You would think that a Master Service Contract concerning boats and oilfield operations in the Gulf of Mexico would be governed by federal maritime law. In some situations you would be mistaken, says Offshore Oil Services, Inc. v. Island Operating Company, Inc.
The facts
Fieldwood and Island Operating entered into a MSC through which
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.
Continue Reading Louisiana Court Considers Texas and Louisiana Oilfield Anti-Indemnity Acts