2013 Independent Insurance Agents of Houston: Energy Symposium Houston, Texas

Transcription

1 2013 Independent Insurance Agents of Houston: Energy Symposium Houston, Texas August 8, 2013 Mary Shaddock Jones Master Service Agreements in the Oil and Gas Industry

2 Agenda Overview of Master Service Agreements in the Oil and Gas Industry Principles of Contractual Indemnity Overview of Anti Indemnity Statute in Texas relating to oil, gas, or water wells, or mines for other minerals. Tex. Civ. Prac. & Rem. Code et seq. (2012) Exceptions to the Anti Indemnity Ban Impact of Anti Indemnity Statutes in Master Service Agreements in the Oil and Gas Industry Impact of Anti Indemnity it Statutes t t in Master Service Agreements in the Oil and Gas Industry Overview of Anti Indemnity Clauses and Insurance involved in Fracking for Oil and Gas in Texas

3 Master Service Agreements in the Oil and Gas Industry In the Oil and Gas industry, Master Service Agreements (MSAs), establish a contractual relationship to govern ongoing work during exploration, drilling, production and service without having to renegotiate terms and conditions multiple times. The Oil and Gas industry created the MSA to respond to two crucial needs: the necessity to respond quickly to operational changes and the implementation ti of acarefully planned risk ik allocation strategy that is suitable for multiemployer work sites. MSA s allow parties to quickly execute simple Work Orders incorporating, by reference, more extensive provisions contained within previously negotiated and executed agreements.

4 Poorly Drafted MSAs MSA s While the MSA concept provides many contractual advantages, MSA s are often inadequately prepared, used in applications for which they were not designed or kept in service beyond their useful life. Failure to take into account relevant legal requirements and operational necessities can result in a contract that fails to guide the parties through foreseeable circumstances. Similarly, the MSA that fails to address certain geographic locations and jurisdictional differences, can also create an contract which does not meet the mutual intentions of the parties; which usually leads to litigation.

5 Risk Allocation

6 Flowing Down Responsibility A Master Service Agreement allows a company to negotiate acceptable terms and conditions in advance without having to negotiate while work is waiting to be performed. It also allows a consistent approach to risk allocation that allows a company s various MSA s to fit together with other contracts that the company will enter into in the performance of the work. For instance, if a Contractor is required to assume responsibility in the prime contract which is beyond the risk appetite of its company, the Contractor has to transfer that risk in one or more ways. One risk transfer method is to transfer the risk to a Subcontractor with expertise in the area, backed up by an indemnity and insurance provisions. The key will be obtaining pass through responsibility in the Subcontract MSA.

7 Focus on Indemnity Black s law definition (1) A duty to make good any loss, damage or liability another has incurred. (2) The right of an injured party to claim reimbursement for its loss, damage, or liability from a person who has such a duty. (3) Reimbursement or compensation for loss, damage, or liability. Layman s English definition An undertaking by which the indemnifying party ( indemnitor ) agrees to make good any loss or damage that the indemnified party ( indemnitee ) has incurred, or to safeguard the indemnitee against liability.

8 Texas Oilfield Anti Indemnity Statute Prior to 1973, oil companies and oil well operators would enter into contracts with smaller contractors, and require the smaller contractors to indemnify them not only from the contractor s negligence, but from their own negligence as well. In addition to being unfair, this was placing an undue financial burden on these smaller contractors. In an effort to combat this practice, the Texas legislature passed the Texas Oilfield Anti Indemnity Statute TEX. CIV. PRAC. & REM. CODE (the Statute ) ) of the Statute provides that any agreement pertaining to wells for oil, gas, or water or to a mine for a mineral which purports to indemnify if a person or entity against liability that t (i) is caused by their sole or concurrent negligence and (ii) arises from personal injury or death; property injury; or any loss, damage or expense that arises from personal injury, death or property p injury is void and unenforceable.

9 Agreement Pertaining to a Well of the Statute defines an agreement pertaining to a well for oil, gas, or water or to a mine for a mineral" as: (1) a written or oral agreement or understanding concerning the rendering of well or mine services or (2) an agreement to perform a part of those services or an act collateral to those services, including furnishing or renting equipment, incidental transportation, or other goods and services furnished in connection with the services, but does not included a joint operating agreement.

