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INDEMNITY IN THE INTERNATIONAL OIL AND GAS CONTRACTS: KEY FEATURES, DRAFTING AND INTERPRETATION

Timur Makarov

INDEMNITY IN THE INTERNATIONAL OIL AND GAS CONTRACTS: KEY FEATURES, DRAFTING AND INTERPRETATION Timur Makarov ABSTRACT:

ABSTRACT: Indemnity is one of the key provisions in the international contract that helps to allocate risk to the party who is in a better position to accept it. The concept has particularly great significance in oil and gas contracts due to the specific features of the industry. It is efficiently used as the contractual tool that lies outside traditional understanding of liability and risk management in the law. This in turn creates certain limitations and exclusions in different jurisdictions. The paper looks at the main elements of the concept and at the ways it is drafted and interpreted in different jurisdictions including some critical points that need to be taken into account by the parties to the contract.

The author has 9 years practical experience in the international oil and gas Services Company in Kazakhstan, dealing with business development and support issues including sales contracts. He also consults with government (regulatory bodies) and the Kazakhstan National Oil Company. E-Mail:

timur.makarov@gmail.com, timur.makarov@bakerhughes.com

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TABLE OF CONTENTS:

ABBREVIATIONS

................................................................................................

iii

INTRODUCTION

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1

  • 1. DEFINITION, SCOPE AND DRIVERS

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2

1.1

Definition

........................................................................................................

2

1.2

Scope

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2

1.3

Drivers

............................................................................................................

4

2.

TYPES

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7

  • 3. DRAFTING AND INTERPRETATION

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9

3.1

English Law

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9

3.2

The Laws of Texas

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  • 3.3 Other Jurisdictions

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CONCLUSION

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BIBLIOGRAPHY:

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ABBREVIATIONS

AIPN

Association of International Petroleum Negotiators

HSE

Health Safety and Environment

JOA

Joint Operating Agreement

LOGIC

Leading Oil and Gas Industry Competitiveness

NOC

National Oil Company

UKCS

United Kingdom Continental Shelf

US

United States

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INTRODUCTION

Oil and gas industry is complex, hazardous and capital intensive which makes it remarkably different from other industries. From seismic shootout up to drilling and down to refining of the final product numerous technologies are involved and various hazards are present like high downhole pressure, toxic Hydrogen Sulfide or use of dangerous goods. Considerable amounts of cash are required for the projects and $500,000 daily rental for the drilling rig is just one example. 1 These factors are multiplied times when operations take place offshore. 2

Higher level of risks requires adjustment of contractual risk allocation matrix where indemnity concept is one of the key elements. Parties to oil and gas contracts deviate from the standard understanding of risk distribution as accepted in law in order to spread the risks to the ones who can handle it more effectively. But contracts are interpreted by judges in different countries and jurisdictions. Thus, it is important to understand how indemnity provisions can be incorporated into a contract in order to be efficient and to make sense at all.

Indemnity is a diversified concept. It can be simple or mutual, examined separately or in combination with insurance as a tool for risk management, function between two or more parties, live in a Joint Operating Agreement (JOA) or a service contract. All these aspects do not fit into the limit of the paper and will be touched upon very briefly while the main focus will be on the key elements of the operator-contractor indemnity, looking at its drivers, specific features and views of different legislations on the concept.

  • 1 Phillips, D., Cost of Offshore Drilling Rising as Fast as Oil Prices, 2008-05-08, http://industry.bnet.com/energy/2008/05/08/cost-of-

offshore-drilling-rising-as-fast-as-oil-prices/ (visited 2008-07-08)

  • 2 Paterson, J., Health and Safety at Work Offshore in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007), p.115

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1. DEFINITION, SCOPE AND DRIVERS

  • 1.1 Definition

Indemnity is defined as "protection against future loss" or "legal exemption from liability for damages". It also has a material meaning of a sum of money paid in compensation for loss or injury. 3 A common element present in the definitions is that the indemnifying party (indemnitor) agrees "to make good" 4 any loss or damage incurred by the indemnified party (indemnitee) and to "safeguard" and "hold harmless" the indemnitee from liability. These definitions point at the protective meaning of indemnity, whereby the parties agree to defend each other from liabilities. This makes it different from other contractual provisions and does not always coincide with the official position of the law.

