Tuesday, March 17, 2015 Houston, TX. 1:15 2:30 p.m. PRODUCT FAILURES IN THE OIL FIELD

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1 Tuesday, March 17, 2015 Houston, TX 1:15 2:30 p.m. PRODUCT FAILURES IN THE OIL FIELD Presented by Brett W. Chalke Associate Gray Reed & McGraw, P.C. Julia M. Palmer Member Gray Reed & McGraw, P.C. With the shale gas boom comes the issues associated with equipment, casing, and other product failures. Significant claims that arose out of failed rental equipment and failed casing and couplings are currently being litigated. This session will analyze the potential causes of action (including contract, tort, and products liability), defenses, and measure of damages. The challenges of trying an oil field products liability case and the charge to be given to the jury will also be discussed. Copyright 2015 International Risk Management Institute, Inc. 1

2 Notes This file is set up for duplexed printing. Therefore, there are pages that are intentionally left blank. If you print this file, we suggest that you set your printer to duplex. 2

3 Brett W. Chalke Associate Gray Reed & McGraw, P.C. Brett W. Chalke is an associate in Gray Reed s maritime and energy practice. He is experienced in all aspects of energy, maritime, commercial, and mass toxic tort litigation. He has experience throughout the Gulf Coast and is licensed to practice in Texas and Louisiana, including representation of a Global Fortune 10 oil company in several large-scale toxic tort suits involving naturally occurring radioactive material, a Global Fortune 10 oil company in suits involving offshore oil and gas production and related contractual disputes, a marine services client in a matter involving a collision with an oil well that resulted in both property damage and pollution claims, and marine insurance underwriters in a case involving a maritime accident in the Philippines that resulted in over 4,000 deaths. Mr. Chalke received his B.A., cum laude, from Tulane University and his J.D. from Tulane University Law School. Julia M. Palmer Member Gray Reed & McGraw, P.C. Julia Palmer, formerly Julia Adams, is an active and respected member of the admiralty and energy bar. Her practice focuses on marine, energy, and insurance issues. For more than 30 years, Ms. Palmer has handled marine and energy litigation, including collision cases, hurricane losses, onshore and offshore oil and gas claims, hydraulic fracturing cases, marine and energy products liability litigation, the defense of personal injury and death actions, contract and lien claims, dock and stevedore liabilities, and subrogation litigation. Her expertise is the handling of downhole losses, environmental claims, property damage, business interruption, vessel and dock operations, and offshore and marine construction. Ms. Palmer is often called upon to analyze insurance, indemnity, and defense provisions in marine and drilling contracts, as well as complex issues arising under the Outer Continental Shelf Lands Act. Prior to joining Gray Reed & McGraw, Ms. Palmer was a partner in the Houston office of Sedgwick LLP where she led the firm s Admiralty and Energy Group and the Hydraulic Fracturing Task Force. She also served as the briefing attorney to the Honorable Hugh Gibson, Judge, US District Court, Southern District of Texas, Galveston Division, from 1982 to She is a member of the Fifth Circuit Bar Association, College of the State Bar of Texas, and the Houston Mariners Club. Ms. Palmer has been appointed by Chief US District Court Judge Ricardo H. Hinojosa to serve on 3

4 the Magistrate Judge Judicial Selection Panel for the Southern District of Texas. She is a proctor in the Maritime Law Association of the United States. Ms. Palmer is a past-president of the Houston Propeller Club and continues to serve on the board. In 2010, she was named Propeller Club Person of the Year. She also serves on the board of International Seafarers Center and the Maritime Gala planning committee and chaired the 2008 and 2009 Maritime Gala. Ms. Palmer is a member of the planning committee for the University of Texas Admiralty and Maritime Law Conference, a trustee of the Houston Maritime Museum, and a member of the board of directors of the Judith Liebenthal Robison Ovarian Cancer Foundation. She is AV Preeminent Rated, the highest possible Martindale-Hubbell Peer Review Rating designation. Ms. Palmer frequently authors and lectures on insurance coverage and maritime law topics. She earned her J.D., cum laude, from South Texas College of Law in While attending law school, she was the editor of the Special Maritime Edition of the South Texas Law Journal and a member of the Order of the Lytae. Ms. Palmer received her B.A. (1979) from the University of Dayton. 4

