Transferring risk by contractual indemnity: a view from oil and energy.

• Author: Quay, Jeanette H.

Preparing clear, comprehensive and effective contracts of indemnity is a complex task, but it pays off by reducing litigation and expense

THE petrochemical and energy resource industries have traditionally subcontracted a large portion of work necessary to locate, capture, transport or refine their products. In almost every contract there is at least one provision designed to either limit or shift potential liability.

Courts have adopted a conservative approach to allowing one party to shift its legal liability to another. Before contractual provisions will be enforced, courts have required that the language used be clear and unequivocal, some even requiring very specific or "talismanic" wording. On the other hand, courts have been far more receptive to allowing one party to obtain insurance coverage from another party's insurers. Perhaps the experience of the oil and energy industries is instructive for other fields in which contractual indemnity is used.

In the 1970s and 1980s, Louisiana and Texas both enacted so-called anti-indemnity statutes, and the Longshore and Harbor Workers' Compensation act was legislatively amended twice to address indemnity claims specifically. Although the Louisiana and Texas statutes have limited the circumstances under which one party may shift its liability to another, with the exception of the Louisiana statute, this legislation has not dramatically affected the ability of one party to transfer its liability to another party's insurers.

Courts continue to enforce indemnity provisions to the extent allowed by the "applicable" law. Therefore, the enforcement of contractual language continues to depend on two factors: (1) whether the intent to shift those particular liabilities is clearly expressed in the contract, and (2) if the intent is clearly expressed, whether that shifting is allowed by the applicable law.

INDEMNITY PROVISIONS

1. Contractual Indemnity Defined

   Absent a contract, under admiralty law, responsibility for any loss is allocated to the parties based on the comparative fault of each party. State laws vary. Some allocate fault "by heads," and others are based on the comparative fault of the parties.

   Contractual indemnity, on the other hand, alters this allocation of responsibility by agreement--one party agrees to undertake the legal responsibility of another party. For this reason, indemnity contracts are strictly constructed against the party seeking indemnity. Courts will give effect to an indemnity provision only if it clearly and unequivocally indicates that the parties intended to shift that responsibility. This is true for all indemnity contracts, whether they are construed under maritime law or state law.

2. "Talismanic Language" Rule

   The primary principle in the interpretation of indemnity contracts is clarity. The party seeking indemnity must have a contract that clearly includes the specific risk for which indemnity is being sought. Although the law does not require that a contract delineate each and every risk, courts have generally looked for "talismanic language"--that is, certain specific terms reflecting the parties' intention that the indemnitee be indemnified for claims caused by its own negligence, strict liability, punitive damages, the unseaworthiness of vessels, or for defects or conditions pre-existing the contract, etc.

   1. Negligence

      Courts have been loath to find indemnity is owed if the contract does not clearly and unequivocally require the indemnitor to indemnify the indemnitee for the indemnitee's own negligence or fault. Although the laws of some states do not require the specific word "negligence" to be used in order for an indemnity agreement to cover claims based on negligent acts, whatever language is used must clearly indicate an intention that the negligence of the indemnitee be covered.

      As an example, in Knapp v. Chevron USA Inc.,(1) a provision that required indemnity for claims "in any way arising out of or connected with the performance by contractor of services hereunder" was held not to include claims arising from the indemnitee's own negligence. Similarly, in Cole v. Chevron Chemical Co.,(2) the contract at issue required indemnity for damages caused "directly or indirectly" by the activities contemplated by the contract but did not specifically include the negligence of the indemnitee. When the parties were found concurrently negligent, the Fifth Circuit refused to enforce the indemnity obligation because the indemnity contract did not contain talismanic words, such as "even though caused by the negligence of the indemnitee."

      In Wiley v. Offshore Painting Contractors Inc.,(3) the contract in question required indemnity for claims "in any way arising out of or connected with the performance by contractor of services hereunder." Finding no "clear indication" that the parties intended the indemnitee, Chevron, to be indemnified for accidents caused solely by its own negligence, the Fifth Circuit held that no indemnity was owed.

