obviously never concerning suspect classifications or other discriminatory considerations This indemnity used to be more common, now rarely present

Indemnities to Watch (Always), cont. Risk allocation generally, or, “beyond knock-for-knock” Whose fault? Whose claim? “Regardless of fault” “To the extent of fault” First-party: “Company Group,” “Contractor Group” Mutual, reciprocal: “knock for knock” or one-way in Company Group’s favor When not knock for knock, mutual & reciprocal: “you break, you pay” Third-party: employees of other contractors, lessors, others Virtually always one-way in Company Group’s favor; including “pass-through” or “round-robin” Virtually always mutual & reciprocal: “you break, you pay”

First-party Indemnity:Claims by each party’s “Group” Not all Groups are made equal Company Group usually will be broader to include e.g. co-venturers, partners, joint-interest owners Otherwise, generally includes each’s directors, officers, employees, members, agents, invitees, etc. Watch out for Company Group that contains insurers Indemnified claims don’t include gross/willful/wanton negligence or intentional action (since these will be excluded by insurance)

First-party Indemnity:Claims by each party’s “Group” Usually mutual, reciprocal regardless of fault, aka “knock for knock” Less frequently, “you break you pay” More frequently “you break you pay” when choice of law is unpredictable Never know when contractual choice of law may not be honored More important, when maritime law is chosen or offshore work puts OCSLA into play, same MSA may be interpreted under different states’ laws Often just easier to saddle each party with its own fault than mess with predicting, and satisfying, multiple state regimes

What multiple regimes?Or, the Anti-Indemnity Acts Louisiana Mentioned briefly before, but simply stated: for personal injury (including death), cannot indemnify another oilfield party for that party’s negligence Does not bar indemnity for property damage (cf. Texas’ statute) Fifth Circuit to the rescue: Marcel v. Placid Oil (1994), since frequently cited by federal courts and (at least implicitly) recognized by Louisiana courts as well Marcel , in a nutshell: A pays B’s premiums, A’s MSA can insist that B indemnify A for A’s fault. Voila, no more LOAIA

Louisiana Anti-Indemnity, cont. Note that “clear and unequivocal” applies here, as always in risk allocation, similar to conspicuousness requirement of the “express negligence” rule Thus lots of bold print and underlining Anyway: Marcel frequently addressed in MSAs which contemplate either work in Louisiana, application of Louisiana law, or both Alternatively, some MSAs go with “knock for knock” generally but switch to “you break, you pay” in anti-indemnity states (Louisiana, Texas, New Mexico, Wyoming) By the way, decent overview of various states’ anti-indemnity regimes: https:// www.munsch.com/Newsroom/93429/A-Bird39s-Eye-View-of-the-Nation39s-Oilfield-Services-Anti-Indemnity-Acts

Louisiana Anti-Indemnity, cont. One thing usually not done (which I’d argue is a mistake): Marcel reciprocity First, operators which bargain for the benefit of the Marcel exception – in practice, rarely pay it. Disconnect between legal and A/P? Anyway, from the contractor’s point of view, Marcel is something of a trap! LOAIA does not distinguish between “certain contractors and their employees” and the Big Oil bad guys “foisting inequities” on them So, is an operator’s mutual indemnity for the contractor’s fault enforceable when the contractor doesn’t pay the operator’s additional premium?

Louisiana Anti-Indemnity, cont. Maybe not! See King v. I.E. Miller of Eunice, Inc. , 970 So.2d 703 (La.App. 3 rd Cir. 2007) for some dicta suggesting Marcel payment must be reciprocal Even more on point: Silverman v. Mike Rogers Drilling Co., Inc. , 34 So.3d 1099 (La.App. 2 nd Cir. 2010), writ denied , 45 So.3d 1099: “Rogers maintains that it—not an oil company like Bass—is one of the “certain contractors” that the LOAIA was designed to protect.” Wrong! Second Circuit refused to assume LOAIA treated differently-situated parties… differently Operators generally will not agree to Marcel reciprocity I have been purposefully misunderstood when requesting this, even after citing case law As of 2017, Silverman still not cited by any other case. I keep waiting…

Louisiana Anti-Indemnity, cont. Remember that table? (Back up to it) “Pass-through”/”round-robin” third-party indemnity Relatively recent in oilfield indemnity contracts (those templates die hard) but now largely ubiquitous Here’s the scenario: operator’s at the head of the octopus, has all these reciprocal indemnities with each of its contractors

Round-Robin Indemnity What relationship does each of those contractors have with each other? Historically, none Who do plaintiffs sue? Everyone (if they can) Drillers normally require operators to indemnify the driller against claims by other contractors Sets up a situation where the operator can take the fall for one contractor’s fault when that contractor’s negligence injures another’s employee