5 1 PRODUCT FAILURES IN THE OIL FIELD Presented by Julia M. Palmer and Brett W. Chalke Gray Reed & McGraw, P.C. March 17, 2015 Product Failures in the Oil Field 2015 IRMI Energy Risk & Insurance Conference Houston, Texas March 17, 2015 Julia M. (Adams) Palmer Gray Reed & McGraw, P.C Post Oak Blvd., Suite 2000 Houston, Texas P: (713) F: (713) Brett W. Chalke Gray Reed & McGraw, P.C Post Oak Blvd., Suite 2000 Houston, Texas P: (713) F: (713) Gray Reed & McGraw, P.C. The information contained herein is subject to change without notice 2 5

6 Litigating Product Failures in the Oil Field 3 Introduction Increased oil field products litigation is the result of increased shale production Typical product failures Casing/collar Blowout preventers Valves Rental equipment 4 6

7 Overview Initial steps and investigation Testing the materials Who are the proper parties? Causes of actions Proving or defending your case Damages 5 Investigation First Steps 1. Control accident scene 2. Place insurer on notice 3. Establish chain of custody 6 7

8 First Steps (cont.) 4. Contact seller/manufacturer may want to witness removal 5. Document removal of product 6. Document evidence of cleanup, repair costs, lost time 7. Identify witnesses 8. Gather documents and invoices 7 Testing Retain metallurgical or other relevant expert Establish testing protocol Non-destructive testing Joint destructive testing Analyze results Plan additional testing 8 8

9 Parties Manufacturer Distributor Seller/rental company Contractor The Lawsuit 9 Causes of action Breach of contract Products liability Negligence Misrepresentation The Lawsuit (cont.) 10 9

10 Breach of Contract Elements A valid, enforceable contract (offer and acceptance) Plaintiff performed according to the terms Defendant breached the contract Plaintiff sustained damages as a result Usually limited to direct seller of product 11 Breach of Contract (cont.) Know your documents Master service agreements Purchase orders/invoices Oral contracts Waiver of warranties/representations 12 10

11 Jury Charge Negligence Did the negligence, if any, of those named below proximately cause the occurrence in question? Product supplier Owner/operator of well Responsible third party 13 Negligence (cont.) Negligence, when used with respect to the conduct of the defendant, means the failure to use ordinary care that is, failing to do that which a company or ordinary prudent person would have done under the same or similar circumstances or doing that which a company of ordinary prudence would not have done under the same or similar circumstances

12 Negligence (cont.) Ordinary care means the degree of care that a company of ordinary prudence would use under the same or similar circumstances. 15 Negligence (cont.) Proximate cause means a cause that was a substantial factor in bringing about an event and without which cause such event would not have occurred. In order to be a proximate cause, the act or omission complained of must be such that a company using ordinary care would have foreseen that the event, or similar event, might reasonably result therefrom. There may be more than one proximate cause of an event

13 Negligent Misrepresentation Elements 1. The defendant made a representation to the plaintiff in the course of the defendant s business or in a transaction in which the defendant had an interest. 2. The defendant supplied false information for the guidance of others. 17 Negligent Misrepresentation (cont.) 3. The defendant did not exercise reasonable care or competence in obtaining or communicating the information. 4. The plaintiff justifiably relied on the representation. 5. The defendant s negligent misrepresentation proximately caused the plaintiff s injury

14 Products Liability \ Civil Practices and Remedies Code Applies to: Manufacturers Sellers (sometimes) 19 Products Liability (cont.) Liability of Nonmanufacturing Sellers A seller can be held liable for harm caused by a defective product if: Participated in the design of the product Altered, modified, or installed the product Exercised substantial control over the content of a warning or instruction that harmed the claimant Makes an incorrect express factual representation about the product Actual knowledge of defect Manufacturer is insolvent Manufacturer not subject to the jurisdiction of the court 20 14

