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Oilfield contract risk management: Louisiana anti-indemnity laws

By Higginbotham on August 07 , 2018

Oilfield contract risk management2

In the second part of our contract review series, we discussed the anti-indemnity laws affecting Texas contracts pertaining to a "well or mine service." 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 and how geography can affect them before your company signs a contract. Not knowing how laws from different states can affect your existing agreements can result in significant costs—both litigation costs and potentially out-of-pocket claims costs.

In this edition, we explore the specific laws affecting Louisiana oilfield contracts and compare them with the Texas oilfield anti-indemnity laws. 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.

Louisiana Oilfield Anti-Indemnity Act

Oil companies have a history of exploiting their superior bargaining power to take advantage of contractors and subcontractors, usually by drafting contracts favoring the oil and gas company. Because the agreements were lopsided, several states sought a legislative remedy to even the playing field. Texas enacted the Texas Oilfield Anti-Indemnity Act (TOAA), and Louisiana enacted the Louisiana Oilfield Anti-Indemnity Act (LOAIA) in 1981. The LOAIA prohibits an indemnitor from indemnifying an indemnitee for injury to persons that is the fault of the indemnitee. If an agreement seeks this risk transfer provision, then the Louisiana legislature declares the agreement "null and void and against public policy of the state of Louisiana."

The LOAIA prohibits an indemnitor to indemnify an indemnitee in agreements pertaining to a well for the indemnitee's own negligence or fault—including strict liability—that causes death or bodily injury to another (La. R.S. 9:2780). It applies only to personal injury or death and not property damage. The LOAIA also restricts parties from including waivers of subrogation or naming the other party as an additional insured on the indemnitor’s insurance policy to circumvent the LOAIA.

The federal Fifth Circuit created an exception to these insurance restrictions where the indemnitee pays the additional cost associated with naming the indemnitee as an additional insured on the indemnitor’s policy. This exception is called the “Marcel exception” ((Marcel v. Placid Oil Co., 11 F.3d 563, 569–70 (5th Cir. 1994)). When the Marcel exception is applied, then the broad and intermediate form indemnities are not "voided." The Marcel exception requires the indemnitee to pay the actual increase in insurance premiums instead of paying the expense of additional insurance.

The LOAIA differs from the Texas law in several ways. First, LOAIA's reach regarding nullification of an indemnity provision is limited to injury to persons, while the Texas statute prohibits the indemnitor from indemnifying the indemnitee for property damage resulting from the indemnitee's own negligence or fault. Second, the scope of what qualifies as an oil and gas contract is more broad in Louisiana. In Texas, the qualifying activity must be related to a "well or mine" service, but in Louisiana the activity must be "related to" oil, gas or water production. For example, if there is an agreement for landscaping not related to oil and gas operations, but occurring where oil, gas or water are being produced, the agreement for the ancillary services could likely fall under the control of the LOAIA. Louisiana uses a two-step approach to determine applicability: 1) the trier of fact (judge or jury) decides whether the contract or agreement relates to an oil or gas well, and 2) it must be determined if the contract or agreement relates to the "exploration, development or transportation of oil, gas or water.”

Here is an excerpt from the statute that demonstrates how open-ended the application of LOAIA can be:

B. "...any provision contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water..." LA Rev Stat § 9:2780 (bold emphasis added-cg)

While broader than the Texas statute, the problem is that the LOAIA has not been evenly applied, and the resulting confusion can have costly consequences. Considering the unpredictable nature of the law's application, it's almost always better to include savings clauses or another contractual trigger to amend provisions that are found to be void and unenforceable. Adding these provisions can save a lot in litigation costs should it come to that unfortunate event.

Types of Contracts Covered by the LOAIA

The following excerpt from the statute describes what activities are covered by the LOAIA:

"...concerning any operations related to the exploration, development, production, or transportation of oil, gas, or water, or drilling for minerals which occur in a solid, liquid, gaseous, or other state, including but not limited to drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, altering, plugging, or otherwise rendering services in or in connection with any well drilled for the purpose of producing or excavating, constructing, improving, or otherwise rendering services in connection with any mine shaft, drift, or other structure intended for use in the exploration for or production of any mineral, or an agreement to perform any portion of any such work or services or any act collateral thereto.”

The use of open-ended terms like "or in connection" and "to perform any portion" makes determining whether the LOAIA applies challenging. The LOAIA applies to contracts to furnish or rent equipment, incidental transportation or 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 or other minerals is probably governed by the LOAIA. Examples include: anything done to a well (drilling, treating, repairing, etc.); the transportation of oil, petroleum products or 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 the LOAIA

The following types of contracts are not governed by LOAIA: public utilities; the forestry industry; and the sulphur industry. Also, similar to the Texas statute, the LOAIA does not apply to bodily injury or death arising from: radioactivity; a wild well or another pollution event; and activity related to the protection of the general public. Like Texas, these provisions apply to certain situations related to public safety. In addition to these safety-oriented exclusions, the LOAIA does not apply to: Operating Agreements; and Farmout Agreements. These two agreements, while related to oil and gas production, are closer related to real estate transactions and therefore not covered by the LOAIA.

Is the Agreement Expressed in Unequivocal Terms?

Texas law requires courts to perform the analysis to satisfy the Texas Fair Notice Doctrine if an indemnity seeks to indemnify an indemnitee for the indemnitee's own negligence. Just as Texas uses the "clearly stated" language in its test, Louisiana is more open to interpretation, but states the agreement to indemnify the indemnitee for the indemnitee’s own negligence must be stated in unequivocal terms. With the LOAIA, there has not been a clear test like one that Texas utilizes, but as long as the Texas standards are applied, the likelihood of ensuring an enforceable indemnity is high.

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.

 

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