Caza Drilling (California), Inc. v. Teg

• Decision Date: 29 August 2006
• Docket Number: No. B182892.,B182892.
• Citation: 48 Cal.Rptr.3d 271,142 Cal.App.4th 453
• Court: California Court of Appeals Court of Appeals
• Parties: CAZA DRILLING (CALIFORNIA), INC., Plaintiff, Cross-defendant and Respondent, v. TEG OIL & GAS U.S.A., INC., Defendant, Cross-complainant and Appellant; Sefton Resources, Inc., Cross-complainant and Appellant.

48 Cal.Rptr.3d 271

142 Cal.App.4th 453

CAZA DRILLING (CALIFORNIA), INC., Plaintiff, Cross-defendant and Respondent, v. TEG OIL & GAS U.S.A., INC., Defendant, Cross-complainant and Appellant;

Sefton Resources, Inc., Cross-complainant and Appellant.

No. B182892.

Court of Appeal, Second District, Division 4.

August 29, 2006.

Ford, Walker, Haggerty & Behar and K. Michele Williams, Long Beach, for Defendant, Cross-complainant and Appellant, TEG Oil & Gas U.S.A., Inc., and Cross-complainant and Appellant, Sefton Resources, Inc.

Clifford & Brown, Grover H. Waldon, and Daniel T. Clifford for Plaintiff, Cross-defendant and Respondent.

EPSTEIN, P.J.

Appellants TEG Oil & Gas U.S.A., Inc. (TEG) and its parent company Sefton Resources, Inc. (Sefton) appeal the grant of summary judgment on their cross-complaint against respondent CAZA Drilling (California), Inc. (CAZA). TEG hired CAZA pursuant to a written agreement to drill a well on an oil field leased by TEG and Sefton and operated by TEG. CAZA argued, and the trial court agreed, that exculpatory and limitation of liability provisions in the parties' agreement precluded the recovery of the types of damages sought in the cross-complaint: compensation for economic loss and physical harm to equipment and facilities. The court entered judgment on the cross-complaint, despite appellants' contention that CAZA was both negligent and in violation of various regulations governing oil drilling operations.

On appeal, appellants take the position that the exculpatory and limitation of liability provisions in the parties' agreement are invalid under Civil Code section 1668 (section 1668), which prohibits enforcement of contracts that have for their object the exemption of parties from responsibility for fraud, willful injury, or violations of law. We conclude that the contractual provisions represented a valid limitation on liability rather than a complete exemption from responsibility, and that, in any event, appellants have failed in their repeated efforts to identify a specific law or regulation potentially violated by CAZA. We shall affirm the trial court judgment.

FACTUAL AND PROCEDURAL BACKGROUND

Certain background facts are not disputed. In 2002, CAZA was hired by TEG to drill a well at the Tapia oil field, located in Castaic, California. The well was referred to as "Yule 6." The work was performed under a standardized contract entitled "Daywork Drilling Contract — U.S."¹ A few days after drilling began, there was a blowout, resulting in the death of a CAZA employee, injury to others, and complete destruction of Yule 6.

It is appellants' position the blowout was the result of the negligence of CAZA's crew in pulling the drillstring out of the wellhole too quickly (referred to as "swabbing in"), which caused a fire to ignite. Under appellants' theory, the crew committed further negligence by failing to close the blowout preventer after the fire began. Nonetheless, TEG felt constrained to engage CAZA to do additional work to help repair the damage. In 2003, the parties signed a second Daywork Drilling Contract and a "Payment Schedule" to deal with outstanding invoices due under the 2002 agreement.

Complaint

In November 2003, CAZA sued TEG for breach of contract, open book account, account stated, quantum meruit, and foreclosure of oil and gas liens. Initially, the complaint was based on the Payment Schedule. CAZA claimed to be owed $33,219.94, plus interest.

Subsequently, CAZA amended the complaint to include claims for breach of the two Daywork Drilling Contracts. The claim for unpaid work was increased to $117,824.73, based on work performed under the 2003 agreement.

Cross-Complaint

TEG and Sefton cross-claimed against CAZA for breach of contract, negligence, and negligence per se based on violations of various safety provisions contained in state and federal regulations. The cross-complaint alleged that as a result of CAZA's actions appellants suffered "damage to the Well and the hole, as well as unexpected and otherwise unnecessary cleanup and remediation damage, and losses to [appellants'] business operations." Although there is a reference to the related lawsuit by the survivors of the deceased worker (Currington et al., v. TEG Oil & Gas U.S.A. et al. (Super. Ct. Los Angeles County, 2003, No. PC033424 (Currington)), the cross-complaint does not seek indemnification for damages paid to the plaintiffs in that lawsuit.

