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Did Texas law or New Mexico law apply to knock-for-knock indemnity provisions in a Master Work and Services Agreement?  When a contract explicitly calls for Texas law, that is likely to be the outcome, as it was in North American Tubular Services LLC v. BOPCO, LP.

Takeaways

  • Decide before something bad happens what law you want to apply to a transaction.
  • Think about it. You’ll have to live with the choice.
  • Providing a safe work place is a moral imperative; financial risk goes a long way toward assuring the imperative is satisfied.
  • (Better left for another post: Does that also apply to leaking methane?)
  • The parties’ choice of law was was bolstered because under the contract the indemnity and insurance requirements would be liberally construed in order to effectuate their enforceability.
  • It would have helped the choice of law if the contract had also said that the choice was without regard for the chosen state’s conflict of law provisions.

Continue Reading Choice of Law Matters in an Oilfield Indemnity Suit

burning moneyMEMORANDUM

From: Legal Department

To: Accounts Payable

Re: What we learned from Shell Western E&P, Inc. v. Pel-State Bulk Plant, LLC

________________________________________________________________________

Just received notice of a Texas subcontractor’s mineral lien? DO NOT continue to pay the contractor. He hasn’t paid the subcontractor. Think you owe nothing on the well on which the lien will be filed? Think what you owe the contractor is not related to the lien? Both good questions, but it might not matter.

If your contractor is insolvent you’ll pay twice, and your standing with the boss will take a major hit.

________________________________________________________________________

Under Chapter 56 of the Texas Property Code a property owner receiving a mineral subcontractor’s lien notice may withhold payment to the contractor in the amount claimed until the debt on which the claim is based is resolved.

Pel-State was a subcontractor for frac jobs in 11 Shell wells.  Pel-State sent Shell a notice that the contractor was not paying for the sub’s work and then perfected a mineral lien.

The dispute was whether the lien amount was $3.19 million or $713,000. The mineral property owner is not liable to the subcontractor for more than the amount the owner owes the original contractor when the notice of lien is received.

A lesson on the Master Service Agreement 

The source of Shell’s misery was its Master Service Agreement with the contractor. When Shell received Pel-State’s lien notice Shell owed the contractor $11 million and thereafter continued to make payments to the contractor.  Bad call.

Shell owed nothing to the contractor on what it considered to be the contract under which Pel-State claimed a lien. Shell owed only $713,000 for the wells on which Pel-State performed work.

Under the MSA no specific work or a price was agreed upon. Those were determined by separate work orders for each job.  The court concluded that the multiple work orders under the MSA comprised a single contract. Where several instruments executed contemporaneously or at different times pertain to the same transaction they will be read together although they did not expressly refer to each other.

What about the Property Code?

Under Section 56.006 the operator cannot be liable to a subcontractor for an amount greater than the amount agreed to be paid under the contract for furnishing material or labor.  Because the MSA was one contract, the court rejected Shell’s argument that a lien should only apply on the work orders for the wells upon which Pel-State provided work.

Pel-State was entitled to collect from Shell for all work performed under the Shell/contractor MSA, under which Shell owed $11 million. The court affirmed Pel-State’s $3.19 million recovery.

Section 56.043 – a safe harbor

This provision, if used properly, protects the operator from liability.  But he has to stop paying the contractor once he receives a notice. Under this opinion, any limitation on the amount of the subcontractor’s lien must be determined by the state of the account between the property owner and the operator, not by amounts that might be owed on a particular work order or field ticket.

Musical interlude – more Bob

Can’t get enough of Bob Dylan songs of loss, sadness and unrequited love, especially when he’s not singing?

Tomorrow is a Long Time

Boots of Spanish Leather

Farewell

controlAre you an operator who hires contractors on location, … a contractor who hires subcontractors, … the party to be indemnified for injuries to the other party’s employees? This post is for you.

Salas v. Allen Keller Company One, LLC, is not about master service agreements, but it is instructive. Want to avoid responsibility for your sub’s employees? Don’t assert control over them.  Think Jason Garrett and his Cowboys, … John Boehner and the Freedom Caucus.

Mr. Saurez was killed while working for his employer, subcontractor C&B, on a highway construction project.  C&B and contractor AKC had a written construction subcontract in which C&B was to perform concrete work. His widow sued AKC for negligence.

