Cannon Oil & Gas Well Servs., Inc. v. KLX Energy Servs., L.L.C.

• Decision Date: 10 December 2021
• Docket Number: No. 21-20115,21-20115
• Citation: 20 F.4th 184
• Parties: CANNON OIL AND GAS WELL SERVICES, INCORPORATED, Plaintiff—Appellant, v. KLX ENERGY SERVICES, L.L.C., Defendant—Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

20 F.4th 184

CANNON OIL AND GAS WELL SERVICES, INCORPORATED, Plaintiff—Appellant,

v.KLX ENERGY SERVICES, L.L.C., Defendant—Appellee.

No. 21-20115

United States Court of Appeals, Fifth Circuit.

FILED December 10, 2021

Marcus R. Tucker, Phelps Dunbar, L.L.P., Houston, TX, for Plaintiff-Appellant.

Blair Dancy, Zachary H. Bowman, Cain & Skarnulis, P.L.L.C., Austin, TX, for Defendant-Appellee.

Before Dennis, Higginson, and Costa, Circuit Judges.

Gregg Costa, Circuit Judge:

Texas and Wyoming are leading oil-producing states.¹ Like other leading energy states,² they both regulate the use of indemnity agreements in their oilfields with Anti-Indemnity Acts. Wyoming, concerned that indemnification disincentivizes safety, forbids oilfield indemnity agreements. WYO. STAT. ANN . § 30-1-131. Texas, concerned that large oil companies will use their leverage to demand indemnity from independent operators, also disfavors the agreements. But it does not ban them entirely. To address the bargaining-power problem, it allows indemnification in limited situations including when the indemnity is mutual and backed by insurance. TEX. CIV. PRAC. & REM. §§ 127.003, 127.005.

This conflict between the Wyoming and Texas oilfield indemnity laws is the focus of this appeal. A contract for the leasing and servicing of drilling equipment includes a mutual indemnity agreement that complies with Texas law but would be unenforceable under Wyoming's blanket ban. Although the agreement states that Texas law will govern, most of the work performed under the contract occurred in Wyoming with none in Texas. And indemnity is being sought for a Wyoming lawsuit filed by a Wyoming resident injured in a Wyoming oilfield operated by a Wyoming business. We must decide whether the Texas or Wyoming Oilfield Anti-Indemnity Act applies.

I.

Cannon Oil and Gas Well Services is an oil-and-gas exploration company based in Wyoming. When Cannon needed to lease drilling equipment, it contracted with Texas-based KLX Energy Services.

The parties memorialized their deal in a "Master Equipment Rental Agreement," which governs "all Equipment rented ... as well as any services provided by [KLX to Cannon]." The document includes three relevant provisions. The first is a choice-of-law clause providing that Texas law governs the agreement. Second is an indemnity provision under which Cannon and KLX must "protect, defend, [and] indemnify" each other against losses involving injuries sustained by the other's employees, regardless of who is at fault. The indemnity provision also notes in a separate clause that each party's obligation "shall only be effective to the maximum extent permitted by applicable law." And third, the agreement anticipates that Cannon will on occasion place extra orders for rental equipment and maintenance services. To ensure its supremacy over such periodic orders, the Master Agreement states that if "there should be any conflict" with "any Order, purchase order, field ticket, work order, or any other type of memoranda," the Master Agreement controls.

The same day that Cannon signed the Master Agreement, it also executed a shorter document titled "Work Order." Like the Master Agreement, the Work Order purports to apply to "all services and rental equipment" that KLX provides to Cannon. It also includes an indemnity provision and choice-of-law clause selecting Texas law. But unlike the Master Agreement, the Work Order's indemnity provision does not include a separate clause limiting the parties' indemnity obligation "to the maximum extent permitted by applicable law."

Initial discussions about the agreement occurred entirely in Wyoming, where KLX maintains a significant presence. Cannon later executed the documents in Wyoming; KLX did so in West Virginia. During negotiations, KLX anticipated providing equipment and services only where Cannon did business—Colorado, Utah, Idaho, Montana, Nevada, and above all, Wyoming. KLX's expectations were warranted. From the time the parties struck their deal to when this case began, KLX issued 252 invoices to Cannon, 228 of which came from Wyoming work. KLX never invoiced Cannon for work in Texas.

The incident that launched this dispute occurred two years later. An employee from KLX's Wyoming office was performing a pressure test on KLX equipment at a Cannon oil well in Southern Wyoming. The employee was injured. He then sued Cannon in state court in his home state of Wyoming.

If the Master Agreement's indemnity provision is valid, KLX is ultimately on the hook for injuries suffered by its employee even if Cannon was at fault. So Cannon filed this federal declaratory judgment action seeking to enforce KLX's indemnity obligation for the Wyoming lawsuit.