There is no procedure prescribed on how the indemnitor should protect or compensate the indemnitee. But, for example in case of injury, options would be for indemnitor to compensate injured person directly or to compensate the indemnitee. This would vary depending on specific cases and contractual arrangements.

  • 1.2 Scope

Scope of indemnity is a matter of contract negotiations when parties may agree on almost any variations allowed outside the principles of the law. 5 However, care should be taken when defining a) the degree of fault that caused liability, b) liability towards the parties outside the contract and c) extent of associated damages.

a) The underlying reason causing liability of the indemnitee may be different. Typically it may be indemnitor's or indemnitee's or both parties' negligence, gross negligence, wilful misconduct or breach of statutory duties. Gross negligence and wilful misconduct are

  • 3 Definitions, Indemnity, http://wordnet.princeton.edu/perl/webwn?s=indemnity (visited 2008-07-07)

  • 4 Black's Law Dictionary, 8 th Ed. (West Group, 2004)

  • 5 Daniels, R.G., Contractual Indemnities: To What Extent Are They Legally Enforceable and Insurable? https://www.schinnerer.com/risk_mgmt/design_firms/amia/indem.pdf (visited 20089-07-09)

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normally excluded from the scope of indemnity. It is argued, that these two categories are normally excluded from oil company-to-oil company contracts 6 and apart from that "some (particularly some US)" companies have corporate policies to exclude gross negligence and wilful misconduct from the scope of indemnity in operator-to-contractor contracts as well. 7 Given that this is explained by the need of protection from deliberate sabotage or conduct below the general standard of care expected in the industry, it is not surprising that such exclusion is practiced not only by American companies and not only in oil company-to-oil company contracts but by many Westerns companies, in the majority of contracts in the countries with high risk profile, particularly developing countries. Indemnification of liability for breach of statutory duty is related to the public policy and other concerns. Indemnification of liability or the breach of statutory duties may be included 8 but should be carefully examined in the jurisdictions that may not allow such indemnification at all.

b) Liability for the third party's personnel injury or equipment damage should be qualified. In this case indemnity is normally provided only for the injury or damage caused by the negligence of the indemnitor. 9 This is explained by the changes of the risk profile when it comes to the third parties who normally lie outside the contractual scope. In such situations parties prefer not to deviate from the formal law position. Third party presence may raise different questions lying outside the context of the paper. For example, when the contractor's liability (caused by his negligence) to the third party exceeded payments received by him for the services provided and weather such contractor is entitled for the indemnity from the customer (WesternGeco Ltd v ATP Oil & Gas (UK) Ltd – [2006] 2 Lloyd's Rep 535).

c) Finally, indemnity should be aligned with the exclusion of liability for consequential damages. These provisions are normally included in a separate article of the contract but are

6 Gordon, G., Risk Allocation in Oil and Gas Contracts in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging

Trends (Dundee University Press, 2007), p.348

  • 7 Baker Hughes Inc., Master Service Agreements, www.bakerhughesdirect.com/resources/legal/contracts/MSA (visited 2008-07-11)

  • 8 AIPN Mobile Offshore Drilling Unit Contact 1999, Art.18.1.3, 18.2.3, 18.8

  • 9 Supra note 8, Art.18.1.3, 18.2.3

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closely related. The parties should define what "consequential damages" are. These may include loss of production, loss of product, loss of revenue or profit (detailed definitions are given in LOGIC 10 or AIPN 11 Model Contracts). Generally indemnitors indemnify only from indemnitors' own consequential losses. This is due to the difficulty to foresee the extent of such losses that can be significant and expensive to insure, thus, it was accepted in the industry that such losses should "lie where they fall." 12

In general, care should be taken when drafting and in particular defining all mentioned terms (negligence, gross negligence, third party, consequential damages and others) in the contract.

1.3 Drivers

Contractual provision that one party agrees to indemnify the other for liability arising from this other party's negligence looks quite controversial at first sight. 13 Different reasons explain why parties opt for such provisions, especially in the petroleum industry. This can be explained by the hazardous, complex and capital intensive nature of the industry with higher risk exposure and the need to think, how to avoid significant time and costs of something, that is not related to the core of the business, for example litigation.

