CHAPTER 8 THE IADC OFFSHORE DRILLING CONTRACT

• Jurisdiction: United States

Oil and Gas Development on the Outer Continental Shelf
(Oct 1998)
CHAPTER 8
THE IADC OFFSHORE DRILLING CONTRACT
William W. Pugh
Liskow & Lewis
50th Floor, One Shell Square
New Orleans, Louisiana 70139
(504) 556-4149

Table of Contents

SYNOPSIS

I. INTRODUCTION

II. GENERAL CONSIDERATIONS

III. MARITIME LAW, STATE LAW, AND THE OCSLA AND THEIR EFFECT ON THE DRILLING CONTRACT

A. Application of State Law Under OCSLA

1. OCSLA situs

2. Federal law applying of its own force

a. Pre-Davis & Sons cases

b. Davis & Sons

3. State law inconsistent with federal law

B. Effect of Choice of Law Provisions

C. How is the "Adjacent" State Determined Under the OCSLA?

IV. RISK ALLOCATION

A. The Requirements for Enforceable Indemnities

1. Is the intent to indemnify clear?

2. The "Conspicuousness" requirement

3. Duty to defend and right to recover defense costs

4. "Pass-through" indemnity

5. Insurance and indemnity coverage for punitive damages

6. The scope of the indemnity

B. Maximizing Insurance Protection

1. General requirements

2. Insurance and indemnity interplay

a. Insurance provisions may prime indemnity provisions

b. Important vessel coverage endorsements

C. Interaction Between Drilling Contract and Other Service Contracts

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V. EXCEPTIONS TO THE RIGHT TO SEEK INDEMNITY

A. LHWCA Section 905(b)

B. The Louisiana Oilfield Indemnity Act

C. The Texas Anti-Indemnity Act

VI. BALANCING THE PARTIES' RIGHTS; POTENTIAL MODIFICATIONS OF THE IADC OFFSHORE FORM

A. The IADC's General Approach and "Standard of Performance" (Paragraph 501)

B. Sound Location Provision

C. Payment Provisions

D. Indemnity Provisions

1. Basic indemnity provisions—property damage and bodily injury

a. General considerations

b. Reciprocal property indemnity (Paragraph 901)

c. Reciprocal bodily injury indemnity (Paragraphs 903 and 904)

2. Additional Indemnities in Favor of Contractor (Paragraphs 902 and 906)

3. Pollution Indemnity (Paragraph 905)

4. Other Specific Indemnity Issues (Paragraphs 908 and 909)

5. General Indemnity Issues (Paragraphs 910 and 911)

6. Breach of Warranty Provision

E. Insurance Provisions (Article X)

F. Other Provisions

1. Force majeure (Paragraph 1303)

2. Choice of Law (Paragraph 108)

VII. ONSHORE V. OFFSHORE: A BRIEF COMPARISON

A. General Approach

B. Drill Site Access

C. Payment Provisions

D. Indemnity

E. Insurance

F. Force Majeure and Choice of Law

VIII. CONCLUSION

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I. INTRODUCTION¹

The International Association of Drilling Contractors ("IADC") ² is a world-wide contractor trade organization. Among other things, the IADC drafts and distributes drilling contract forms. Not surprisingly, the IADC forms tend to favor drilling contractors as opposed to operators. One of the more commonly used IADC forms is the IADC Offshore Daywork Drilling Contract (Revised February 1997) (the "IADC Offshore Form"), and this paper will address some significant issues that can result from using that contract, particularly without modification. Some of the problematic provisions are easily recognized and simply constitute the drilling contractors' side of certain ongoing debates concerning contractual risk allocation. Other potential pitfalls, however, are not as obvious, but they can be just as "dangerous" from the operator's perspective, if not more so.

Understanding the issues presented by the IADC Offshore Form, particularly in the area of risk allocation, requires a good understanding of certain other areas, most notably issues concerning applicable law and contractual indemnity and insurance. These issues can be even more significant in understanding the interaction of the IADC Offshore Form and other related contracts, such as master service agreements and charters. Accordingly, this paper will begin with a brief discussion of some of the general considerations surrounding the use of the IADC contract and then focus on the interaction of maritime law, state law, and the Outer Continental Shelf Lands Act ("OCSLA") and various issues related to obtaining enforceable indemnity and insurance protection (including restrictions created by the Louisiana and Texas anti-indemnity acts). With this background, significant provisions of the IADC Offshore Form will then be addressed, including the provisions concerning standard of performance, access to the drill site, payment, indemnity, insurance, and force majeure and choice of law, together with potential modifications of the applicable provisions. Finally, this paper will briefly compare the IADC Offshore Form with the IADC onshore daywork form.