Daywork Drilling Contract

The 2002 Daywork Drilling Contract consists of a standardized form agreement with a number of blanks for the name of the operator, the contractor, the location of the well, the commencement date of drilling operations, the rates to be charged for various tasks, and other items. TEG was designated the "Operator" and CAZA was described as the "Contractor." The contract begins with a statement that "Operator [TEG] engages Contractor [CAZA] as an Independent Contractor to drill the hereinafter designated well or wells in search of oil or gas on a daywork basis" and that "Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction, supervision and control of Operator." "Daywork basis" is defined to mean that "Contractor shall furnish equipment, labor, and perform services as herein provided, for a specified sum per day under the direction, supervision and control of Operator (inclusive of any employee, agent, consultant or subcontractor engaged by Operator to direct drilling operations)." The contract also provides that: "When operating on a daywork basis, Contractor shall be fully paid at the applicable rates of payment and assumes only the obligations and liabilities stated herein. Except for such obligations and liabilities specifically assumed by Contractor, Operator shall be solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis, including results and all other risks or liabilities incurred in or incident to such operations."

Paragraph 8, entitled "DRILLING METHODS AND PRACTICES" includes the following pertinent subparagraphs: "8.1 Contractor [CAZA] shall maintain well control equipment in good condition at all times and shall use all reasonable means to prevent and control fires and blowouts and to protect the hole. [¶] . . . [¶] 8.3 Each party hereto agrees to comply with all laws, rules, and regulations of any federal, state or local governmental authority which are now or may become applicable to that party's operations covered by or arising out of the performance of this Contract."

Paragraph 14 governs "RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF RISK." Under subparagraph 14.1, the contractor (CAZA) "assume[s] liability" for "damage to or destruction of Contractor's surface equipment," unless the damage fell under paragraph 10, which requires the operator (TEG) to prepare a "sound location" to support the drilling rig, or subparagraph 14.3, which requires the operator to assume liability for damage to or destruction of the contractor's equipment "caused by exposure to highly corrosive or otherwise destructive elements, including those introduced into the drilling fluid." Subparagraph 14.2 requires the operator to assume liability for "damage to or destruction of Contractor's in-hole equipment."

Subparagraph 14.4 requires the operator (TEG) to assume liability "for damage to or destruction of Operator's equipment . . . regardless of when or how such damage or destruction occurs," and to `release Contractor of any liability for any such loss or damage." Similarly, under subparagraph 14.5, the operator is to "be solely responsible for . . . damage to or loss of the hole, including the casing therein" and the operator is to "release Contractor [CAZA] of any liability for damage to or loss of the hole" and in addition "protect, defend and indemnify Contractor from and against any and all claims, liability, and expense relating to such damage to or loss of the hole."

In subparagraph 14.6, the operator releases the contractor from liability for, and agrees to indemnify the contractor from and against claims "on account of injury to, destruction of, or loss or impairment of any property right in or to oil, gas, or other mineral substance or water" unless "reduced to physical possession above the surface of the earth," and for "any loss or damage to any formation, strata, or reservoir beneath the surface of the earth."

Subparagraphs 14.8 and 14.9 require the parties to indemnify each other for claims based on injuries to their own employees "without regard to the cause or causes thereof or the negligence of any party or parties."

Subparagraph 14.10 states that the operator is liable "for the cost of regaining control of any wild well, as well as for cost of removal of any debris."

The parties focus particular attention on subparagraph 14.11. Entitled "Pollution and Contamination," it provides:

"Notwithstanding anything to the contrary contained herein, except the provisions of Paragraphs 10 and 12[²], it is understood and agreed by and between Contractor and Operator that the responsibility for pollution and contamination shall be as follows: [¶] (a) Unless otherwise provided herein, Contractor [CAZA] shall assume all responsibility for, including control and removal of, and shall protect, defend and indemnity Operator from and against all claims, demands and causes of action of every kind and character arising from pollution or contamination, which originates above the surface of the land or water from spills of fuels, lubricants, motor oils, pipe dope, paints, solvents, ballast, bilge and garbage, except unavoidable pollution from reserve pits, wholly in Contractor's possession and control and directly associated with Contractor's equipment and facilities.

"(b) Operator [TEG] shall assume all responsibility for, including control and...