"Watch your own side"

If one of the contractor's employees was injured at the rig he can sue any party that is

potentially liable for the injury. It can be an operator, another contractor, another contractor's subcontractor, the contractor itself or combination of all or any of these parties. It may be extremely difficult to determine the liability level in this situation. Even if it is identified, there may be various appeals, counterclaims and other time and cost consuming procedures. That is why parties agree that each employer accepts responsibility for his own employees

  • 10 LOGIC Model Contract for Supply of Major Items of Plant and Equipment, Cl. 24, 2 nd Ed., December 2005

  • 11 Supra note 8, Art.20

  • 12 Supra note 6, p.378

  • 13 Smith, E.E., Service Contracts, Technology Transfers and Related Issues, in International Petroleum Transactions, 2 nd Ed. (Rocky Mountain Mineral Law Foundation 2000), p.492

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and indemnifies his counterparts from any related claims. This position was widely supported in different opinions, including London Bridge, related to Piper Alpha disaster – one of the most prominent, complex and time taking series of litigations where indemnity was one of the central points. 14 The same principle applies to equipment. This driver is supported by the idea, that every company is more familiar with and in a better position to control its employees and equipment. He knows the employees' qualifications and the equipment parameters better than any other party, so that it is more practical for him to bear responsibility.

In some countries, especially where National Oil Companies (NOCs) are involved, deals between operator and contractor assume appointment by the operator of employees to work for the contactor – it can be permanent employees or, more often, trainees or interns who are supposed to inherit experience. Dangerously, such employees are more exposed to different risks. They are less aware of safety requirements, less experienced and often look "lost" at the worksite 15 . In such cases contactors normally insist that indemnity provisions apply only to situations involving their "genuine" employees. Care should be taken in this situation with definition of "Contractor employee".

Insurance

Insurance is used in order for the indemnitor to have a risk cushion in a situation when he is

responsible for his own employees and equipment. It is argued that insurance in fact is the underlying driver in this case rather than ancillary tool for risk management. 16 This is particularly natural for super-majors, who tempt to self-insure and minimize transaction costs. 17 But this reason is hardly applicable to smaller companies as they cannot afford self- insurance.

  • 14 Caledonia North Sea Ltd. v British Telecommunications Plc same v Kelvin International Services Ltd. same v London Bridge Engineering Ltd. same v Norton (No. 2) Ltd. (In Liquidation) same v Pickup No. 7 Ltd. same v Stena Offshore Ltd. same v Wood Group Engineering Contractors Ltd. - [2002] 1 Lloyd's Rep 553

  • 15 Some companies "mark" them with extra-bright coveralls and have New Worker Support rules in place.

  • 16 Supra note 6, p.344

  • 17 BP Annual Report and Accounts 2007, p.39

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Costs

Another driver is related to costs; for instance, those arising from possible litigations. Apart from legal and administrative fees these may include rig downtime costs for statutory investigations, personnel extra working hours and other costs that could be avoided if parties have taken a "hold harmless" approach. These drivers point at one key feature of the oil and gas business – practicality. Oilmen work in the intensive and venturesome industry and use every opportunity simplify everything that is not related to the core of this business.

Multiple Contractors and Briefly on Back-to-Back Indemnity

Petroleum operations involve numerous contractors. Many people live on the offshore platform working for an operator, a drilling contractor its subcontractors and other contractors. Some companies employ many employees some have only one at the platform. In this situation risk exposure is uneven. In addition, contacts between work processes and people are very intensive and a person can be injured by the tool of the party that his employer has no contractual relations with. It looks more practical in this case that every party is responsible for its own people or equipment.

But how can the risk profile be evenly distributed? Risk can be spread through the chain of mutual indemnity agreements. In this chain, operator would indemnify all parties below the contractual line (as there is nobody on top of him) and respectively would get indemnity from these parties via contractor. Such contractor would indemnify operator up the line and subcontractors down the line. The same way subcontractor would indemnify contractor and sub-subcontractors. 18 In practice there would be several lines and "branches" involved creating the matrix rather than a simple chain and requiring extra efforts to support indemnity. Prominent initiative was taken in the UKCS and is called Industry Mutual Hold Harmless

18 Comprehensive schematic explanation in Supra note 6, Figure 13.1, p.347

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scheme. 19 In other regions, operators may request all contractors and subcontractors working at the well site to sign mutual hold harmless agreement.

