Real-World Litigation Impacts of Contract Clauses in Energy Contracts: Enforceability of Indemnification Provisions | JD Supra

Real-World Litigation Impacts of Contract Clauses in Energy Contracts: Enforceability of Indemnification Provisions | JD Supra

Indemnity clauses are an integral tool used regularly in energy contracts and master service agreements. Indemnity is an obligation by one party to make another party whole for a loss or damage that the other party has incurred. Indemnity is a form of restitution, and indemnity clauses are useful tools that allow companies engaged in energy production to mitigate and allocate risk that can arise from numerous issues in producing, transporting, refining, and selling oil and gas and other energy resources.

While these clauses are commonplace in various industries, the ability of parties to allocate risk via indemnification clauses can be limited via statute in an energy context. The Texas Oilfield Anti-Indemnity Act (TOAIA), for example, prohibits parties from enforcing certain types of indemnity clauses in oil and gas contracts. It was originally promulgated in 1973 to address “an inequity fostered on contractors by the indemnity provisions in certain agreements pertaining to wells for oil, gas, or water or to mines for other minerals.” 1973 Tex. Gn. Laws 1767, Ch. 646 § 1.

TOAIA was passed in part to assuage the costs that small contractors in perilous financial situations faced simply by engaging in the energy industry, and to protect small contractors from the “hold harmless” agreements that forced contractors to indemnify operators for losses caused not only by the contractors, but also by the operator and third parties as well. Specifically, the act provides:

[A covenant is] void if it purports to indemnify a person against loss or liability against damage that is caused by or results from the sole or concurrent negligence of the indemnitee, his agent or employee, or an individual contractor directly responsible to the indemnitee; and arises from (A) personal injury or death; (B) property injury; or (C) any other loss, damage, or expense that arises from personal injury, death, or property injury.

It is crucial to be aware of potential limitations concerning the enforceability of indemnification clauses, particularly with respect to upstream and downstream work in the energy sector.

For example, in Coastal Transport Co. v. Crown Central Petroleum Corp., 20 S.W.3d 119 (Tex. Ct. App. 2000), the court held that TOAIA did not invalidate the indemnity clause at issue. The case arose after an employee of a trucking company sustained injuries from a gasoline fire at Crown’s loading dock. Coastal contended that the indemnity provision in its agreement with Crown was void under TOAIA. The court noted that TOAIA applied to contracts for services involved in the drilling and servicing of wells, not the refining and transportation of petroleum products. The court found that the general ban of indemnity clauses imposed by TOAIA would notapply in this situation, and that TOAIA did “not render the indemnity agreement void and unenforceable.” Id. at 128.

Limitations on indemnity clauses vary from state to state; for example, Pennsylvania and West Virginia do not have legislation similar to Texas that would limit indemnity clauses. Producers, operators, contractors, and insurers should be aware of the specific language used in the indemnity clauses of contracts they enter into in the energy sector, as well as the potential statutorily imposed limitations on these clauses, so that they can avoid unpleasant surprises with respect to liability in the course of operations.

Images Powered by Shutterstock