NEGOTIATNG INDEMNITIES AND LIABILITIES 20 November 2018 Olga Labai Director
INTRODUCTION www.ogc.works Oil and Gas Consultants is a training consultancy comprising professionals experienced in various sectors of international oil and gas. We provide a wide spectrum of training programs, business consultancy and contract management services to our clients.
SERVICES PORTFOLIO Contract Negotiations, Drafting and Management Claims Management and Dispute Resolution In-house training programs Tender Support and Bid Review Services Open training Liquified Natural Gas
EXPERIENCE - OPERATOR Sakhalin-2 Project Sakhalin Energy Investment Company Ltd. (Gazprom, Shell, Mitsui, Mitsubishi) 182,4 million tons of oil 633,6 billion cubic meters of gas First specialised port in Russia 3 offshore platforms Onshore Processing Facility 800 km pipelines oil and gas 30 thousand people involved
EXPERIENCE MAJOR CONTRACTOR Weatherford Iraq/Turkmenistan operations; Broad range of oilfield services, including drilling; Focused on improvement of processes related to revenuegenerating contracts; Major clients of Weatherford included biggest oil and gas businesses conducting operations in Iraq.
AGENDA NEGOTIATING INDEMNITIES Major industry risks Major disasters and their contribution to industry contractual practices Summary of Macondo incident Macondo effect on indemnities Practical recommendations for drafting risk allocation provisions Practical view on addressing liabilities in contracts
O&G INDUSTRY RISKS Category Risk Description Economic Commodity Price Volatility and decreases in oil or natural gas prices leading to worsened operating results and future prospects. Regulatory and legislative changes and increased cost of compliance. Environmental Natural Disaster Natural catastrophe leading to interrupted or reduced production or industrial accident. Resultant environmental or health restrictions and regulations. Operational Industrial Accident Major accident or oil spill resulting in loss of life, environmental damage, regulatory fines, civil liability, loss of license to operate and reputational damage. Political Political Instability Disruption of supply due to war, civil war, guerrilla attack, terrorism or other political instability. Resource Resource Availability Material change in estimates regarding oil and gas reserves or development potential. Inability to expand reserves or find replacement reserves.
CONTRACTUAL RISK ALLOCATION of factors frustrating contract (economic, regulatory etc.) of catastrophic events and natural disasters of not being compensated for the losses (both parties) related to work performed drilling, oilfield services, dredging RISK of related to increased dependency on Contractor (technical approvals process, integrated operations) non-performance by Contractors related to the insufficient levels of quality of not being paid or underpayment (Contractor s risk)
WHICH RISK SHOULD BE ADDRESSED BY THE CONTRACT?
UNDERSTANDING INDEMNITIES Risk allocation tools, usually based on an ownership and employment Tools to avoid ambiguity regarding party s liability Tools to place liability in the hands of the party in the best position to handle the situation Tools to avoid future disputes regarding liabilities Tools to simplify enforcement of insurance obligations
UNDERSTANDING TYPICAL INDEMNITY CLAUSE Indemnity clause in contract for services
UNDERSTANDING INDEMNITIES What are knock for knock indemnities? In Legal Terms: Party A (e.g., an operator) indemnifies Party B (e.g., a drilling contractor) against claims, losses, damages, etc. arising from: Death of, or personal injury to, Party A s employees; Loss of, or damage to, Party A s property; and/or Pollution emanating from Party A s property. All notwithstanding that Party B s negligence may have caused or contributed to the death, personal injury, loss, damage, or pollution in question. Party B provides the same protection to Party A.
UNDERSTANDING INDEMNITIES In Simplified Legal Terms: Party A will cover losses to its people and property no matter the cause. B does the same. Question: What people? Question: Whose property? Question: No matter the cause?
MACONDO CASE On April 20, 2010, the Deepwater Horizon mobile offshore drilling unit exploded, killing 11 people, injuring dozens, and discharging millions of gallons of oil into the Gulf of Mexico over the course of 87 days.