The sub’s obligations – looks like an MSA

C&B represented and agreed:

  • It was capable and experienced in the construction,
  • It would supply its own materials, labor, tools and equipment,
  • It would procure its own insurance,
  • It would assume responsibility for claims arising out of death to injuries to persons or damages to property sustained in connection with C&B’s performance of the contract, and
  • It would take all reasonable safety precautions and comply with applicable laws.

C&B was to perform traffic control.  On the day of the accident Suarez was performing traffic control duties.

Did the contractor owe a duty?

Here is Texas law on a contractor’s duty to a sub’s employees:

  • Ordinarily, there is no duty to insure that an independent contractor performs its work safely.
  • A limited duty arises if the contractor retains some control over the manner in which the independent contractor performs its work. The contractor’s duty of care to the sub’s employee is commensurate with the control it retains over the independent contractor’s work.
  • There must be a nexus between the contractor’s retained control and the activity that caused the plaintiff’s injury.
  • The key is the actual exercise of control.
  • There must be more than a general right to order the work stopped or resumed to inspect progress, or make suggestions and recommendation which need not necessarily be followed, or prescribe alterations and deviations.
  • There must be such a retention of a right of supervision that the sub-contractor is not entirely free to do the work in its own way.

Factors that matter

AKC did not have a contractual right to control C&B’s performance but could have actually exercised such control in a manner that would give rise to a legal duty to C&B’s employees.

  • On-site orders or instructions on the means or methods to carry out a work order are important.
  • TxDOT’s inspections and directions was no evidence that AKC retained supervisory control over operations of the sub.
  • AKC never instructed the C&B crew on how to actually move and set out cones and signs.
  • There was no nexus between any exercise and control and Salas’ conduct which caused his injuries.

Salas Simplified

  • You can tell the sub what you want; don’t tell him how to do it.
  • Suggestions ≠ instructions.
  • Make sure your field personnel is mindful of the difference.

A musical interlude.

trumpYou do, whether you are a vendor or an operator. Matador Production Company vs. Weatherford Artificial Lift Systems, Inc. is a treatise on what can go wrong with a frac job: Failure of pumps, worker inexperience, failure of the “delayed release gel breaker”, failure to clean gel hoses, failure to pump enough gel and proppant, loss of materials, profuse apologies, invoices, refusal to pay invoices, and … litigation. It also suggests what you need for an enforceable MSA and the likely result if you don’t have one.

The Lessons

If you are trying to enforce an MSA:

  • Disclaimers and exculpatory clauses in six point font on the last page of a six-page stimulation recommendation will not satisfy the conspicuousness requirement of the express negligence rule (about which, see below).
  • Terms and conditions to be found on the vendor’s web site, if the customer bothers to look, are insufficient.
  • Between two parties who had never before worked together, an MSA signed three months after the FUBAR is not admissible at trial.
  • A properly prepared and administered MSA can save a party – the vendor in this case – lots of time, money and grief.

The Trial

Weatherford sued on a sworn account alleging $314,000 due on invoices. Matador counterclaimed for economic damages of $2,300,000. after summary judgment for Weatherford on the sworn account, the jury found that Weatherford failed to use reasonable skill and diligence and breached its implied warranty of a good and workmanlike performance of services. But Weatherford’s breach was excused because Matador waived compliance with the contract and released Weatherford from liability arising from the contract. It did this in the Master Service Agreement.

The Appeal

Reversed. Weatherford could not rely on the MSA (see the lessons). In the MSA Matador released Weatherford for Weatherford’s negligence, agreed that acceptance of delivery indicates inspection and approval of the equipment, and waived its right to consequential damages. A release by one party of another for the released party’s own negligence must be CONSPICUOUS IN THE CONTRACT (this is the express negligence doctrine). As a result of Weatherford’s failure to properly prepare and administer its MSA Weatherford’s home run at trial morphed into a bases-loaded strikeout on appeal.

What to Do?

Am I suggesting that a MSA is more important for the vendor than the customer? No. The purpose of an MSA is peace of mind brought about by certainty, to establish from the outset – before there is a disagreement having major financial consequences – who will be liable for acts and omissions and who will be responsible for damages. Get your MSA in place, whether you are a vendor or producer. Take care of potential exposure with proper and sufficient insurance coverage.

Au Contraire

Didn’t the customer benefit from not having an MSA? Yes, but if he had been the negligent party, maybe not.

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