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Oilfield contract risk management: Texas anti-indemnity laws

By Higginbotham on July 05 , 2017

Oilfield contract risk management

In the first part of this contract review series, we discussed the state-specific anti-indemnity laws affecting Texas construction contracts. As we explained, the Lone Star State has specific anti-indemnity laws for the commercial construction, oilfield and common carrier transportation industries. It’s important to understand these laws before your company signs a contract so you can avoid unexpected costs and litigation in the event of a claim.

In this edition of the three-part series, we’ll unpack the specific laws affecting Texas oilfield contracts. But first, be sure you understand the three basic types of indemnity (limited form, intermediate form and broad form) by referencing the first edition of this series for a review.

The Texas Oilfield Anti-Indemnity Act (TOAIA)

Prior to 1973, oil companies and oil well operators could enter into contracts with smaller contractors and require the smaller contractors to indemnify the oil companies and well operators from not only the contractor’s negligence, but from their own negligence as well. The contractors were often unable to obtain insurance at a reasonable cost, or in some cases, to obtain any insurance at all, to cover the liability that might be incurred from these indemnity obligations. Contractors were thus subjected to significant liability with no feasible means of insuring against those obligations. In addition to being unfair, this placed an undue financial burden on smaller contractors. So in an effort to combat this practice, the Texas legislature passed the Texas Oilfield Anti-Indemnity Act.

TOAIA generally provides that a broad or intermediate form indemnity is void as against public policy. Despite the breadth of the language of TOAIA, it’s limited in two important respects. First, it only applies to certain oil and gas contracts. Second, it does allow broad or intermediate form indemnification if certain conditions are met.

Types of contracts covered by TOAIA

Only contracts concerning the rendering of “well or mine services” are governed by TOAIA. This includes contracts to furnish or rent equipment, incidental transportation and other goods and services furnished in connection with the well or mine services. Essentially, this means any contract related to the rendering of services to a well drilled to produce or dispose of oil, gas, water and other minerals is governed by TOAIA.

Examples include:

  • Anything done to a well (drilling, treating, repairing, etc.);
  • The transportation of oil, petroleum products and other liquid commodities and water used in fracking operations (brine water, fresh water, produced water, etc.); and
  • Anything done to a mine (designing, constructing, improving, etc.) intended for use in exploring or producing a mineral.

Types of contracts not covered by TOAIA

The following types of contracts are not governed by TOAIA:

  • Joint operating agreements;
  • Purchasing, selling, gathering, storing and transporting gas or natural gas liquids by pipeline or fixed associated facilities; and
  • The construction, maintenance and repair of oil, natural gas liquids and gas pipelines or fixed associated equipment.
Services related to pipelines in Texas are likely governed as construction contracts (see construction contract risk management). Additionally, TOAIA doesn’t apply to bodily injury or property damage (including underground damage) that results from radioactivity, pollution and services to control a wild well.

When is broad form indemnity allowed?

Texas law requires courts to perform a two-step analysis in determining validity of indemnity agreements: first, the indemnity provision must satisfy the Texas Fair Notice Doctrine (also called the “express negligence test”); then, if the indemnity agreement passes muster, the provision must meet the following exceptions provided in TOAIA.

Exceptions provided in TOAIA

Although TOAIA voids broad and intermediate form indemnity agreements, there’s an exception when the parties agree in writing that the indemnitor will furnish liability insurance to support its indemnity obligation. However, this exception is subject to limitations depending on the type of indemnity obligation, Mutual or Unilateral, both of which are defined terms in TOAIA.

A Mutual indemnity obligation requires both parties to indemnify bodily injury or property damage claims resulting from the other party’s sole or concurrent negligence (also called “knock-for-knock”). A Unilateral indemnity obligation only requires one party to agree to indemnify bodily injury claims to its employees and agents (including employees and agents of any of its subcontractors), resulting from the indemnified party’s sole or concurrent negligence. Importantly, a Unilateral indemnity obligation only applies to bodily injury claims to the indemnitor’s employees caused by the indemnified party’s negligence; therefore an indemnity agreement in which only one party agrees to indemnify property damage caused by the indemnified party’s negligence will be unenforceable.

If an oilfield contract contains a Mutual indemnity obligation, the indemnity obligation is limited to the extent of the coverage and dollar limits of insurance or qualified self-insurance each party as indemnitor has agreed to obtain for the benefit of the other party as the indemnified party. If an oilfield contract contains a Unilateral indemnity obligation, the amount of insurance required may not exceed $500,000.

The most common method of circumventing TOAIA is to include a “knock-for-knock” indemnity provision and an agreement that each party will maintain liability insurance, in equal amounts, to support its respective indemnity obligation.

The Texas Fair Notice Doctrine

As we’ve explained, a broad form indemnity provision must first satisfy the Texas Fair Notice Doctrine in order to be valid. In summary, the doctrine requires broad form and intermediate form indemnity provisions to be: (1) clearly stated; (2) conspicuous; and (3) within the four-corners of the contract (this literally means within the four-corners of the paper the contract is written on, even if the contract is multiple pages).

To meet the requirements of this doctrine, an indemnity provision should be written in a manner in which a reasonable person ought to have noticed it, and it should: (a) clearly state which party is to be indemnified; (b) clearly set forth that the indemnity is applicable even for the indemnified party’s own negligence; and (c) specifically state that the indemnity is applicable whether the indemnified party is solely or concurrently negligent.

Contract drafters will often include a phrase like this to meet the requirements: “The parties intend this indemnification to apply regardless of whether the claim, damage, loss, or expense is caused, or alleged to be caused, in whole or in part by the negligence of the indemnitor or any indemnified party. 

Navigating the Complexities

Being unaware of the industry and state-specific statues affecting your contracts can lead to unexpected costs and litigation in the event of a claim. When you partner with the experts at Higginbotham for your contract review process, you’ll get the tools you need to make smart decisions about managing your contractual risks. We can help you avoid the pitfalls so your Texas business thrives.

 

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