15 Products Liability (cont.) Types of product liability claims Manufacturing defect Design defects Marketing defects 21 Products Liability: Manufacturing Defect Manufacturing defect exists if the product, or any component thereof, deviated, in its construction or quality, from its specifications or planned output in a manner that rendered it unreasonably dangerous; that is, dangerous to an extent beyond that which would be contemplated by the ordinary user of the product, having ordinary knowledge common to the community as to the product s characteristics

16 Products Liability: Design Defect A design defect is a condition of the product that renders it unreasonably dangerous as designed, taking into consideration the utility of the product and the risk involved in its use. For a design defect to exist, there must have been a safer alternative design. 23 Products Liability: Marketing Defect A marketing defect with respect to the product means there was a failure to give adequate warnings of the product s dangers that were known, or by the application of reasonably developed human skill and foresight should have been known, or failure to give adequate instructions to avoid such dangers, which failure rendered the product unreasonably dangerous as marketed

17 Products Liability: Marketing Defect Adequate warning and instructions mean warnings and instructions given in a form that could reasonably be expected to catch the attention of a reasonably prudent person in the circumstances of the product s use; and, when the product is marketed solely to professionals experienced in using the product, the content of the warnings and instructions must be comprehensible to a reasonable professional in using the product and must convey a fair indication of the nature and extent of the danger and how to avoid it to the mind of such a reasonably prudent professional. Source: Pavlides v. Galveston Yacht Basin, Inc., 727 F.2d 330 (5th Cir. 1984) (applying Texas law). 25 Other Causes of Action Deceptive Trade Practices Act Breach of warranty Implied warranty of merchantability Implied warranty of fitness for a particular purpose Implied warranty of good and workmanlike performance Common law fraud 26 17

18 Proving or Defending Your Case Establish timeline of events identifying key witnesses and documents Preserve testimony of key witnesses Secure expert opinions Prove up or discredit damages Develop causation arguments early Analyze/choose course of action/defenses 27 Damages to Oil and Gas Wells If the well is lost and cannot be replaced: Damages reasonable cash market value of the well as equipped immediately preceding its destruction, less the value of any salvage realized and reasonable costs incurred in trying to save/repair the well. Dowell, Inc. v. Chichowski

19 Damages to Oil and Gas Wells (cont.) If the well is lost and can be replaced: The lesser of two values The cash market value of the old well or The cost of reproducing the well with a new well equipped like the old well, less any salvage value of the old well 29 Damages to Oil and Gas Wells (cont.) Market value means the amount that would be paid in cash by a willing buyer who desired to buy, but is not required to buy, to a willing seller who desires to sell but is under no necessity of selling. (PJC 83.3 Property Damage Market Value before and after Occurrence) 30 19

20 Damages to Oil and Gas Wells (cont.) Overview of recovery: Repair costs + Replacement costs OR loss in value of the well 31 Damages: Pertinent Caselaw Dresser Indus., Inc. v. Page Facts: Equipment became stuck downhole and lost several thousand feet of wireline. Well was abandoned and a replacement well was drilled. Damages: Jury found a market value of $836,000 before the incident. Remedial work was $366,000. The reasonable cost of replacing the well was $494,112. The court awarded the lesser value (market value) as opposed to the remedial costs plus the cost of the replacement well

21 Damages (Cont.) Atex Pipe & Supply, Inc. v. Sesco Prod. Co. Facts: Tubing collapsed inside well, essentially plugging the well; jury found the tubing to be unmerchantable. Damages: Plaintiff production company sought damages based on loss of production. The court refused to allow damages for loss of production and instead followed the typical measure of damages: costs of repair, replacement, or the market value, whichever is less. 33 Damages: Jury Charge Answer separately in dollars and cents for damages, if any: Market value of the well immediately before the occurrence in question. $ Market value of the well immediately after the occurrence in question. $ The reasonable and necessary costs to repair and restore the well. $ The salvage value of the well. $ The reasonable and necessary costs to redrill and complete an oil and gas well of the same dimensions, type, and depth. $ 34 21

22 Recoverable? Attorney s Fees Contract: yes Products: no Negligence: no Negligent misrepresentation: no 35 Takeaways Early preservation is important Study and choose causes of actions and defenses early Prepare jury charge early Secure testimony Damages are complex and not standard property damage models 36 22