Almost every oilfield services contract will contain some type of indemnity provision. Yet several oil-producing states—including Texas—have enacted statutory provisions that limit the scope of allowed indemnity provisions. In particular, these statutes will at times render unenforceable an indemnification provision that purports to require indemnification for the indemnitee's own negligence. These anti-indemnity acts originate from the perceived bargaining inequities between the oil well operators and the (generally smaller) oilfield services contractors. Because, at least historically, the operator controls the contract language, it was felt that the operator would unfairly insist that the services company indemnify it for the operator's own misconduct, thus leaving the services company responsible for both its own negligence and the negligence of the operator.
To prevent this potential outcome, the Texas Oilfield Anti-Indemnity Act, Tex. Civ. Prac. & Rem. Code §§ 127.001-.007 ("TOAIA"), generally provides that an agreement to indemnify a person for his own negligence is void as against public policy. Despite the breadth of the language of the statute, it is limited in two important respects. First, TOAIA only applies to certain oil & gas contracts. Second, the act does allow for "own negligence" indemnification if certain conditions are met.
As to the first point, by its own terms, TOAIA applies only to contracts related to oil, gas, or water wells, or mines for other minerals. Courts have tended to construe TOAIA somewhat narrowly and usually hold that it only applies to those contracts with a close relationship to an actual well, rather than oil & gas activity generally. And, TOAIA itself specifically identifies certain situations to which it does not apply, including: injury or death resulting from radioactivity; property injury arising from pollution or reservoir damage; or injury (personal or property), death, or costs related to wild well control.
As to the second point, TOAIA does allow certain "own negligence" indemnification, provided that insurance obligations are met. If the contract calls for cross-indemnification between the parties, the "own negligence" indemnity obligation is capped only by the amount of insurance obtained to cover the obligation. If the contract calls for unilateral indemnification (so that only one side to the contract is required to indemnify for the other's negligence), the indemnification obligation cannot exceed $500,000. Naturally, TOAIA requires such indemnification provisions to be in writing. And, as with any contractual indemnity provision, a practitioner should make sure the provision is both express and conspicuous. This is accomplished most often through the use of all caps and/or bolding.
Texas is not alone in having an oilfield anti-indemnity statute. At least three other states have one as well: Louisiana; New Mexico; and Wyoming. Each of these state's statutes varies from TOAIA in important respects. Therefore, drafters should review oilfield anti-indemnification provisions in the states where their clients intend to drill, even if the contract calls for application of another state's law. While courts usually defer to parties' choice of law provisions, the possibility exists that a court will determine that the anti-indemnity provisions of its own state are a matter of public policy and disregard the choice of law provision if it allows "own negligence" indemnification.
Ron Palmer
Houston
+1 713 495 8812
rpalmer@kslaw.com
