On 26th and 31st January 2012, the US District Court, Eastern District of Louisiana, issued orders on motions for partial summary judgments by Transocean and Halliburton (respectively) regarding the extent of BP's indemnity obligations under relevant contracts entered into between the Parties. The decisions reached by the Court and the underlying reasons were fully detailed in the earlier Order (Transocean) with the subsequent Order (Halliburton) relying for the most part upon that earlier decision. Accordingly, this note focuses mainly on the Transocean decision. The trial of the disputed claims was due to commence on 27 February 2012 but has been delayed to 5 March 2012 to allow further settlement discussions.

The issues before the Court were:

1. the extent of BP's indemnity obligation relative to pollution/contamination under the drilling contract
   
   
2. the extent of BP's obligation to "defend" Transocean with respect to legal fees associated with:

• establishing Transocean's right to indemnity from BP relative to pollution/contamination claims
• defending claims made against Transocean which may fall within the scope of BP's indemnity obligations

The relevant provisions of the drilling contract were Articles 24.1, 24.2 and 25.1, the relevant content of which stated as follows:

Article 24.1 - Contractor Responsibility

"Transocean shall assume full responsibility for and shall protect, release, defend, indemnity and hold [BP] and its Joint Owners harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination... originating on or above the surface of the land or water... 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."

Article 24.2 - Company Responsibility

"[BP] shall assume full responsibility for and shall protect, release, defend, indemnity and hold [Transocean] harmless from and against any loss, damage, expense, claim, fine, penalty, demand or liability for pollution or contamination... 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]."

Article 25.1 - Indemnity Obligation

"Except to the extent any such obligation is specifically limited to certain causes 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, release, defend, indemnify, and hold harmless the indemnified Party or Parties from and against any and all claims, demands, causes of action, damages, costs, expenses... judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof including... breach of representation or warranty... 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..."

Scope of Indemnity

Transocean argued that:

• Article 24.2 required BP to indemnify for all claims relating to pollution originating below the water surface, including those attributable to negligence or gross negligence of Transocean (although it accepted that the indemnity would not extend to its intentional or wilful misconduct)
• that the indemnity obligation applied to claims for punitive damages and statutory penalties (under the Clean Water Act) as well as compensatory damages

BP argued that:

• the indemnity did not extend to pollution or contamination caused by Transocean's gross negligence. Although Article 25.1 specifically referred to "negligence... whether such negligence be... gross", BP argued that the reference at the end of Article 24.2 to "specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean]" constituted a restriction of the application of the indemnity as contemplated by the opening phrase of Article 25.1 ("Except to the extent any such obligation is specifically limited to certain causes elsewhere in this contract...") - ie that the indemnity only extended to "normal " negligence or fault
• even if Transocean's interpretation of the indemnity was correct, public policy prohibits and invalidates a contractual indemnity which purports to cover gross negligence, punitive damages or CWA civil penalties
• the indemnity provision is void if Transocean breached the terms of the Drilling Contract and/or acted in a way which materially increased BP's risk under the indemnity provision.

The Court decided that:

• Article 24.2 obliged BP to indemnify Transocean in respect of third party claims for pollution or contamination originating below water surface even if attributable to negligence, gross negligence or strict liability, on the basis that:
• the reference to negligence of Transocean at the end of Article 24.2 was included for emphasis and did not constitute an exception to the indemnity scope as anticipated by Article 25.1
• although there was support (under the Louisiana Civil Code and case law) for the contention that a release (i.e. an agreement between contracting parties whereby one releases the other from liability for damage suffered by it) extending to gross negligence was invalid, there was no such support for the same general rule applying to indemnities (i.e. an agreement between contracting parties as to which of them will ultimately bear the risk of damage to a third party). In the case of indemnities each case would require to be considered on its own merits and applying an appropriate balance between the principles of "freedom of contract" and "public policy". In the case of Article 24.2, the "reciprocal" application and scope of the indemnities in the contract as a whole, the equal bargaining strength of the contracting parties and the fact that the indemnity did not operate to leave an "injured party" without recourse, were cited as reasons supporting the Court's view that the indemnity would extend to Transocean's gross negligence
• the indemnity did not extend to punitive damages for which Transocean may be liable. The purpose of punitive damages was to punish the wrongdoer and discourage future similar behaviour. That principle would be undermined if the burden could be shifted by contractual indemnity
• the indemnity did not extend to civil penalties imposed under the Clean Water Act. Although the act had multiple goals, including a compensatory element, its principal objective was to deter future pollution through suitable punishment of offenders
• there is no general rule to the effect that a breach of the contract, or behaviour increasing risk under an indemnity provision contained in the contract, voids the indemnity. The Court recognised the possibility of a breach of a fundamental, core obligation of a contract invalidating an indemnity provision, but expressed the view that in the present case BP's argument appeared doubtful given the clear wording of Article 25.1 (which included a specific reference to breach of contract).
  
  

Legal Fees

Transocean sought an order requiring BP to refund legal fees incurred by Transocean:

• in defending environmental claims for which BP is obligated under the indemnity provisions of the contract
• in enforcing its right to indemnity from BP

Transocean argued that the duty to "defend" arose when allegations of a complaint reflected that at least some of the claims would fall within the scope of the indemnity provision and was independent of and wider than the indemnity obligation itself. BP argued that the obligation to "defend" was co-extensive with the obligation to indemnify would only apply if Transocean was found to be entitled to indemnity at conclusion of the trial.

The Court decided that:

• although a contract could provide for a "defend" obligation which was wider than the associated indemnity, such intent was not expressed in Article 25.1, the wording of which reflected that the indemnify and "defend" duties were to be treated identically
• although the parties to a contract could agree that enforcement costs would be covered by the "defend" obligation in an indemnity provision, the wording of the particular provisions under consideration did not do so
  
  

The Halliburton Decision

Broadly similar issues arose with respect to Halliburton claims and BP counter-claims relative to the contract entered into between them for the provision of cementing services. The Court orders mirrored those handed down in the BP/Transocean case and, indeed, referred to and relied upon that earlier decision.

The only additional issue commented upon by the Court related to BP's allegation that Halliburton "made fraudulent statements" and "fraudulently concealed material information" concerning cement tests conducted by it, which BP relied upon in permitting the pouring of the unstable slurry which led to the blowout event. BP averred that the relevant indemnity provision of the contract did not extend to fraud and that, even if it did, public policy would not permit such indemnification. Halliburton argued that BP's claims were merely claims for breach of contract "cloaked" as fraud.

The Court could not issue summary judgment on this issue as it required determination of material issues of fact. It did, however, comment that fraud could void an indemnity clause on public policy grounds although it also noted that "mere failure to perform contractual obligations as promised does not constitute fraud but is instead breach of contract".

Upcoming Seminars

• Aberdeen (breakfast event) on 18 April 2012
• Oslo (breakfast event) on 24 April 2012
• Bergen (breakfast event) on 27 April 2012
• London (evening event) on 10 May 2012

Please keep these dates free if these seminars are of interest. Further information to follow shortly. 

Contact Us

If you think your business may be affected by any of the above, or if you have any other questions, please contact:

Uisdean Vass
Head of Oil & Gas
01224 356 146
uisdean.vass@mms.co.uk

MMS Knowledge®

Given your interest in Oil & Gas law, you may find some of our other updates particularly useful. Corporate, for example, has been selected by many of our clients who have signed up to Oil & Gas. To register for additional bulletins, guides and seminars, visit sign up.

Please feel free to forward on this bulletin to friends and colleagues who may find it of interest and wish to subscribe themselves.

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.