Deepwater Horizon Mobile Offshore Drilling Unit MACONDO CASE
On August 10, 2010, most of these actions were transferred/consolidated to the United States District Court for the Eastern District of Louisiana. MACONDO CASE Approximately 3,000 cases with over 100,000 named claimants have been filed in U.S. courts (both state and federal): (a) claims including wrongful death and personal injury due to the explosion and fire; (b) post-incident injury resulting from exposure to oil and/or chemical dispersants used during the oil spill response; (c) damage to property or natural resources; and (d) economic losses resulting from the
MACONDO CASE To what extent does the 1998 Drilling Contract between BP and Transocean require BP to indemnify Transocean for the civil claims and the government claims? BP admits that the Drilling Contract requires it to indemnify Transocean in some circumstances, but disputes the scope of the indemnity; BP denies that BP must indemnify Transocean for government claims under Oil Pollution Act and Clean Water Act and for claims based on Transocean s gross negligence; BP also argues that public policy prohibits a broad indemnity clause.
MACONDO CASE CIVIL ACTIONS Actions for personal injury, wrongful death, economic loss, property damage, etc. brought against Transocean Transocean impleaded BP under Federal Rules of Civil Procedure BP and Transocean crossclaimed against one another, seeking contribution, indemnity, and affirmative defenses from the other for liabilities resulting from the incident GOVERNMENT ACTIONS United States asserted claims for civil penalties under Section 311(b)(7) of the Clean Water Act ( CWA ), 33 U.S.C. 1321(b)(7) United States sought declaration of liability for removal costs and damages under the Oil Pollution Act of 1990 ( OPA ), 33 U.S.C. 2701 Named BP and Transocean as defendants, who crossclaimed against each other (similar to what happened in the civil actions)
Section MACONDO CASE TRANSOCEAN RESPONSIBILITY 24.1 Transocean shall assume full responsibility for and shall protect, release, defend, indemnify, and hold [BP]... fine, penalty, demand, harmless or liability from and for against pollution any or loss, contamination, damage, expense, including claim, control and removal thereof, originating on or above the surface of the land or water, from spills, leaks, or discharges of fuels, lubricants, motor oils, pipe dope, solvents, ballast, air emissions, bilge sludge, garbage, or any other liquid or solid whatsoever in possession and control of [Transocean] and without regard to negligence of any party or parties and specifically without regard to whether the spill, leak, or discharge is caused in whole or in part by the negligence or other fault of [BP], its contractors, (other than [Transocean]) Partners, joint venturers, employees, or agents.
MACONDO CASE BP RESPONSIBILITY Section 24.2 BP shall assume full responsibility for and shall protect, release, defend, indemnify, and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand, or liability for pollution or contamination, including control and removal thereof, arising out of or connected with operations under this contract hereunder and not assumed by [Transocean] in Article 24.1 above, without regard for negligence of any party or parties and specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean].
Section MACONDO CASE INDEMNITY OBLIGATION Except to the extent any such obligation is specifically limited to 25.1 certain clauses elsewhere in this contract, the parties intend and agree that the phrase shall protect, release, defend, indemnify and hold harmless means that the indemnifying party shall protect, party or parties from release, and against defend, any indemnify, and all claims, and hold demands, harmless causes the indemnified of action, damages, costs, expenses (including reasonable attorneys fees), judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including preexisting conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels (including the drilling unit), breach of representation or warranty, expressed or implied, breach of contract, strict liability, tort, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or any other theory of legal liability and without regard to whether the claim against the indemnitee is the result of an indemnification agreement with a third party.
