OILFIELD MASTER SERVICE AGREEMENTS: INDEMNITIES AND ASSOCIATED INSURANCE PROVISIONS

• Jurisdiction: United States

Oil and Gas Agreements: The Exploration Phase
(May 2004)
CHAPTER 10A
OILFIELD MASTER SERVICE AGREEMENTS: INDEMNITIES AND ASSOCIATED INSURANCE PROVISIONS
Richard C. Beu
Consultant
Sugar Land, Texas
Donald P. Butler
Seneca Resources Corporation
Houston, Texas

Dick Beu, currently consulting, retired after twenty years of international business law practice in the oilfield service industry, initially in house with Dresser Industries Inc. and later with M-I Drilling Fluids, which was initially a Dresser/Halliburton company and currently a Smith International/ Schlumberger company. As such, he had legal responsibility for company operations in North and South America and North Africa and for litigation, credit, insurance, human resources and intellectual property on a worldwide basis. He was a member of the service company negotiating team for the MSA 2000 Project of the Houston Chapter of the American Corporate Counsel Association. He was also involved in the negotiations of the model well servicing contract project of the Association of International Petroleum Negotiators. Prior to the oil patch, he was an Assistant County Attorney of Harris County, Texas, involved, among other things, in enforcement of environmental laws including injunctive relief at the trial court level and contesting EPA regulations in the D.C. Circuit and U.S. Supreme Court. Prior to government service he was in private practice in the maritime law field. He graduated from the University of Houston Law Center where he was awarded the Order of Barons and is a member of the American Corporate Counsel Association and the Maritime Law Association of the U.S. His pre-law experience included three years active duty as a U.S. Coast Guard officer assigned to merchant marine vessel inspection and merchant marine casualty investigation (including casualties involving fixed structures on the Outer Continental Shelf) and receiving his Honorable Discharge as a Lieutenant. Prior to his stint in the military service, he was a production engineer for Sunray DX Oil Company having earned an engineering degree from Texas A&I University and during summer breaks from college he roughnecked on drilling rigs in South 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.

This paper is about the indemnities related to property damage and personal injury in master service agreements. An indemnity is a promise by the company ¹ or the contractor to protect the other from unfavorable events that may occur during the work. Although the exact nature, timing, and severity of property damage and personal injury are uncertain, they are, like tornados, inevitable. Because the company and the contractor know that property damage and work related injuries are inevitable, these indemnities are often the most contentious part of the "boilerplate."

The indemnities discussed in this paper are "mutual" and not "one-sided." The approach to indemnification in this area has evolved into an effort to create a "no-fault" liability system using private contracts. The purpose is to save money for everyone: operators, contractors, and insurers.

Both operators and drilling contractors have urged the Texas Legislature to encourage indemnity provisions under certain conditions. A comparison with situations in which there is no indemnity suggests why.

Drilling sites, of course, can be hazardous places. When injuries occur, it is often difficult to tell who is at fault due to the complex nature of the enterprise, the large number of subcontractors usually involved, difficult questions regarding the right to control, and the intersection of premises liability and agency law in drilling operations. As a result, there are usually two disputes to resolve--one pitting the injured party against all those potentially responsible, and another among the defendants to allocate fault and the resulting burden of any settlement or judgment.

Mutual indemnity provisions (if routinely enforced) eliminate the latter dispute. In the standard drilling contract, they allocate costs and liability according to who hired the injured party, not who caused the accident. This eliminates liability and coverage disputes between drilling operators and contractors. In the event of a lawsuit, they need not file cross-actions for contribution, conduct discovery between themselves, or even hire separate lawyers. This may result in a 'united front' against a plaintiff, but it may also work to a plaintiff's advantage by shifting money from duplicative defense costs to settlement funds.

But indemnity provisions often fall short of this purpose. This Court and others have been kept busy in recent years resolving indemnity disputes. In the choice-of-law analysis that follows, it must be kept in mind that these clauses will never accomplish their primary purpose as long as there is substantial uncertainty about whether they will be enforced. ²

So that the reader's master service agreement will not "fall short," the authors wish to provide a warning with respect to using the clauses in this paper for a master service agreement. The paper addresses two issues separately. One issue is the common law restrictions on indemnification for one's negligence. The other issue is the anti-indemnity statutes. To illustrate compliance with each, the clauses have been limited to illustrating certain points in these areas. In a "real" master service agreement, these issues would have to be considered together as well as other issues related to the work, the parties, and many other matters.

If a starting point is desired for a "real" master service agreement, the authors recommend the sample master service agreement that was done by the Energy Law Committee of the Houston Chapter of the American Corporate Counsel Association. The authors participated, on opposite sides, in this process. It can be found on the website indicated in Don Butler's biographical information or by e-mailing Don at the places indicated. The agreement is not a standard form, but an example of a master service agreement that was negotiated by a team of operator in-house counsel acting for a theoretical mid-sized operator and in-house counsel for service companies acting for a theoretical mid-sized service company under the assumed conditions of equal bargaining power, unlimited time (it took from 1998 to 2002), and knowledge of the relevant law. The sample master service agreement has a preamble that explains what the document has and does not have to offer. That sample master service agreement while not a standard form or a consensus is a diligent effort not to "fall short." This sample master service agreement is sometimes in a companion paper written by Don Butler, but if not, it can be obtained by contacting him.

A paper on master service agreements would not be high on many people's lists of things to read, but it has become more important as management and insurers come to realize that a company's loss history has much to do with what kind of master service agreements its lawyers negotiate:

Another shift in the insurance sector for the oil and gas industry is the growing emphasis on master service agreements between an operator and all subcontractors. . . . Insurance companies increasingly want to have master service...