Round-Robin Indemnity, cont. Let’s get concrete: Foreman v. Exxon Corp. , 770 F.2d 490 (C.A.5, 1985) Exxon (platform owner) contracted with Diamond M (rig owner) and Offshore (casing crew) Offshore’s employee (Foreman) sued Exxon and Diamond M (LHWCA precluded suing Offshore); Exxon third-partied Offshore While Exxon had agreed to indemnify Diamond M for the latter’s liability, Exxon’s contract with Offshore did not include Offshore’s liability for Exxon’s contractual indemnity Result: Even though the jury assessed all three defendants at fault, Offshore owed no contractual liability to Exxon (and no tort liability to Foreman under LHWCA), so Exxon and Diamond M were assessed Offshore’s share of fault (which was 35%) in proportion to their own fault as assigned by the jury

Round-Robin Indemnity, cont. In Foreman , Exxon had to pay a portion of its own contractor’s fault because its MSA with that contractor did not “clearly and unequivocally” include indemnity for Exxon’s contractual obligations to other contractors Confused yet? Further cases on this issue: Wallace v. Oceaneering Int’l , 727 F.2d 427 (C.A.5, 1984); Corbitt v. Diamond M Drilling Co., 654 F.2d 329 (C.A.5, 1981)

Round-Robin Indemnity, cont. So what’s Exxon’s (or any other operator’s) solution? Two major approaches “Cross Indemnity” – explicit indemnity to “other contractors which have executed a contract with Company… containing cross indemnity provisions substantially similar to this provision” Generally calls on “Action Over” GL endorsement Sometimes insurance requirements will include specific “cross-indemnity” endorsement Broadened “Company Group” to include other subcontractors Also “action over” claims, but generally much easier to deal with from an insurance standpoint since “Company Group” is the named additional insured

Cross-Indemnity: Specifics Contractor agrees to … indemnify… Company's AND COMPANY’S AFFILIATES’ other Contractors which have executed a Contract with Company OR ONE OF COMPANY’S AFFILIATES containing Cross Indemnity provisions substantially similar to this provision ("Cross-Indemnified Contractors") from and against any and all claims suffered WITH RESPECT TO: a. PERSONAL INJURY… OF MEMBERS OF CONTRACTOR GROUP ; OR b. … PROPERTY OWNED OR HIRED BY CONTRACTOR GROUP, ARISING in connection with the Contract, howsoever caused , i ) whether or not caused… by the negligence… of any party, including Cross-Indemnified Contractors, or their respective employees or invitees, or ii) whether by defects or unfitness of any equipment, building or structure, or otherwise. The parties intend this indemnity to apply to all such claims and losses described above based on any theory of liability, including negligence, negligence per se, gross negligence, statutory, premises or strict liability of any party, including Cross-Indemnified Contractors. The parties INTEND that this Cross Indemnity apply to and be for the benefit of Company's AND COMPANY’S AFFILIATES’ other Contractors who have included substantially similar Cross Indemnity provisions in their respective Contracts with Company OR COMPANY’S AFFILIATES. For the application of this Cross Indemnity to such other Contractors, Company will ACT ONLY as A FACILITATOR for the benefit of such other Contractors, who will be entitled to enforce this Cross Indemnity directly against Contractors in addition to Company's right to enforce

Texas Anti-Indemnity Disclaimer : Not a Texas lawyer That said, the statute is at least simpler than Louisiana’s. Restricts oilfield indemnity, but permits if explicitly supported by insurance (either unilateral up to $500k or reciprocal to the agreed-upon amount) Texas law probably most commonly chosen Followed by law of operator’s domicile (if not TX) Forum is always operator’s domicile

Insurance Terms And speaking of additional insureds, our final subject Required coverages generally need to be tailored to the job, may need to be specific to particular contractors e.g. when aircraft are involved you want a very large umbrella up there Additional-insured status, primary-coverage designation, waiver of subrogation all standard and non-negotiable Not all certificates of insurance are created equal! Some CoIs may limit add’l insured rights; some operators require their own

Insurance Terms, cont. Reciprocity of additional-insured status Rarely acceptable. Why? Accepting no additional-insured status forces reliance on the upstream’s naked indemnity Contractor may end up paying for its own defense, at least initially, and eroding its limits Also introduces uncertainty into e.g. Texas enforceability of indemnities Notice of coverage modification Many insurers now charge additional premiums per additional insured to extend coverage in this manner (typically 30 days) Upstreams usually amenable either to “as soon as is practicable” or, failing that, shifting the prior-notice burden to the Contractor from the insurer