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II. GENERAL CONSIDERATIONS

Drilling contracts, including offshore drilling contracts, come in many forms. The IADC has its forms as does the American Petroleum Institute ("API").³ Many operators also have their own forms, which frequently include provisions specifically designed to avoid problems encountered in their particular experience. In addition, many hybrids exist, including modifications of IADC and API forms and earlier versions of those forms.

The only potential advantage of the IADC forms is that they can be quicker to negotiate than other forms, particularly if drilling rigs are scarce and drilling contractors have the ability to insist on the most favorable terms. The IADC forms are commonly used forms, contractors and operators are generally familiar with the base terms, and the IADC forms are quite detailed and address many undisputed points. Moreover, the IADC forms, having been designed by a contractor trade organization, are readily acceptable to drilling contractors. Consequently, when time is short, or the drilling market is tight, it is not uncommon for an operator to be given an IADC form on an almost "take it or leave it" basis, and the frequency of the IADC forms' use tends to strengthen the contractors' negotiating position. Nevertheless, there are major problems with the IADC contracts from the operators' perspective, and the speed of negotiation is directly proportionate to the contractual protections afforded the drilling contractor at the expense of the operator.

In general, the IADC forms tend to minimize the obligations of the drilling contractor to the maximum extent possible. For instance, under the IADC forms, the operator is asked to bear the burden of all risks not specifically assumed by the contractor, often regardless of fault. In addition, as with any standardized form that favors one party (the contractor in this instance), it is harder for the other party (the operator) to deviate from the form to obtain minor benefits or to obtain the maximum benefits that the operator might have obtained had its form been used.

Although certain general statements can be made about the "IADC contracts" and the advantages they offer to contractors, one must be careful to distinguish between the "daywork" and "turnkey" forms. Under the IADC Offshore Form, nearly all of the risks inherent in a drilling operation are allotted to the operator. However, under the IADC Offshore Turnkey Contract (the "Turnkey Form"), the contractor assumes substantially more risk, at least during "turnkey" operations.⁴ In the most general terms, a "turnkey" drilling contractor agrees to drill a

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well for a fixed price to be earned only when a specified depth is reached.⁵ This paper will focus on the IADC Offshore Form, but it is also important to review the IADC Turnkey Form carefully before assuming that all of the risks have been allocated in accordance with the operator's expectations.⁶

III. MARITIME LAW, STATE LAW, AND THE OCSLA AND THEIR EFFECT ON THE DRILLING CONTRACT

A. Application of State Law Under OCSLA

In analyzing issues arising out of a drilling contract, one of the threshold issues is what law applies. As discussed below, that issue is usually fairly straightforward as respects the drilling contract itself because a drilling contract involving a jack-up rig or a semi-submersible is considered to be a contract for the use of a vessel and therefore governed by maritime law.⁷ On the other hand, a drilling contract involving a platform drilling rig is considered to be performed on an "artificial island" and is therefore governed by the law of the adjacent state pursuant to the

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OCSLA.⁸ The legal analysis remains important, however, because the test for determining the applicable law for all of the other contracts at issue in a particular drilling operation (i.e., master service agreements and charters) is not necessarily the same, at least in result, and the answer can be anything but straightforward. These ancillary contracts are intertwined with the drilling contract itself. And what law applies to those contracts can be very significant, especially as respects the risk allocations and indemnity and insurance obligations undertaken in the drilling contract.

Whether a contractual indemnity or insurance obligation is enforceable often turns on whether the contract is determined to be a maritime contract or is governed by state law through the OCSLA. The OCSLA provides, in pertinent part:

To the extent that they are applicable and not inconsistent with this Subchapter or with other Federal laws and regulations of the Secretary now in effect or hereafter adopted, the civil and criminal laws of each adjacent State, ... are hereby declared to be the law of the United States for that portion of the subsoil and seabed of the outer Continental Shelf, and artificial islands and fixed structures erected thereon, which would be within the area of the State if its boundaries were extended seaward to the outer margin of the outer Continental Shelf, and the President shall determine and publish in the Federal Register such projected lines extending seaward and defining each such area.⁹

In the context of contractual disputes arising from...