MACONDO CASE BP s Argument Last clause of Article 24.2 ( specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean] ) limited its indemnity obligation to instances where subsurface pollution is cause by Transocean s negligence or fault i.e., Transocean s ordinary negligence; Inclusion of negligence or fault in Article 24.2 excludes from the indemnity losses resulting from other causes, such as gross negligence and strict liability; indemnification for Transocean s gross negligence is against public policy; indemnity for punitive damages and civil fines/penalties under CWA is also against public policy; Transocean s breach of drilling contract invalidates indemnity.
MACONDO CASE Transocean s Argument Argued that Article 25.1 s broad indemnity coverage applies to Article 24.2 because Article 24.2 did not specifically limit indemnity coverage to certain causes after it used the phrase shall protect,... Contends that the Drilling Contract made it clear when the indemnity obligation was specifically limited to certain clauses, such as in Articles 22.3 and 23.1
MACONDO CASE Trial Court Decision Article 25.1 establishes a rule for interpreting the other indemnity Articles Court found that Article 24.2 does not specifically limit the application of Article 25.1 Indemnity, by its express language includes gross negligence, strict liability, or other causes or damages listed in Article 25.1 Article 25.1 is itself a clear and unequivocal agreement to provide broad indemnity coverage whenever the triggering phrase shall protect,... appears. Moreover, if the triggering phrase appears, the except... specifically limited... clause establishes that equally clear language is required to restrict Article 25.1 s broad indemnity coverage.... Article 24.2 contains the phrase triggering Article 25.1, but does not contain language that specifically limit[s] Article 25.1 s application.
INDEMNITY EVOLUTION CONSPICUOUSNESS REQUIREMENT Courts will not enforce a provision if the indemnitor did not have sufficient notice that the indemnity obligations would extend to the indemnitee s own negligence. For example, in Dresser Industries, Inc. v. Page Petroleum, Inc., 1993), the Texas Supreme Court held that indemnity provisions and releases must be conspicuous, and adopted the standard provided in the Texas Uniform Commercial Code.
DRESSER INDUSTRIES, INC. V. PAGE PETROLEUM, INC., 1993 50% 40% 10%
INDEMNITY TRENDS Operators challenge the traditional risk allocation Significant, adverse implications for contractors; Effect on long term competitiveness and sustainability of the industry. Regulators attempt to shift from long-held position that major responsibility sits with operator/licensee
INDEMNITY TRENDS Subject of indemnity Traditional Reflects Macondo PERSONAL INJURY OR PROPERTY DAMAGE SUFFERED BY CONTRACTOR GROUP PERSONAL INJURY OR PROPERTY DAMAGE SUFFERED BY COMPANY GROUP LOSS, DAMAGE, INJURY OR DEATH SUFFERED BY THIRD PARTIES CONTRACTOR RESPONSIBILITY FOR POLLUTION COMPANY RESPONSIBILITY FOR POLLUTION CONSEQUENTIAL LOSS LIABILITY EXCLUSION SCOPE AND EXCLUSIONS SUNKEN PROPERTY AND WRECK REMOVAL
1. From spills of fuels, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge and garbage, sewerage and other materials in possession and control of CONTRACTOR GROUP or from the property of CONTRACTOR GROUP 3. from fire, blowout, cratering, seepage, or any other uncontrolled flow of oil, gas wastes or other substance from any well arising out of or relating to the performance of the CONTRACT, when resulting from negligence or breach of duty (whether statutory, contractual or otherwise) of CONTRACTOR GROUP but only up to and not in excess of CONTRACTOR limit of liability of Twenty Million U.S. Dollars (US$20,000,000) per occurrence INDEMNITY TRENDS CONTRACTOR TO COVER POLLUTION THAT ORIGINATES 2. from spills, leaks or dumping of oil emulsion, oil base or chemically treated drilling fluids, produced fluids, contaminated cuttings and cavings, lost circulation materials and fluids, when said materials are in possession and control of CONTRACTOR GROUP 4. from leakage, or other uncontrolled flow of oil, gas or water from pipelines, on or in submerged lands, within any location arising out of or relating to the performance of the CONTRACT, when resulting from negligence or breach of duty (whether statutory, contractual or otherwise) of CONTRACTOR GROUP but only up to and not in excess of CONTRACTOR limit of liability of Twenty Million U.S. Dollars (US$20,000,000) per occurrence.
