BEYOND THE “KNOCK” IN OILFIELD MASTER SERVICE AGREEMENTS: LIMITING RISK IN THE REST OF THE MSA WITH A COMPLETE FORM

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(May 2004)
CHAPTER 10B
BEYOND THE "KNOCK" IN OILFIELD MASTER SERVICE AGREEMENTS: LIMITING RISK IN THE REST OF THE MSA WITH A COMPLETE FORM
Donald P. Butler
Seneca Resources Corporation
Houston, Texas

Don Butler is certified by the Texas Board of Legal Specialization in Oil, Gas and Mineral Law. He has held in-house positions with several independent producers, including his current employer, Seneca Resources Corporation, a wholly owned subsidiary of National Fuel Gas Company (NYSE: NFG), as well as law two firm positions: five years at Vinson & Elkins in its General Litigation Section and seven years at Fulbright & Jaworski in its Energy & Environmental Litigation Section. These positions have involved both domestic and international oil and gas law, transactions and litigation. He graduated second in his class from the University of Houston Law Center where he was one of several editors on the Houston Law Review. He has been an adjunct professor of law at the University of Houston Law Center since 1974 and taught Oil and Gas Law from 1990 to 1994 and again in 1996, and has been a guest lecturer in International Energy Transactions. His writings include: All-out oil production won't serve Russians' needs, Houston Chronicle 5E (Sunday, February 9, 1992). Personnel Issues in International Mineral Transactions at International Resources Law 11 (Rocky Mountain Mineral Law Foundation and Section on Energy; Resources Law of the International Bar Association) 1995, and Making the Transition from Domestic to International Oil and Gas Deals at South Texas College of Law Oil & Gas Institute 1998; and Drafting Consulting Agreements for Oil and Gas Professionals, Advanced Oil, Gas & Energy Resources Law Course, 2001. He has spoken for the last two years at the Strategic Research Institute's Contract Risk Management course. In 2002, his paper was Drafting Indemnity Clauses To Meet Common Law Strict Construction Requirements, Including, But Not Limited To, The Express Negligence Rule and Conspicuousness. In 2003, his paper was on The Proper Use of Restrictions On Otherwise Available Remedies In Master Service Agreements, Construction, Fabrication, And Installation Agreements. He was chairperson of the 1999 and 2000 South Texas College of Law annual Energy Law Institute. He's a member of the Texas Bar Association, the Houston Bar Association, and the American Corporate Counsel Association where he chaired the Energy Law Committee in 1999 and 2000. He received a 2000 Excellence in Corporate Practice award from the American Corporate Counsel Association national organization. He is currently Secretary and on the Board of Directors of the Houston Chapter of the American Corporate Counsel Association. Don was active throughout 1998 to 2002 in the ACCA/Houston Energy Law Committee Master Service Agreement 2000 Project. For more information go to http://www.plantdata.com/ACCA_Form_MSA.htm.

SUBJECTS

PART I CHECK LIST FOR LIMITING LIABILITIES IN MASTER SERVICE AGREEMENTS AND SIMILAR CONTRACTS IN AREAS OTHER THAN INJURED PERSONS AND DAMAGE PROPERTY

PART II USING INDEMNITIES TO CONTROL RISK IN ALL AREA OF THE CONTRACT, NOT JUST PEOPLE AND PROPERTY

PART III SELECTED AREAS FROM THE CHECKLIST IN PART I EXPANDING EXPLANATIONS, SUGGESTIONS, AND FORMS

TOPIC NO. 1: ALTHOUGH RARELY SEEN IN THE NATIONAL REPORTER SYSTEM, THE BENEFITS OF A CONSEQUENTIAL DAMAGE WAIVER ARE A MAJOR RISK REDUCTION TOOL FOR THOSE COMPANIES NOT INCLINED TO SOLVE THEIR PROBLEMS IN COURT.

TOPIC NO. 2: DO YOU WANT TO KNOW EVERY THING THERE IS TO KNOW ABOUT CONSEQUENTIAL DAMAGES, BUT ONLY HAVE TO PLOW THROUGH THE READER'S DIGEST VERSION? THE ASSOCIATION OF INTERNATIONAL PETROLEUM NEGOTIATORS IN THEIR SERVICE AGREEMENT PROJECT DID SOME STELLAR RESEARCH THAT DOES JUST THAT.

TOPIC NO. 3: WHILE THE ASSOCIATION OF INTERNATIONAL NEGOTIATORS WERE DOING THEIR SERVICE AGREEMENT AT DROP GORGEOUS FOREIGN DESTINATIONS, THE HOUSTON CHAPTER OF THE AMERICAN CORPORATE COUNSEL ASSOCIATION (OR AS IT IS KNOWN TODAY THE ASSOCIATION OF CORPORATE COUNSEL - AMERICA), WAS MEETING IN A WINDOWLESS OFFICE OF A MAJOR OIL COMPANY WORKING ON THEIR MASTER SERVICE AGREEMENT PROJECT. THEY BOTH CAME UP WITH CONSEQUENTIAL DAMAGE WAIVERS.