A few important points should be mentioned. First is that there shouldn't be any holes in the arrangement, i.e. all contractors and subcontractors should be inside the matrix. Next is that indemnity provisions should be aligned in the direct contracts between the participants – back-to-back principle. Another point is problematic – what if different contracts between the participants are governed by different laws treating indemnity concept differently? But this question deserves a separate discussion.

2. TYPES

Indemnity may function in different contracts. But operator-contractor agreements seem to be the most interesting ones. They are characterized by higher degree of commercial interactions and tensions compared to JOA which does not assume provision of goods or services as a central part of an agreement. 20 JOA is more a contract "within" rather than a contract "between" and is more designated to achieve common goals and objectives of parties. Indemnities provided by JOA partners to an operator against losses incurred by a Joint Venture are justified by the fact that operator is in charge of major commercial activities 21 and relative risks should be mitigated or spread over to partners. In purely commercial terms, there is no party on top of an operator in a contractual line as license or concession is signed with a government and this is a different part of the overall picture. Thus, a risk mitigating cushion is created by JOA partners (see Figure 1). Another question deserving further separate discussion would be how this is managed if a state is participating in JOA via NOC.

  • 19 Industry Mutual Hold Harmless Scheme, http://www.imhh.com/ (visited 2008-07-10)

  • 20 Another interest is purely practical: being a non-lawyer the author of this paper is still involved in negotiations with oil companies who often have a very little knowledge of the indemnity.

  • 21 Kramer B.M. and Conine G.B., Joint Development and Operations in Smith E.E. et al, International Petroleum Transactions, 2 nd Ed. (Rocky Mountain Mineral Law Foundation, 2000), p.564

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Indemnity can also be unilateral provided only by one party. For example, operator provides indemnity to contractor for any losses below rotary table even if they are caused by contractor's negligence. 22 This is because such losses may be so high that it would be economically unfeasible and extremely risky for a contractor to assume responsibility or provide insurance. However, this provision is subject to the right of an operator to request re- drilling of the well which is explained by the high drilling costs. But as a general rule, everything below rotary table is considered to be operator's "domain". Though, in some Former Soviet Union countries it is often argued by operators that contractor shall be responsible for absolutely everything he is doing. This may be due to the formal approach applicable in other industries or the "old school" socialist view to the economics and risks of the project.

The subject can be examined depending on what liability is indemnified. It can be liability for damages to people or equipment or it can be fiscal or environmental liability, normally going hand-in-hand with relative statutory requirements and limitations. Consequently contract provisions vary depending on the type of indemnity. In this paper the concept is mainly viewed against the background of indemnity for liability for damages to people or equipment.

22 Supra note 8, Art.18.5-18.6

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Figure 1: Basic Structure of Risk and Indemnity Flow in Oil and Gas Industry

State (Government) JOA partner JOA partner Operator JOA partner JOA partner Contractors and subcontractors
State
(Government)
JOA partner
JOA partner
Operator
JOA partner
JOA partner
Contractors and
subcontractors
  • Indemnity flow within JOA as per AIPN model Art. 4.6(a) and (b) subject to optional (c) (black colour)

  • Risk dissemination within JOA (grey colour)

  • Indemnity flow between Operator and other Parties (black colour)

  • Risk flow between Operator and other Parties (grey colour)

  • Unilateral indemnities (black colour)

3. DRAFTING AND INTERPRETATION

As it was mentioned earlier, whatever the contractual indemnity arrangements between the parties are, if it comes to the litigation, they would be examined and interpreted by judges serving in different jurisdictions and having different views on indemnity. This means that due care should be taken when drafting choice of law provision of the contract. This part of the paper is looking at how different legal systems treat contractual indemnity.

3.1 English Law

Traditional approach of the English Law, probably as well as of many other legal systems, can be summarized as "the party who is in breach is liable". 23 But contractual arrangements may deviate from this approach. Interpretation of the contractual indemnity clause was discussed in EE Caledonia Ltd v Orbit Valve Co 24 - the case that raised many questions about clashes between enforcement of indemnity agreements with important public policy concerns.