10 What is a Well or Mine Service? of the Statute provides that well or mine service : includes: (i) drilling, deepening, reworking, repairing, improving, testing, treating, perforating, acidizing, logging, conditioning, purchasing, gathering, storing, or transporting oil, brine water, fresh water, produced water, condensate, petroleum products, or other liquid commodities, or otherwise rendering services in connection with a well drilled to produce or dispose of oil, gas, other minerals or water; and (ii) designing, i excavating, constructing, ti improving, i or otherwise rendering services in connection with a mine shaft, drift, or other structure intended for use in exploring for or producing a mineral; but does not include: (i) purchasing, selling, gathering, storing, or transporting gas or natural gas liquids by pipeline or fixed associated facilities; or (ii) construction, maintenance, or repair of oil, natural gas liquids, or gas pipelines or fixed associated facilities.

11 Statutory Exceptions of the Statute provides that additional types of indemnity agreements will not be rendered void and unenforceable when: The parties agree in writing that the indemnity obligation will be supported by liability insurance coverage to be furnished by the indemnitor subject to the limitations specified below. With respect to a mutual indemnity obligation, the indemnity obligation is limited to the extent of the coverage and dollar limits of insurance or qualified self insurance each party as indemnitor has agreed to provide in equal amounts to the other party as indemnitee. it With respect to a unilateral indemnity obligation, the amount of insurance required may not exceed $500,

12 Additional Statutory Exceptions of the Statute provides that the following will not be rendered void and unenforceable: insurance contracts and a benefit conferred under the Texas Workers' Compensation statutes of the Statute allows the surface estate owner the right to secure indemnity from a lessee, an operator, a contractor or other persons conducting mineral exploration or production operations on the owner's land.

13 Drafting Enforceable Indemnity Clauses Drafting enforceable indemnity clauses under the Texas Oilfield Anti Indemnity Statute can be difficult. Although the Statute is broadly worded, a number of courts have interpreted its language g strictly. A thorough understanding of the Statute and the location and type of work are critical in order to ensure that the agreements are technically sound and comply with each section of the Statute. I started out this presentation talking about Indemnity clauses in a Master Service Agreement. However, the first case I want to discuss involves an indemnity clause not in an MSA, but in a work ticket t with standard dterms and conditions.

14 Recent Cases What can go wrong! Expro Ams., LLC v. Sanguine Gas Exploration, LLC, 351 S.W.3d 915 (14 th District Court of Appeals Houston)(October 27, 2011) Sanguine is an Oklahoma based entity which operated an oil andgas lease in Wheeler County, Texas. Sanguine hired Anadarko Consultants, Inc. ("Anadarko") "to design, manage, and directly supervise" a drilling project on the lease. Roy Judd, an employee of Anadarko, worked as "company man" at the well site. In this capacity, Judd frequently requested services and equipment from contractors and signed hundreds of job tickets pertaining to these services. Judd contacted Expro to request "choke flow services. Expro employee Brandon Sh Schreck provided d the requested services and then presented Judd with a job ticket to sign. The reverse side of the ticket was entitled "Rental and Service Agreement Terms and Conditions" and contained eight separate provisions. Provision seven was entitled "RELEASE & INDEMNITY."

15 Recent Cases (continued) According to terms and conditions in the work ticket, the parties agreed to indemnify each other and procure insurance covering their respective indemnity obligations. Schreck did not explain any of the language g or refer Judd to the reverse side of the ticket. Further, Judd signed the ticket without reading the provisions. Sanguine received a copy of the ticket and paid for the services rendered by Expro without objection. Subsequently, Expro was named as a defendant in a lawsuit arising from a fatal accident that occurred at the well site. Expro demanded Sanguine provide defense and indemnity in connection with the underlying suit.

16 Who Are The Players? Operator Contractor Sub Contractor Sanguine Operated doil and Gas Lease Anadarko Hired to Supervise the Drilling Expro America s Hired to perform subcontract Deceased Family of the Deceased

17 Expect to Occur Deceased Family Insurance Sanguine MSA Expro Anadarko MSA

18 Actually Occurred Deceased Family Sanguine (Owner) Work Ticket Expro (Subcontractor of Subcontractor)

19 What are the Issues? Was there a Contract between Expro (Subcontractor) and Sanguine (Operator)? Remember An Employee of Anadarko contacted Expro to request "choke flow services. Sanguine didn t have anything to do with requesting the service from Expro. What did the Rental and Service Agreement Terms and Conditions say? Sanguine is listed as "CUSTOMER" on the Expro job ticket, and Judd (Anadarko Employee) signed the ticket as "CUSTOMER REP." EQUIPMENT LISTED HEREIN RECEIVED; I HAVE READ AND EQUIPMENT LISTED HEREIN RECEIVED; I HAVE READ AND UNDERSTAND THE TERMS AND CONDITIONS ON THE REVERSE SIDE AND REPRESENT THAT I AM AUTHORIZED TO SIGN THIS AGREEMENT AS A CUSTOMER'S AGENT

