Indemnity agreements in offshore oil and gas contracts: multiple considerations when drafting and reviewing.

• Author: Hurst, Isaak
• Position: SPECIAL SECTION: Oil & Gas

It's a story many Alaskan businesses are familiar with. The large, multinational company pushes a service contract onto the small, Alaskan owned and operated company with the simple undertone of: "Hey, you want to do business with us, sign the bottom line." However, buried in these contracts is always an "Indemnity Clause." These clauses are designed to effectively transfer certain third party liabilities (personal injury, property damage, pollution expenses, etc.) away from one party (usually the multi-national) and onto the other party (usually the small Alaskan owned and operated company). In the offshore oil and gas industry, where costs can quickly accumulate and liabilities can be astronomical, indemnity agreements are an effective risk management tool for the skilled contractor. The flip side of that coin, however, is that indemnity agreements can have immense financial repercussions for the unwary. Naturally, Alaska businesses should be cautious about signing any contract with an onerous Indemnity Clause--especially those engaged in the offshore oil and gas arena.

Indemnity Agreements--Generally

An indemnity clause is a contractual provision in which one party agrees to answer for any specified or unspecified liability or harm that the other party might incur, according to Black's Law Dictionary, Eighth Edition. In effect, a well drafted indemnity clause can transfer the negligence of one party (and all the costs associated with that negligence) onto another party. Sound crazy? Well, it is--a little. In the maritime and offshore oil and gas industry, courts still respect the "Freedom to Contract" principle, which allows two parties to basically agree to anything--so long as it violates no public policy principles. As a result, US courts will generally uphold indemnity agreements even where the negligence of the party seeking indemnity actually caused or contributed to the injury.

In Alaska, indemnity agreements are typically entered into between an owner or operator of an offshore facility and a contractor hired to perform services on that facility. Moreover, the enforceability of an indemnity provision carries particular significance in Alaska's oil and gas industry because accidents related to offshore exploration can incur significant cleanup costs. Consequently, indemnity clauses have become a ubiquitous feature in modern offshore oil and gas contracts.

Insurance Implications

Indemnity and insurance provisions in offshore oil...