  • 23 Treitel G.H., The Law of Contract, 11 th Ed. (Sweet & Maxwell, 2003), p.926

  • 24 EE Caledonia Ltd v Orbit Valve Co, Court of Appeal [1995] 1 All ER 174, [1994] 1 WLR 1515, [1994] 2 Lloyd's Rep. 239

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The defendant's (Orbit) employee lost his life in Piper Alpha fire. Dependents of the employee sued the plaintiff (EE Caledonia Ltd), the claim being based on the breach of the common law duty of care and breach of statutory duties. Liability arouse assuming that plaintiff's (operator's) engineer in charge was responsible for the fire and various breaches of statutory duty took place. The plaintiff settled the claims and was looking to be indemnified by the defendant as per the indemnity agreement. 25

Questions for the court were if indemnified liability had been caused by the operator's negligence, if it had been caused by breach of statutory duty by the operator as well as his negligence and if injury and death had occurred in connection with the performance of the agreement.

It was noted by the court that it doesn't matter what intentions of the parties were when they signed the contract but what matters is to understand what words of the article mean. This is in line with predictability requirements of the English Law – whatever is meant when a contract is drafted it must be clearly expressed as a judge will be looking at the contract language but not at the parties' intentions. If a negligent party wants to be indemnified, the text of the contract must contain express reference to negligence of the indemnitee or words equivalent to such negligence. In Orbit Valve it is difficult to understand the meaning of indemnity clause and its connection to the negligence of the "potential" indemnitee, neither there is a reference to the breach of statutory duty. To understand the meaning of the clause the court applied Lord Morton's test from Canada Steamship Lines Ltd v R 26 that can be summarized as follows:

a) If indemnity from liability due to negligence is expressly stated such clause is effective; b) If it is not stated, the court must decide if other words mean such indemnity;

  • 25 Indemnity provisions of the contract are in Supra note 21, p.574

  • 26 Canada Steamship Lines Ltd v R, [1952] 1 Rep 1, p 8; [1952] AC 192, p 208

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c) If other words are not enough, the court must look for the original grounds ("the head of damage") of liability and these grounds must be connected to the subject ("not fanciful or remote"), for e.g. it could be gross negligence or breach of statutory duty and if such grounds are other than negligence the indemnitee is not to be indemnified.

The judge concluded that even if the language of the contract was wide enough to cover indemnitee's negligence, it didn't pass the part of the test in terms that the words of the same article could have been intended to exclude other "heads of claim", in this case breach of statutory duty 27 . Thus the claim was dismissed. 28

There was an attempt to deviate from the strict to more contextual view on the interpretation 29 but in general, contra proferentem 30 approach assuming that ambiguous term of the contract is construed against the interests of the party who imposed it is prevailing.

It should be mentioned that Lord Morton's approach was criticized in some other common law jurisdictions 31 where it was stated that absence of ambiguity in the indemnity clause should be sufficient to cover negligence and part (c) of the Canada Steamship "test" was not effective in the absence of ambiguity. 32 In general, if the parties choose English Law to govern their contract they should first of all consider predictability, and think that they primarily draft the clause not for themselves but for a judge or an arbitrator who will interpret it. Definitions should be clearly refined and statutory limitations taken into account. Parties' intentions should be express and unambiguous to avoid misunderstanding.

  • 27 Supra note 6, p.359

  • 28 The court also stated that death was connected with the contract performance even if the engineer was not working at that time. This is a reasonable decision especially if the one takes into account confined working conditions offshore. The claim was dismissed

  • 29 Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896

  • 30 Latin for "against (contra) the one bringing forth (the proferens)", http://en.wikipedia.org/wiki/contra_proferentem (visited 2008-07-11)

  • 31 Panicker V., Sinking the Steamship, Building & Construction News, October 2007, http://www.piper-alderman.com.au/media/files/3145.pdf (visited 2008-07-07)

  • 32 BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173

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3.2 The Laws of Texas

Indemnity provisions under the laws of Texas flow from Ethyl case 33 and focus on "express negligence doctrine" and "fair notice" requirements.

In Ethyl, a contractor's (Daniel) employee was injured during the work at the owner's (Ethyl) worksite. It was determined that Owner was 90 per cent responsible for the injury and Contactor was 10 per cent negligent in causing the injury. The contract indemnity clause read as follows:

"Contractor [Daniel] shall indemnify and hold Owner [Ethyl] harmless against any loss or damage to persons or property as a result of operations growing out of the performance of this contract and caused by the negligence or carelessness of contractor, contractor's employees, subcontractors, and agents or licenses."