20 Issues relating to Anti Indemnity 1. Is the "Rental and Service Agreement Terms and Conditions an Agreement relating to Wells thus covered by the Texas Oilfield Anti Indemnity Statute? 2. Did it require one party to indemnify it for its own negligence? 3. Did it comply with the Express Negligence requirement ( a party seeking indemnity from the consequences of that party's own negligence must express that intent in specific terms within the four corners of the contract). 4. Did it comply with the Conspicuousness requirement (something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it). 5. Is thereastatutoryexceptionapplicableto theagreement?

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22 What did the Court Find? This court has recognized that indemnity provisions included among unrelated terms and conditions on the reverse side of a document generally do not satisfy the conspicuousness requirement when the provision is not set apart by contrasting font or typeface. EQUIPMENT LISTED HEREIN RECEIVED; I HAVE READ AND UNDERSTAND THE TERMS AND CONDITIONS ON THE REVERSE SIDE AND REPRESENT THAT I AM AUTHORIZED TO SIGN THIS AGREEMENT AS A CUSTOMER'S AGENT Only eight provisions appear on the reserve side of the ticket. Directly above the first provision, is the following bolded, italicized, and underlined language: BOTH PARTIES ACKNOWLEDGE THAT THE TERMS AND CONDITIONS, BELOW, ARECONSPICUOUS AND AFFORD FAIR AND ADEQUATENOTICE. Provision seven is entitled RELEASE & INDEMNITY, pertains solely to indemnification, and contains a lengthy bolded, italicized, and underlined definition for the phrase Regardless of Cause. Additionally, notwithstanding use of small font and thin, colored paper, the provision is not unreadable. In fact, the capitalized and bolded heading RELEASE & INDEMNITY is prominent because of the small font. Construing the job ticket as a whole, we conclude as a matter of law that the indemnity provision would attract the attention of a reasonable person.

23 What about the Insurance Policy? In Armijo v. Tetra Techs, Inc. a March 27, 2013 case recently decided in the Eastern District of Louisiana the insurance company stated that even if the indemnity agreement was upheld, there was no coverage due to the following exclusions in a Marine GeneralLiability Policy: Exclusion (d) coverage does not apply to obligations under worker s compensation laws, the LHWCA, the Jones Act, General Maritime Law, FELA, or any similar law; Exclusion (e) providing that coverage does not apply to injuries to employees of the insured; Exclusion (g) providing that coverage does not apply to injuries arising out of the use of a watercraft owned, leased or chartered to an insured; and, Endorsement No 2, which excludes coverage for damages with respect to crew members of the insured vessel.

24 Plaintiff seeking damages for personal injury sustained offshore while assisting in a crane operation to remove a dismantled bridge that had connected two sections of an oil production platform in the Gulf of Mexico off the coast of Louisiana. Plaintiff an Employee of Vertex who is the NAMED INSURED on the General Liability Policy Owner of the Platform Contractor/ vessel owner Employer Welding Company General Liability Insurance Policy of Employer.

25 Exclusion (d): (d) The insurance does not apply to any obligation of the insured under a workers compensation, United States Longshore and Harbor Workers Compensation, Jones Act, Death on the High SeasAct, General Maritime Law, Federal Employers Liability Act, disability benefits or unemployment compensation or any other similar law. Court found that the exclusion applied to Workers Compensation type liability not general liability claims under general maritime law.

26 Exclusion (e) The is policy does not apply to: Bodily Injury to : (1) An employee of the insured arising out of and in the course of: (a) () Employment by the Insured; or, (b) Performing duties related to the conduct of the insured s business This exclusion applies (1) whether the insured may be liable as an employer or in any other capacity This exclusion does not apply to liability assumed by the insured under an insured contract. The Court found that the plaintiff was NOT an employee of the Insured. (in this case the insured was the additional assured. The plaintiff was anemployee ofthe Named Assured.