After the parties filed dueling summary judgment motions, the district court ruled in KLX's favor. The district court first reasoned that the Master Agreement's indemnity provision controls over the Work Order's because of inconsistencies between the two. It then held that the Master Agreement's choice of Texas law does not extend to its indemnity provision because the latter provision contains language recognizing that indemnity could be limited by "applicable law." The court thus concluded that the parties left open the issue of which law would govern their indemnity dispute. Applying Texas choice-of-law rules, the court determined that Wyoming law controlled. Because Wyoming bans oilfield indemnity, the indemnity provision in the Master Agreement was unenforceable.³ Cannon thus would have to defend itself in Wyoming state court. This appeal followed.

II.

Cannon first challenges the district court's conclusion that the parties did not decide which state's law would govern their indemnity obligation. Resolving this issue depends on whether the Master Agreement exempts its indemnity provision from its general choice of Texas law.

The Master Agreement states that indemnity "shall only be effective to the maximum extent permitted by applicable law, whether by statute or a controlling applicable judicial decision." It further provides that if "any such existing or future law" limits indemnity, the parties' obligation "shall extend only to the maximum extent permitted by such law." KLX convinced the district court that because this language refers to "applicable law" instead of "Texas law," the indemnity provision is not governed by the Master Agreement's general choice-of-law clause. In other words, the "applicable law" clause calls for a different choice-of-law analysis than the rest of the contract.

This argument reads too much into the words "applicable law." The more natural reading is that the Master Agreement recognizes that even under applicable Texas law, indemnity provisions will not always be enforced. See TEX. CIV. PRAC. & REM. § 127.003. If existing or future Texas law "limits the extent to which indemnification may be provided," the Master Agreement affirms that the indemnity provision still extends to "the maximum extent permitted by such law." The "applicable law" clause thus is a savings clause that preserves the indemnity provision to the extent allowed by "applicable law," which per the choice-of-law provision is Texas law. See Ranger Ins. Co. v. Am. Int'l Specialty Lines Ins. Co. , 78 S.W.3d 659, 663–64 (Tex. App.—Houston [1st Dist.] 2002, no pet.) (example of another indemnity savings clause); Weber Energy Corp. v. Grey Wolf Drilling Co. , 976 S.W.2d 766, 767 (Tex. App.—Houston [1st Dist.] 1998) (same). The choice-of-law provision that governs the rest of the Master Agreement therefore also applies to its indemnity provision.

On this reading, the Master Agreement and the Work Order are consistent—both contain choice-of-law and indemnity provisions that are not meaningfully different. It does not matter which document controls this dispute because under either the result is the same: Cannon and KLX chose Texas law to govern the scope of their indemnity obligation.⁴

III.

The question becomes whether the parties' choice of Texas law is enforceable for this Wyoming-centered indemnity dispute.

At first blush, the answer may seem straightforward. Courts usually enforce contracts as written. Wayman v. Southard , 23 U.S. (10 Wheat.) 1, 48, 6 L.Ed. 253 (1825) (Marshall, C.J.) ("[I]n every forum a contract is governed by the law with a view to which it was made."). Enforcing what the parties bargained for promotes efficiency and certainty. See DeSantis v. Wackenhut Corp. , 793 S.W.2d 670, 677 (Tex. 1990).

But when it comes to enforcing a contractual choice-of-law provision, freedom-of-contract values collide with a state's interest in regulating conduct within its borders. State laws regulating contracts would lose much of their bite if parties could oust them by agreeing to apply laws from a favored jurisdiction. See SYMEON C. SYMEONIDES ET AL., CONFLICT OF LAWS §§ 18.5–7 (6th ed. 2018) (providing examples of choice-of-law provisions evading consumer protection, employment, franchise, and insurance laws). And if "regulation is desirable, then choice of law creates a race to the bottom by eroding efforts to eliminate social harms." Erin Ann O'Hara, Opting out of Regulation: A Public Choice Analysis of Contractual Choice of Law , 53 VAND. L. REV. 1551, 1571–72 (2000).

Texas's choice-of-law rules, which we apply as a federal court sitting in diversity, Klaxon Co. v. Stentor Elec. Mfg. Co. , 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), harmonize this tension. Texas recognizes that "parties can agree to be governed by the law of another state." Exxon Mobil Corp. v. Drennen , 452 S.W.3d 319, 324 (Tex. 2014) ; see also TEX. BUS. & COM. CODE § 1.301(a) ("[W]hen a transaction bears a reasonable relation to this state and [another state] the parties may agree that [either law] shall govern their rights and duties."). Numerous Texas cases thus apply the law the parties agreed would govern. See, e.g., Drennen , 452 S.W.3d at 331 ; Gator Apple, LLC v. Apple Tex. Restaurants,...