INDEMNITY IN THE INTERNATIONAL OIL AND

GAS CONTRACTS: KEY FEATURES, DRAFTING

AND INTERPRETATION

Timur Makarov

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

i
 TABLE OF CONTENTS:

ABBREVIATIONS ................................................................................................ iii

INTRODUCTION ................................................................................................... 1

1. DEFINITION, SCOPE AND DRIVERS ............................................................ 2

1.1 Definition ........................................................................................................ 2

1.2 Scope ............................................................................................................... 2

1.3 Drivers ............................................................................................................ 4

2. TYPES ................................................................................................................. 7

3. DRAFTING AND INTERPRETATION ............................................................ 9

3.1 English Law .................................................................................................... 9

3.2 The Laws of Texas ........................................................................................ 12

3.3 Other Jurisdictions ....................................................................................... 15

CONCLUSION ...................................................................................................... 16

BIBLIOGRAPHY: ................................................................................................ 18

ii
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

iii
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

1
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, 8th 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)

2
normally excluded from the scope of indemnity. It is argued, that these two categories are

normally excluded from oil company-to-oil company contracts6 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 included8 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

3
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 LOGIC10 or AIPN11 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, 2nd Ed. (Rocky
Mountain Mineral Law Foundation 2000), p.492

4
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

worksite15. 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

5
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

6
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, 2nd Ed.
(Rocky Mountain Mineral Law Foundation, 2000), p.564

7
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

8
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

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 Co24 - 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, 11th 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

9
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 R26 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

10
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 duty27. Thus the claim was dismissed. 28

There was an attempt to deviate from the strict to more contextual view on the interpretation29

but in general, contra proferentem30 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 jurisdictions31 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

11
3.2 The Laws of Texas

Indemnity provisions under the laws of Texas flow from Ethyl case33 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

12
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 case38 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

13
Texas Oilfield Anti-Indemnity Act41

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)

14
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 provisions49. 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 safety50 the safety of oilfield

operations51, 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)

15
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 provisions53 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".

16
Parties can negotiate and include in the contract almost everything subject to certain

exceptions55 but they need to think if such arrangements will make sense and if they will be

efficient and enforceable.

55
Supra note 5

17
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, 2nd 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, 2nd Ed. (Rocky Mountain Mineral Law Foundation 2000)
Treitel, G.H., The Law of Contract, 11th 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, 8th 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, 2nd 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)

20