27 Exclusion (g) This policy does not apply to: Bodily Injury or Property Damage arising out of: (1) the ownership, maintenance, use or entrustment to others of any watercraft owned, leased, rented or chartered to any insured. Use includes loading and unloading. This exclusion does not apply to (b) liability assumed under any insured contract for the ownership, maintenance or use of watercraft. The Court noted that although one of the entities seeking additional assured status owned the vessel on which the injury occurred, the injury was caused by two sources: (1) negligence and (2) the unseaworthiness of the barge. The exclusion did not apply to the extent the personal injury arose out of negligence, as opposed to the unseaworthiness of the vessel.

28 Endorsement No 2 Endorsement No. 2. stated: In consideration of the premium charged, it is understood and agreed that this policy excludes any loss, damage, claims or expenses with respects to employees of the Assured and/or members of the crew of the Vessel Insured hereunder. The insurance company claimed that the plaintiff was working on the barge; and was therefore, a member of the crew which triggered the exclusion. h f d h h l ff ld h The Court found that the plaintiff was a welder, who was just asked to work from the barge while performing his welding duties on the job. He was not a member of the crew.

29 Wrap Up: Armijo vs. Tetra Tech (1) Because the job was to remove a walkway on a decommissioned oil and gas platform the Court said that the Oilfield Anti IndemnityStatute didnotapply. (2) The Court found that the Indemnity Clause in the MSAwas valid. (3) The Court found that the indemnitees (platform owner and barge owner) were provided coverage for bodily injury to theemployeeofthenamedinsuredtotheextentthatthe personal injury arose out of the negligence of the indemnitees, and not from the unseaworthiness of the vessel.

30 Recent Case Delahoussaye v. Pisces Energy, LLC United States District Court for the Eastern District of Louisiana. Decided March 30, 2012 Pisces Energy LLC is the owner of the platform at issue in this case, Mustang Island 739 A (hereinafter MI 739 A ). The MI 739 A is a fixed platform, permanently embedded in the subsoil and seabed in the Gulf of Mexico and adjacent to the coast of Texas on the Outer Continental Shelf. Crescent Drilling and Production, Inc. was hired to furnish a Consultant to manage the workover. In place at this time was a Master Service Agreement between Crescent and Pisces. Pisces had a contract with Warrior Energy Services, whereby Warrior agreed to provide a crew to perform work on the MI 739 A under a MSA Pisces also contracted with Performance Energy Services, LLC for the services of a crane operator to perform work on the MI 739 A under a MSA

31 Who Are The Players? Operator Contractor Sub Contractor Pisces Owner of Platform Crescent Drilling Hiredto Supervise the workover Warrior Energy Services and Performance Hired to perform subcontracts Injured Employee Delahoussaye Employee of Warrior

32 Expect to Occur Injured Employee Of Warrior Insurance Pisces MSA Warrior Crescent MSA

33 Issues relating to Anti Indemnity 1. Does Maritime Law or Texas Law Apply? 2. If Texas law, is the Master Service Agreement an Agreement relating to Wells thus covered by the Texas Oilfield Anti Indemnity Statute? 3. Did it require one party to indemnify it for its own negligence? 4. Did it comply with the Express Negligence requirement ( a party seeking indemnity from the consequences of that party's own negligence must express that intent in specific terms within the four corners of the contract). 5. Did it comply pywith the Conspicuousness requirement (something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it). 6. Is there a statutory exception applicable to the Agreement?

34 Texas Law vs. Maritime Law? The rules are different when determining the law to apply to the claims of the injured party (TORT CLAIM) vs. the law to apply to the validity of an indemnity claim (CONTRACT). To determine the law to apply for the Indemnity Claim where the accident occurred offshore on the Outer Continental Shelf: 1. Are the MSA s Maritime Contracts? 2. If non maritime, then does OCSLA apply? l? 3. If OCSLA applies, then what state law applies? 4. Does the State law conflict with OCSLA or Federal Law? 5. Does a Choice of Law provision override all of the above? The reason that this analysis is crucial to this case, is that federal maritimelaw would uphold the indemnity clause, but OCSLA, federal law, and Texas law may not.

