Oil Field Contracts: What You See May Not Be What You Get

by C. Randy King and Jacqueline Moy
Porter & Hedges, L.L.P.
 713.226.6000  713.226.6000

Reprinted from
The Houston Business Journal
November 2002

The old adage that you should believe only half of what you read and none of what you hear holds a modicum of truth, especially when you are speaking of oil field contracts containing indemnity provisions. At least in part, this is because of two rules of law applicable to indemnity provisions in oil field agreements. One of those rules of law is a Texas statute known as the Texas Anti-Indemnity Act (“TAIA”). The other such rule is a common law concept known as the “express negligence rule.” The former applies only to contracts dealing with the rendering of well or mine services. The latter applies to all contracts containing indemnity provisions where one party (“Party A”) requires the other party (“Party B”) to indemnify Party A for Party A’s own negligence. It may sound confusing, but it’s really fairly simple.

Here is an example of the interplay between these two rules of law. Let’s say you are an exploration company (“Exploco”) and you are going to drill a well in Texas. You sign a master service contract with an oil field service company (“Servco”) who agrees to provide services to you in connection with the drilling of your well. The contract contains typical “knock for knock” indemnity provisions where each party indemnifies the other for any claims brought by it’s own employees against the other party for personal injury or property damage occurring during the course of the job. A simple example of such an indemnity provision might say, “Servco agrees to indemnify Exploco for all injuries to Servco’s employees while Servco is doing the job; Exploco agrees to indemnify Servco for all injuries to Exploco’s employees for the same time period.” You read that provision of the contract and you think you know what it means, i.e., that both Exploco and Servco will each take care of injuries or property damage to their own employees, even when the negligence of the other party causes the injury or damage. The trouble is, however, that for these provisions to be enforceable as actually intended by both parties, the contract language must comply with both the TAIA and the express negligence rule.

The TAIA provides that it is against public policy for one party to an oil field agreement to require the other party to indemnify it for its own negligence. However, the TAIA also provides that such indemnity provisions are okay if they are supported by the statutorily required insurance coverage. Because the indemnity provisions in our example contract require Servco to indemnify Exploco for injuries to Servco’s employees, even when Exploco’s negligence causes such injuries, that provision is unenforceable under the TAIA unless the contract also contains the required insurance provisions. In short, unless the knock for knock indemnity provision is supported by the requisite insurance coverage, the provision is unenforceable and you do not have the indemnity you thought you had when you signed the contract.

The “express negligence rule” can likewise cause oil field contracts (or any other contracts, for that matter) to mean something other than what they say. The express negligence rule is court–made law that dictates, also as a matter of public policy, that a contractual indemnity provision requiring a party to indemnify the other for it’s own negligence is void and unenforceable unless the applicable contract provision contains “express” and “conspicuous” terms making it clear that such a transfer of responsibility for one’s own negligence was contemplated by both parties when they signed the contract. Texas courts are very strict in their interpretation of this rule and will most likely find unenforceable any such provision that is the slightest bit ambiguous or that is not clearly conspicuous in the contract document.

In our Exploco/Servco example, both parties struck the bargain that each would indemnify the other for injuries to their own employees, regardless of which party was at fault, and drafted a contract saying, “Servco agrees to indemnify Exploco for all injuries to Servco’s employees while Servco is doing the job.” This provision implies that Servco is obligated to indemnify Exploco for injuries caused by Exploco’s own negligence. However, because this indemnity provision does not expressly say that Servco will indemnify Exploco for Exploco’s negligence, but only implies as much, a Texas court will most likely find Servco’s indemnification obligation unenforceable.

Lights may be going off in your head about now. Yes, you have finally figured out why lawyers put indemnity provisions in all capital letters or in bold type and why they add the “lawyerese” to the indemnity provision, which is usually something to the effect of “REGARDLESS OF EXPLOCO’S NEGLIGENCE.”

Therefore, a word to the wise: when entering into oil field agreements containing indemnity provisions, be careful and consult an attorney familiar with these special rules. Oil field contracts do not always mean what they say. This is due in no small part to the TAIA and the express negligence rule, both of which can cause indemnity provisions to be unenforceable.

This article, in slightly different form, was originally published in the Houston Business Journal, November 29, 2002.

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