Ethyl argued that this clause was sufficient to seek for indemnity under the contract.

Express negligence doctrine assumes that "a party seeking to indemnify the indemnitee from the consequences of its own negligence must express that intent in specific terms" and such intent "must be specifically stated within the four corners of the contract." 34

The court rejected Ethyl's arguments that the indemnity provision was in line with the express negligence test and held that contractual language of “any loss” and “as a result of operations” did not expressly state that Daniel Construction was indemnifying Ethyl for Ethyl's own negligence.

  • 33 Ethyl Corp. v Daniel Construction, 725 S.W.2d 706 (Tex 1987)

  • 34 Ibid, 708

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It was further enhanced in Dresser case where the clause passed express negligence test, as it was stated that effect of the contract was "to "exculpate" each party from the consequences of its own negligence and transfer that risk to Page the better policy is to cut through the ambiguity of those provisions and apply an express negligence rule". 35 To compare with Ethyl language, the contract between Page and Dresser reads as follows:

"[Page] shall indemnify [Dresser] and hold [Dresser] free and harmless from all claims for subsurface damage or injury to the well including claims that injuries or damages were caused by [Dresser's] negligence, whether such claims are made by [Page], by [Page's] employees, or by third parties."

The difference is obvious. But this is only one part of the "fair notice requirements" for the clause to be effective. The clause didn’t pass conspicuousness part of the test whereby it must be clearly visible and explicit, 36 put in capital letters or any other conspicuous way or when the language of the clause is located in an extremely short document. 37

Fair notice requirements were scrutinised in different ways after Green case 38 which raised certain questions about Texas Supreme Court's position. 39 But the most important statement of the Supreme Court to keep in mind is that these requirements only apply to the clauses which “operate to shift risk in an extraordinary way, such as exculpating a party from the consequences of its own negligence." 40 Indemnification is definitely covered by such clauses.

  • 35 Dresser Indus. v Page Petroleum, 821 S.W.2d 359 (Tex. App.—Waco 1992), 368

  • 36 Murphy P.S., The Contract You Thought You Made: The Express Negligence Doctrine (Part 1), Thompson & Knight LLP, Publications, 2003

  • 37 Supra note 35, 511

  • 38 Green International, Inc v Solis, 951 S.W.2d 384 (Tex. 1997)

  • 39 Fox T.R., Risk Shifting from Ethyl to Green: Fork in the Road or New Path?, Int. I.L.R. 1998, 6(7), 231-237

  • 40 Supra note 38, 387

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Texas Oilfield Anti-Indemnity Act 41

Important statute was adopted in Texas having effect on oil and gas operator-contractor relations. Texas Oilfield Anti-Indemnity Act says that any “agreement pertaining to wells for oil, gas or water or to a mine for a mineral” envisaging indemnity to a person against liability caused by its own negligence and arising from personal injury or death, property injury, or any loss, damage or related expense is unenforceable. 42

It is argued that the Act helps to remove unfair conditions and undue financial burden from smaller contractors who were forced by operators' bargaining powers to indemnify them not only from the contractor’s negligence, but from their own negligence as well. 43

The scope of the Act is huge and expands to all major upstream and midstream operations mainly excepting surface operations (for example, construction of pipelines). 44 Apart from that it doesn't cover JOAs as they are deemed, inter alia, to be commonly understood, accepted, and desired by the parties, encourage mineral development and to be not against the public policy. 45 If thoroughly examined operations covered by and excluded from the Act appear to have different risk profile.

Allowance is made in the Act for the indemnity agreements if they are backed up by liability insurance coverage in accordance with the outlined requirements (different for mutual and unilateral indemnity) 46 . This, however, raised certain debates and litigations. 47

In general, drafters of the indemnity provision governed by the Laws of Texas should consider doctrines of fair notice and express negligence and be careful if the contract is

  • 41 Tex. Civ. Prac. & Rem. Code §§127.001–127.007

  • 42 Ibid., §127.003

  • 43 Texas Oilfield Anti-Indemnity Statute, http://images.jw.com/com/publications/203.pdf (visited 2007-07-07)

  • 44 Supra note 41, §127.001

  • 45 Supra note 41, §127.002

  • 46 Supra note 41, §127.005

  • 47 Redfearn R., Oilfield Anti-Indemnity Acts and Their Impact on Insurance Coverage, 2005-08-22, http://www.insurancejournal.com/magazines/southcentral/2005/08/22/features/59583.htm (visited 2008-07-10)

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related to oil and gas well services, taking into account the Texas Oilfield Anti-Indemnity Act. Apart and its insurance requirements.