35 Findings By the Court: It is undisputed that the MI 739 A isafixedplatformlocated in the Mustang Island Block 739, in the Gulf of Mexico and adjacent to the coast of Texas on the Outer Continental Shelf, approximately seventy five (75) miles from the coast. Maritime vs. non maritime? Does the Outer Continental Shell Lands Act Apply? The OCSLA generally incorporates the law of the adjacent state as surrogate fd federal llaw. Situs of the WORK covered by OCSLA? Yes, Fixed Platform on OCSLA Federal maritime law must not apply on its own Statelawmustnotbeinconsistent with federal law. The court ultimately determined that because the work was not dependent upon a vessel, that the OCSLA and thus Texas StateLaw applied.

36 Findings By the Court (continued) The Court then turned its attention to discussing the Texas Oilfield Anti Indemnity Act: As a general rule, the TOAIA voids indemnity provisions in agreements pertaining to a well for oil, gas,orwaterortoa mine for a mineral if those agreements seek to indemnify a person for his own negligence. A contract pertains to a well if it requires the rendering of well or mine services. Id. Mores specifically, this includes: the reworking, repairing, improving... or otherwise rendering [of] services in connection with a well drilled to produce or dispose of oil, gas, other minerals or water.

37 Findings By the Court (continued) The Safe Harbor Provision provides that indemnity language in a contract that falls under the TOAIA is not void if the indemnity obligations are reciprocal and if the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage to be furnished by the indemnitor. The Master Service Agreements in place do not contain reciprocal indemnity provisions and they require both Crescent and Performance to procure and maintain insurance to cover its indemnity obligations under the contract. In conclusion, since the insurance requirements of the Safe Harbor Provision are not met, the MSA between Crescent and Pisces and the MSA between Performance and Pisces violates the provisions of the TOAIA.

38 Was the Court Correct? Statutory Exceptions of the Statute provides that additional types of indemnity agreements will not be rendered void and unenforceable when: The parties agree in writing that the indemnity obligation will be supported by liability insurance coverage to be furnished by the indemnitor subject to the limitations specified below. With respect to a mutual indemnity obligation, the indemnity obligation is limited to the extent of the coverage and dollar limits of insurance or qualified self insurance each party as indemnitor has agreed to provide in equal amounts to the other party as indemnitee. it With respect to a unilateral indemnity obligation, the amount of insurance required may not exceed $500,

39 Yes The Court was Correct According to the Court, both the Pisces Crescent and the Pisces Performance MasterServiceAgreements providethe following indemnity language: [Pisces] shall defend, protect, indemnify, and hold harmless Contractor, its employees, subsidiaries, affiliated companies, joint venturers, partners, contractors, agents, invitees, i and all of their respective officers, directors, and employees (hereinafter sometimes collectively referred to as the Contractor Group ) from and against all suits, actions, claims, liabilities, damages, and demands based upon personal injury, death, or property p damage or loss, whenever occurring, suffered by any of the Palm Group, where the claim or loss arises out of, is connected with, incident to, or is directly or indirectly resulting from or relating to the performance of this Agreement or out of any related or unrelated activities in the vicinity thereof, whether the claim is groundless or not, and whether the loss or injury is caused in whole or in part by the negligence or fault of any of the Contractor Group or the condition of any vehicle, vessel, aircraft, or equipment or by defect in any equipment or property of the Contractor Group.

40 Insurance For Pisces Not Required According to the Court, the Master Service Agreements in place do not contain reciprocal indemnity provisions and they require both Crescent and Performance to procure and maintain insurance to cover its indemnity obligations under the contract. The Court does not find the obligations contained in either MSA to be mutual indemnity obligations. Additionally, the Safe Harbor Provision is not met because the MSA contains no requirement for mutual insurance. In fact, this Court notes, there are no insurance requirements of Pisces. The Plaintiff was part of the Pisces Group; therefore, Pisces was required to indemnify if Crescent and Performance for injury or death to the Plaintiff even if Crescent or Performance was negligent. The Court discussed that there was no mutual indemnity, but the TOAIA allows for unilateral indemnity provided insurance is provided by the person owing the indemnity but it is limited to $500,000. The MSA apparently did not require Pisces to have insurance; therefore, the Court was right in its findings; but I believe wrong in the explanation because a unilateral indemnity is allowed provided insurance is required, but the liability is capped at $500,000.

41 Fracking. To discuss if there is sufficient time! If not We will address in the next session.

42 Questions or Comments? Mary Shaddock Jones, LLC Attorney At Law 1508 Hodges St. Lake Charles, LA (Office) (Cell) (Direct Office)