TOPIC NO. 4: THE KEY IS SEEING THE DIFFERENCE: CONSEQUENTIAL OR DIRECT? AN EXCERPT FROM AN ARTICLE ON NEW YORK CONTRACT LAW EXPLAINS IT SIMPLY.

PART IV MASTER SERVICE AGREEMENT

PART V AUTHOR'S ANNOTATIONS ON WARRANTY PART OF TYPICAL MSA.

PART VI AUTHOR'S ANNOTATIONS ON INSURANCE PART OF TYPICAL MSA.

PART I CHECK LIST FOR LIMITING LIABILITIES IN MASTER SERVICE AGREEMENTS AND SIMILAR CONTRACTS IN AREAS OTHER THAN INJURED PERSONS AND DAMAGE PROPERTY

&TLRbull2; Waive Consequential and Punitive Damages (Wisely)

&TLRbull2; Waiving consequential and punitive damages significantly reduces litigation risk:

• Takes away the upside

• Be certain it does not take away your only viable remedy. Sometimes the only damages are consequential or uncertainty surrounds the word "consequential."

&TLRbull2; Be as specific as you need to be under the circumstances to define what consequential damages you are concerned with. What is consequential damages is far from clear and all of the following vie for attention: (a) loss of earnings, profits, or revenue from collateral or ancillary transactions; (b) loss of use of any asset; (c) loss of business, reputation, or goodwill; (d) loss of business opportunity or lost sales; (e) loss of management or employee productivity; (f) wage increase or other inflationary cost of labor; (g) increase in financing costs, administrative fees, legal fees, or overhead or failure to realize expected savings; (h) business interruption; and (i) loss of product or production, (j) reservoir damage, (k) loss of hole, or (l) damage due to blowout or crating. The above list did not come from a treatise or law review article. They came from actual consequential damage clauses from agreements filed with the SEC. One might add "reservoir revisions."

&TLRbull2; Loss of earnings, profits, or revenue from the transaction that is the subject of the agreement may be considered direct damages because they do not depend on the actions of a third party.

&TLRbull2; Do not waive consequential damages where you are being indemnified. If the contractor and the owner may waive consequential damages against each other, the indemnity scheme should include consequential damages. Indirect damages are actual damages. They are available as long as there is the proper predicate and as long as they can be shown with reasonable certainty. If you are the protected party in an indemnity scheme, you want the indemnifying party to protect you from all features of the claim. You don't want to be protected from direct damages, but exposed without an indemnity for indirect damages. Unlike punitive damages, consequential damages are not rare. There would also be a public interest in not allowing the passing through of punitive damage from the person designate to learn the lesson.

&TLRbull2; Consider partial waivers of consequential damages if necessary to preserve claims that the parties contemplate will be paid b insurance. Do not inadvertently give an "out" to an insurer.

&TLRbull2; Negate Fiduciary Duties (Wisely)

&TLRbull2; Fiduciary duties are often specifically eliminated in a business context, but you may not want to completely eliminate the duty. For example, you might not want someone to be bound to a fiduciary duty in deciding how to spend their money, but you may want them under a fiduciary duty when they are handling your money.

&TLRbull2; Grant specific rights, such as the right to compete in certain areas, where you cannot or do not want to eliminate the duty completely.

&TLRbull2; Negate Duty of Care (Wisely)

&TLRbull2; The most common situation for eliminating the duty of care is where property is purchased "as is, where, is."

&TLRbull2; The next most common situation is where someone is taking on a duty out of the ordinary or without compensation, such as good Samaritan in a business context.

&TLRbull2; Negate Causes of Action (Wisely)

&TLRbull2; The most common elimination is the implied warranties.

&TLRbull2; The next most common situation is the statutory warranties.

&TLRbull2; Why? Leave only the contractual causes of action.

&TLRbull2; The most extreme case: eliminate all causes of action except an exclusive contractual one.

&TLRbull2; Negate Certain Remedies

&TLRbull2; The right to consequential damages is the most common remedy negated.

&TLRbull2; The right to punitive damages is also commonly negated.

• You may not want to eliminate punitive damages from some aspects of your indemnity scheme.

• Although many companies do strike punitive damages from the indemnity scheme, you may want to reconsider that strategy for fault-based (you indemnify me for your faults that hurt third parties and I'll do the same) or activity based indemnities (you indemnify me for your faults while you are in charge that hurt third parties and I'll do the same when I'm in charge). Even though you are the protected party, you may be held jointly and severally liable with the indemnifying party for punitive damages and may have to pay them to avoid execution on your property. As the protected party, you will want to be reimbursed.

• How does the protected party become jointly and severally liable for the punitive damages incurred because an employee of the indemnifying party was grossly negligent? The answer is partnership, joint venture, common law mining partnership, common enterprise, etc.

&TLRbull2; The right to damage for delay is something sometimes negated.

&TLRbull2; Restricting Duties, Causes of Action, And Remedies Is The Next Line Of Defense

&TLRbull2; Financial Caps

&TLRbull2; Liquidated Damages

&TLRbull2; Contractual "Statutes of Limitation"

&TLRbull2; Express Contractual Duty to...