      On the other hand, courts generally have awarded indemnity under contracts requiring indemnity for claims "resulting from or in any way connected with the services performed, even though contributed to or in any way connected with joint or concurrent fault or negligence on the part of" the indemnitee.(4)

      Language that excludes any obligation to indemnify for the indemnitee's own negligence has been routinely upheld. In Monson v. Shell Oil Co.,(5) the contract required indemnity "except where such injury, death, loss or damage resulted from the negligence of Shell without negligence or fault on the part of contractor or any sub-contractor." Since only Shell was found negligent, no indemnity was owed.

   2. Strict Liability

      Another big issue in this area is whether a contract requiring indemnity for negligence also includes indemnity for a claim based on strict liability--that is, in the absence of any negligence.

      In Bourgeois v. CNG Producing Co.,(6) the indemnitor contended that the contract did not provide indemnity for strict liability. The contract stated that indemnity was owed for "any and all claims, demands or suits ... which may be brought ... in any way arising out of or incident to the work performed whether caused in whole or in part by the negligence" of the indemnitee. The federal district court concluded that the contract evidenced the intent of the parties to provide indemnification for claims that arose because of strict liability of the indemnitee.

      In Hyde v. Chevron USA Inc.,(7) the Fifth Circuit interpreted the following provision:

      [Pool] shall be responsible for, and shall defend, indemnify, and hold operator harmless from and against, any claims for damages for loss or destruction of property of [Pool], or for injury to, impairment of health, or death of employees of [Pool] or employees of [Pool's] subcontractors that may arise from [Pool's] operations under this agreement. The court concluded that this provision, combined with the elaborate insurance obligations Pool undertook in the agreement, manifested the "clear intention of the parties indicating Pool was to be wholly responsible for all claims for personal injury or death made by its employees," including responsibility resulting from strict liability.

      Interestingly, in Authement v. Conoco Inc.,(8) an undertaking by a vessel owner to indemnify the charterer "from any and all claims, demands or lawsuits" was deemed by the Louisiana Court of Appeals to be broad enough to encompass claims of strict liability based on Article 2317 of the Louisiana Civil Code. This holding is in accord with other Louisiana state court cases interpreting similar indemnity agreements outside the oilfield context.(9)

   3. Unseaworthiness

      A contract that specifically includes a requirement for indemnification against unseaworthiness claims is enforceable.(10) However, in Despaux v. California Co.,(11) U.S. District Judge Judge Rubin held that an agreement to indemnify Chevron for claims "in any way arising out of or connected with the performance by contractor of services hereunder" did not include an obligation to indemnify against claims of unseaworthiness.

   4. Pre-existing Conditions

      The phrase "any and all claims" has been held to be qualified by the requirement that the claims be "incident to, arising out of, or in connection with or resulting from the activities of the subcontractor," and thus the indemnity obligation does not extend to defects that existed prior to the execution of the contract.(12) Although a Louisiana intermediate appellate court intimated in Rosales v. Dixie Mill Supply Co.(13) that a correctly drafted contract requiring indemnity for an injury that occurred during the term of the contract would be broad enough to include injuries as a result of pre-existing conditions, the recommended practice would suggest inclusion of specific language to this effect.

   5. "Arising out of"

      Some courts have held that indemnification is not triggered unless the claim "arises out of" the performance of the contract. In Lanasse v. Travelers Insurance Co.,(14) the sole cause of the injury was the negligence of the oil company's crane operator. The vessel was neither unseaworthy nor was its crew negligent. The contract at issue was a time charter flowing in favor of the oil company with terms as follows:

      Owner hereby warrants that the said vessel is now, and at all times during the life of this charter will be, maintained by owner at owner's expense properly staunch, strong, and in all respects seaworthy, and in good repair and running.... Owner hereby agrees to indemnify and hold harmless [the oil company] against all claims ... as well as against any and all claims for damages, whether to person or property, and howsoever arising in any way directly or indirectly connected with the possession, navigation, management, and operation of the vessel. The Fifth Circuit found that this indemnity provision insulated the oil company against...