3.3 Other Jurisdictions

The main problem may arise when parties work in the countries outside the domain of English Law or The Laws of Texas, even if they properly drafted the indemnity clause but put, for example, Kazakh or Russian Law as the governing law of the contract. Many jurisdictions do not uphold indemnity concept. 48

In Kazakhstan, in the case of injury or damages a party in breach would be sued in accordance with the Civil Code provisions 49 . Where tort is involved, it is very unlikely that judges would exercise any freedom of the contractual provisions. Unfortunately it is quite difficult to find judicial decisions of Kazakh courts but most probably, formal approach of "party in breach is liable" would be taken and there is a very small chance that indemnity agreements, especially the ones where a party is indemnified for its own negligence, would be enforceable. The judges will refer to legislation that is often ambiguous and has many cross- references to various decrees, related to the offshore safety 50 the safety of oilfield operations 51 , general industrial safety rules 52 and if the case is about damage to equipment, to hundreds of technical requirements (GOST's). This is the fundamental difference with Common Law approach.

The parties working outside common law jurisdictions should pay attention to the governing law clause and try to have common law as a governing law if they use indemnity clause in the contract.

  • 48 Civil Code of the RoK, General Part, Ch.20-21, 1994-12-27 (as of 2007-08-07); Civil Code of Russian Federation, Part I, Section III, Sub-section I, 1994-11-30 (as of 2008-06-30)

  • 49 Civil Code of the RoK, Particular Part, Ch. 47 §§2-3, 1994-12-27 (as of 2007-08-07)

  • 50 Offshore Safety Rules of the RoK No.RND-99 (as of 1999-06-28)

  • 51 Decree No.745 of the RoK on Oilfield Operations (as of 1996-06-18)

  • 52 Law of the RoK No.314-II on Industrial Safety (as of 2002-04-03)

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CONCLUSION

Indemnity is a complex but very effective concept. It allows deviating from formal views of the law on risk allocation and has remarkably developed in oil and gas industry. This is because risk management in the industry is one of the key points due to high risk profile, complexity and considerable cash involved. On the other hand, the industry is driven by practicability and with the help of the party autonomy rule the clash of risk and practicability can be mitigated in the contracts. Indemnity and insurance arrangements aligned with general limitation of liability provisions 53 are the key parts of this mitigation.

Parties exercising indemnity provisions should expressly and unambiguously draft what liabilities they intend to indemnify and to what extend. Under the Laws of Texas the clause must also be conspicuous and all people involved in negotiations, drafting and reviewing should be aware of it. 54

Definitions of every element of the clause should be clear. Care must be taken in terms of indemnity from liability caused by gross negligence, wilful misconduct and breach of statutory duty as "extra" to indemnity from liability caused by negligence. When used, liability capping should be aligned and cross-checked with insurance and other provisions. During negotiations, statutory requirements shall be taken into account and governing law provisions considered so that the indemnity clause would have sense at all. When parties can choose between English Law and the Laws of Texas, they must consider Texas Anti- Indemnity Act limitations and its insurance requirements.

  • 53 Supra note 6, p.335

  • 54 One translator formatted the contract governed by the Laws of Texas and changed all "ALL CAPS" to normal font; nobody reviewed formatting of the final version of the contract, so it was signed "as formatted".

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Parties can negotiate and include in the contract almost everything subject to certain exceptions 55 but they need to think if such arrangements will make sense and if they will be efficient and enforceable.

