Merriam-Webster defines “indemnity” as follows: 1. a: security against hurt, loss, or damage; b: exemption from incurred penalties or liabilities. Those in the oil and gas industry define it as a necessary evil, but also a tricky one. The issue of indemnity provisions in contracts has been the subject of much scrutiny by both the Texas Courts and the Texas Legislature. Texas has several rules that those in the oil and gas industry must adhere to in order to create a valid indemnity obligation, and a possible new kink in those rules is House Bill 2093. The House Bill was signed by Governor Perry last year, and took effect January 1, 2012.
Angela Staples
Under current rules, in order to have an Indemnity provision in a contract upheld, oil and gas companies must adhere to two Texas doctrines, and one Texas Statute. These are commonly known as the Express Negligence Doctrine, the Conspicuous Requirement (both collectively referred to as the “fair notice requirements”), and the Texas Oilfield Anti-Indemnity Statute.
The first fair notice requirement, the Express Negligence Doctrine, requires that “the intent of the parties must be specifically stated in the four corners of the contract.” If the intent of the parties to indemnify each other’s negligence is not clear from the contract (i.e. if there could be any other interpretation), then the indemnity provision is unenforceable. The second fair notice requirement, Conspicuousness, mandates “that something must appear on the face of the [contract] to attract the attention of a reasonable person when he looks at it.” Language may satisfy the conspicuousness requirement by appearing in larger type, contrasting colors, or otherwise calling attention to itself. Texas courts have ruled that an indemnity provision that requires Party A to indemnify Party B for Party B’s own negligence is unenforceable unless (1) the contract is explicit that the indemnification covers the negligence of the indemnitee and (2) the provision in question is conspicuous.
In addition to the fair notice requirements, companies must be aware that, under the Texas Oilfield Anti-Indemnity Statute, a covenant, promise, agreement, or understanding contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water or to a mine for a mineral is void if it purports to indemnify a person against loss or liability for damage that:
(1) 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
(2) 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.
However, this does not apply to an agreement that provides for indemnity if the parties agree in writing that the indemnity obligation will be supported by liability insurance coverage to be furnished by the mutual indemnitors as agreed to by the parties, or, if a unilateral indemnity obligation, no more than $500,000.
In short, in order for a company to be indemnified for its own negligence, the indemnification must be clearly stated, the words on the contract must be in bold type and/or in all caps and/or underlined, etc., (i.e. conspicuous), and it must be supported by insurance.
Now, Texas House Bill 2093 is in effect. HB 2093 ostensibly only voids the indemnity provisions in construction contracts entered in to on or after January 1, 2012, that indemnify a party for the negligence or fault of the indemnitee (with exceptions for certain bodily injuries). Most oilfield contracts will not fall under HB 2093. This is so because HB 2093 excluded application to any contract that was currently governed by the Texas Oilfield Anti-Indemnity Statute. However, contracts for pipeline or fixed associated facilities construction may be affected, as those specific constracts are excluded from the Texas Oilfield Anti-Indemnity Act.
Of course, no Court has had an opportunity to review the applicability of House Bill 2093 to pipeline or fixed associated facilities construction contracts, but we need to anticipate the possible application of this new legislation. There is the strong chance that pipeline and facilities construction contracts will need to be tailored to meet the requirements of House Bill 2093. Otherwise, there is a good chance that litigation will result from those unlucky oil and gas companies that fall within the grey of the Texas Oilfield Anti-Indemnity Act and House Bill 2093.