INDEMNITY - TRENDS Subject to [CONTRACTOR s POLLUTION INDEMNITY], Company shall be responsible for and shall save, indemnify, defend and hold harmless Contractor Group, from and against all claims, losses, damages, costs (including legal costs), expenses and liabilities arising from pollution and/or contamination including without limitation such pollution or contamination emanating from the reservoir and/or from any property of Company Group arising from or related to the performance of the Contract.
NON-NEGOTIATIABLE TERMS We don t negotiate these are our standards T&C, other suppliers accepted them without ANY comments!
TERMS AND CONDITIONS Middle East trends T&C: imposed by Legal teams, available for use only in PDF; Procurement professionals are not authorised to negotiate any T&C; Legal below team drafts T&C above templates which goods are or value-driven: low risk or $250k $250k services high risk
TERMS AND CONDITIONS Specific types of services Stages of a project Experience with a specific supplier Supplier relationship strategy THERE IS NO CONSIDERATION OF Fairness of T&C at a given point in time Length of a future contract Effect on the total cost of purchasing
CONTRACTUAL RISK ALLOCATION To achieve efficiency with contract drafting, management and close out processes: 1. Contracting Procedure (Policy) 2 separate documents for procurement and revenue generating; 2. Clear accountability allocation; 3. Improved interface between contributing functions; 4. Approvals structure for each key clause in contract lifecycle.
INSURANCE BP sued Transocean and Transocean s insurers for a declaratory judgment that as an additional insured, BP was entitled to the full reach of Transocean s liability insurance, some $750 million dollars, to pay for pollution clean-up claims. BP told the Texas Supreme Court it should be covered by Transocean Ltd. s $750 million insurance, arguing that to rule otherwise would create great uncertainty about oil and gas insurance contracts statewide.
INSURANCE Lloyds s position Because liabilities BP faces for pollution emanating from BP's well are from below the surface and from BP's well, those liabilities are not within the scope of the additional insured protection On Friday February 13 th, 2015, the Texas Supreme Court rejected BP's claim for $750 million worth of coverage under Transocean Ltd. s insurance policies to help pay the billions of dollars in damages and other costs associated with the illfated Deepwater Horizon oil rig in the Gulf of Mexico.
PRACTICAL DRAFTING TIPS Choice of law: what law applies to the contract is immensely important to the ultimate question of whether an indemnity agreement will be enforceable. For common law contracts - include an express reference to the negligence of the indemnified party, as well as an express reference to other forms of fault such as the sole or concurrent fault of the indemnified party, strict liability, unseaworthiness, and pre-existing conditions. If there is an intent that agreement covers the indemnified party s contractual liability to a third party, expressly provide for this in the agreement as well.
PRACTICAL DRAFTING TIPS Limit carve outs and add ons to the actual risk intended (such as well control or wreck removal costs) as opposed to all claims arising out of... [a blowout]. Given the uncertainty of the meaning of gross negligence, use the term only on the basis that it is defined. This will also allow each party to propose a definition which is more appropriate to the particular contract than the manner in which the term is likely to be defined at common law. Note: U.S. court might well disregard such a contractual definition of gross negligence. It might instead apply whatever definition the court deemed to be required by applicable law.
PRACTICAL DRAFTING TIPS Indemnitor needs to make sure the effect of pass-through is achieved (through well-defined groups of multiple indemnitees and underlying contracts). Exercise cross-indemnity for the multiple-indemnitee scenario. In combining indemnity and insurance obligations, it is important to craft the insurance coverage to support the indemnity without hindering or limiting the coverage provided by either.
BE CAUTIOUS Section 24.1 Section 24.2 Section 25.1
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