Federal Insurance Company et al v. Select Energy Services LLC and Exco et al. is a reminder for negotiators of indemnity and defense obligations in oilfield contracts that choice of law is important. Ignore it when drafting and it will be too late when litigating.

The events

Three workers were injured on an Exco drilling rig in DeSoto Parish. Two sued in Texas, one sued in Louisiana. In the Texas suit Exco demanded that Select indemnify and defend Exco under the parties’ service agreement; Select did, and paid $31MM to settle. In the Louisiana suit the roles were reversed. Exco (through Federal) agreed to defend Select. Exco then withdrew its defense and alleged that the indemnity provision was unenforceable because it contravened La. R.S. 9:2780 the Louisiana Oilfield Anti-Indemnity Act.  Select filed a reconventional demand to recover the amount of the Texas settlement.

The choice of law provision called for Texas law to apply without regard to conflict of laws provisions. In case a court might choose to apply the Louisiana Act, there was a substitute indemnity provision: The indemnity and insurance obligations are separate and apart from each other. The insurance obligation would support, but not in any way limit, the defense and indemnity obligations set forth in the agreement.

The Louisiana and Texas Acts

The Louisiana Act was an attempt to avoid adhesionary contracts in which, due to unequal bargaining power, a contractor would have no choice but to agree to indemnify the oil company lest they risk losing the contract. The Act declares null and void any provision in any agreement which requires defense and/or indemnification where there is negligence or fault on the part of the indemnitee or an independent contractor who is directly responsible. If Louisiana law applied, the statute would invalidate Exco’s defense and indemnity obligations to Select.

On the other hand, the Texas Act generally invalidates oilfield indemnity agreements but allows enforcement of mutual indemnity obligations limited to the scope and amount of contractual indemnity insurance each party as indemnitor has agreed to provide to the other as indemnitee. Thus, a mutual obligation is enforceable but limited to the extent of coverage limits of contractual indemnity insurance.

The insurance provided by the parties in the contract brought the mutual indemnity agreement within the exception.

Louisiana Choice of Law

Under Civil Code art. 3515, an issue is governed by the law of the state whose policies would be most seriously impaired if its law were not applied to that issue. Under CC art. 3537, this is determined by evaluating the strength and pertinence of the relevant policies of the involved states in light of:

  • The pertinent contacts of each state to the parties and the transaction, including the place of negotiation, formation and performance of the contract, the location of the object of the contract, and the domicile or residence of the parties;
  • the nature, type and purpose of the contract;
  • The policies referred to in art. 3515 as well as policies of facilitating the orderly planning of transactions, of promoting multistate commercial intercourse, and protecting one party from undue imposition by the other.

The result

Texas law applied and Exco’s obligation to indemnify and defend Select was confirmed. It would be a grave injustice to Select to allow Exco to avoid honoring is own obligation under the mutual indemnity Agreement.  The factors:

  • The dispute was between Texas companies which agreed to the application of Texas law and Select already performed its obligation under Texas law, Texas’ policy of freedom of contract would be severely impaired if the contract was invalidated under Louisiana law.
  • The impairment to Texas policy is greater than any impairment to Louisiana policy that could result from failure to uphold Exco’s indemnity obligation.
  • Texas policy under the Texas Act to protect contractors from adhesionary indemnity obligations to oil companies is not impaired by upholding an oil company’s indemnity obligations to its contractor, especially where the contractor has already satisfied its indemnity obligations to the oil company.
  • The injured workers had been paid handsomely to settle the claims. Thus, Louisiana’s policy of compensating injured oilfield workers would not be impaired by application of Texas law.

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