55 Supra note 5

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BIBLIOGRAPHY:

PRIMARY SOURCES

Statues

Civil Code of Russian Federation, Part I, 1994-11-30 (as of 2008-06-30)

Civil Code of the Republic of Kazakhstan, 1994-12-27 (as of 2007-08-07)

Decree No 745 of the Republic of Kazakhstan on Oilfield Operations (as of 1996-06-18)

Law 314-II of the Republic of Kazakhstan on Industrial Safety (as of 2002-04-03)

Offshore Safety Rules of the Republic of Kazakhstan RND-99 (as of 1999-06-28)

Tex. Civ. Prac. & Rem. Code §§127.001–127.007

Cases

BI (Contracting) Pty Limited v AW Baulderstone Holdings Pty Limited [2007] NSWCA 173

Caledonia North Sea Ltd. v British Telecommunications Plc same v Kelvin International Services Ltd. same v London Bridge Engineering Ltd. same v Norton (No. 2) Ltd. (In Liquidation) same v Pickup No. 7 Ltd. same v Stena Offshore Ltd. same v Wood Group Engineering Contractors Ltd. - [2002] 1 Lloyd's Rep 553

Canada Steamship Lines Ltd v R, [1952] 1 Rep 1, p 8; [1952] AC 192

Dresser Indus. v Page Petroleum, 821 S.W.2d 359 (Tex. App.-Waco 1992)

EE Caledonia Ltd v Orbit Valve Co, Court of Appeal [1995] 1 All ER 174, [1994] 1 WLR 1515, [1994] 2 Lloyd's Rep. 239

Ethyl Corp. v Daniel Construction, 725 S.W.2d 706 (Tex 1987)

Green International, Inc v Solis, 951 S.W.2d 384 (Tex. 1997)

Investor Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896

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WesternGeco Ltd v ATP Oil & Gas (UK) Ltd – [2006] 2 Lloyd's Rep 535

SECONDARY SOURCES

Books

Gordon, G., Risk Allocation in Oil and Gas Contracts in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007)

Kramer, B.M. and Conine, G.B., Joint Development and Operations in Smith E.E. et al, International Petroleum Transactions, 2 nd Ed. (Rocky Mountain Mineral Law Foundation, 2000)

Paterson, J., Health and Safety at Work Offshore in Gordon G. and Paterson J., Oil and Gas Law. Current Practice and Emerging Trends (Dundee University Press, 2007)

Smith, E.E., Service Contracts, Technology Transfers and Related Issues, in International Petroleum Transactions, 2 nd Ed. (Rocky Mountain Mineral Law Foundation 2000) Treitel, G.H., The Law of Contract, 11 th Ed. (Sweet & Maxwell, 2003)

Articles

Daniels, R.G., Contractual Indemnities: To What Extent Are They Legally Enforceable and Insurable? https://www.schinnerer.com/risk_mgmt/design_firms/amia/indem.pdf (visited 20089-07-09)

Fox, T.R., Risk Shifting from Ethyl to Green: Fork in the Road or New Path?, Int. I.L.R. 1998, 6(7), 231-

237

Murphy, P.S., The Contract You Thought You Made: The Express Negligence Doctrine (Part 1), Thompson & Knight LLP, Publications, 2003

Panicker, V., Sinking the Steamship, Building & Construction News, October 2007, http://www.piper- alderman.com.au/media/files/3145.pdf (visited 2008-07-07)

Phillips, D., Cost of Offshore Drilling Rising as Fast as Oil Prices, 2008-05-08, http://industry.bnet.com/energy/2008/05/08/cost-of-offshore-drilling-rising-as-fast-as-oil-prices/ (visited

2008-07-08)

Redfern, R., Oilfield Anti-Indemnity Acts and Their Impact on Insurance Coverage, 2005-08-22, http://www.insurancejournal.com/magazines/southcentral/2005/08/22/features/59583.htm (visited 2008-07-10)

Other sources

AIPN Mobile Offshore Drilling Unit Contact 1999

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Baker Hughes Inc., Master Service Agreements, www.bakerhughesdirect.com/resources/legal/contracts/MSA (visited 2008-07-11)

Black's Law Dictionary, 8 th Ed. (West Group, 2004)

BP Annual Report and Accounts 2007

Definitions, Indemnity, http://wordnet.princeton.edu/perl/webwn?s=indemnity (visited 2008-07-07)

Industry Mutual Hold Harmless Scheme, http://www.imhh.com/ (visited 2008-07-10)

LOGIC Model Contract for Supply of Major Items of Plant and Equipment, 2 nd Ed., December 2005

Texas Oilfield Anti-Indemnity Statute, http://images.jw.com/com/publications/203.pdf (visited 2007-07-07)

Wikipedia, http://en.wikipedia.org/wiki/contra_proferentem (visited 2008-07-11)

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