Chesapeake Operating v. Nabors Drilling Usa

• Decision Date: 21 November 2002
• Docket Number: No. 14-00-00173-CV.,No. 14-00-00580-CV.,14-00-00173-CV.,14-00-00580-CV.
• Citation: 94 S.W.3d 163
• Parties: CHESAPEAKE OPERATING, INC., Appellant, v. NABORS DRILLING USA, INC., Appellee. Nabors Industries, Inc., Nabors Drilling USA, Inc., Nabors Loffland Drilling Co., and Nabors Energy Services, Inc., Appellants, v. Chesapeake Operating, Inc. and Chesapeake Energy Corp., Appellees.
• Court: Texas Court of Appeals

94 S.W.3d 163

CHESAPEAKE OPERATING, INC., Appellant, v. NABORS DRILLING USA, INC., Appellee.

Nabors Industries, Inc., Nabors Drilling USA, Inc., Nabors Loffland Drilling Co., and Nabors Energy Services, Inc., Appellants, v. Chesapeake Operating, Inc. and Chesapeake Energy Corp., Appellees.

No. 14-00-00173-CV.

No. 14-00-00580-CV.

Court of Appeals of Texas, Houston (14th Dist.).

November 21, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert E. Ammons, Maxine D. Goodman, Houston, for appellant (case no. 14-00-00173-CV).

Mark Pharr, Houston, for appellants (case no. 14-00-00580-CV).

Bradley A. Jackson, Elizabeth Wheeler, Mark Pharr, Houston, for appellee (case no. 14-00-00173-CV).

Mark Allen, Houston, for appellees (case no. 14-00-00580-CV).

Before the court en banc.

MAJORITY OPINION

SCOTT BRISTER, Chief Justice.

Two personal injury claims emerged from a drilling site in a Louisiana wood. Both followed the strangely well-worn path to trial courts in Texas. There, the tangle of Texas and Louisiana oilfield indemnity statutes led two very experienced trial judges to split results, and produced a similar split in this Court on both appeals. With the help of a specially appointed eleventh justice, we find Texas law has the better claim, and follow it for the reasons described below.

The applicable facts are undisputed. In December 1996, Chesapeake Operating, Inc. contracted with Nicklos-Hinton Drilling Company to drill an oil well in Vernon Parish in western Louisiana. Less than a month later — before any injuries occurred — Nabors Industries acquired Nicklos-Hinton, and all rights and obligations under the contract were assigned to Nabors Drilling USA, Inc. (with Chesapeake's consent). Nabors and Nicklos-Hinton were both Texas corporations, Chesapeake an Oklahoma corporation. It appears from the contracts and correspondence that each party negotiated and signed these agreements in its home state.

The contract was a standard form daywork drilling contract supplied by the International Association of Drilling Contractors (IADC). It contained mutual indemnity provisions protecting each party against suits by the other's employees or subcontractors, regardless of who was at fault.¹ Each party agreed to obtain $1 million in insurance to back up these indemnities. The contract also contained a "Governing Law" paragraph in which the parties agreed that:

This contract shall be construed, governed, interpreted, enforced and litigated, and the relations between the parties determined in accordance with the laws of Texas.

[blank typed-in in original].

Chesapeake hired several subcontractors to perform drilling-related services at the well, including Reeled Tubing, Inc. ("RTI"), a company based in Louisiana, and Quality Pressure Testing ("QPT"), a Texas company. On February 15, 1997, Danny Alms, a Texas resident employed by RTI, injured his shoulder and back while working at the well.² Four days later, Dennis Fritz, a Texas resident employed by QPT, slipped, fell, and suffered injuries at the well.

From this common starting point, the paths of Alms and Fritz diverged. Fritz filed suit against Chesapeake, Nabors, and others in Harris County, Texas; Alms sued Chesapeake, Nabors, and others in Brazoria County, Texas. Since both men worked for Chesapeake's subcontractors, Nabors filed cross-actions against Chesapeake in both suits seeking indemnification for all liability and defense costs incurred. In nearly identical motions, Nabors moved for summary judgment on the crossclaims.

The Alms court applied Texas law, granted Nabors' indemnity claim, and severed that claim from the rest of the suit for this appeal. The Fritz court first tried the underlying claims (resulting in a take-nothing judgment against Fritz),³ then applied Louisiana law, and denied Nabors' indemnity claim for defense costs.

On appeal, a panel of this Court initially reversed the Alms court. Thereafter, Nabors' appeal in Fritz was submitted to a different panel (without mention by either party that an identical case was pending), and Nabors moved for rehearing in Alms.⁴ We granted Nabors' motion for rehearing, consolidated the two appeals, and now withdraw the panel opinion and issue this en banc opinion. Our review of the trial courts' opposite rulings on essentially the same summary judgment evidence is de novo. Minnesota Mining & Mfg. Co. v. Nishika Ltd., 955 S.W.2d 853, 856 (Tex. 1996) (stating which state's law governs is a question of law).

I. The Purpose of Indemnities

Before considering each state's indemnity laws, we consider briefly the clauses they limit. At first glance, it appears suspect that an innocent party would agree in advance to pay the costs of a liable party, no matter what happens. Yet indemnity clauses are widespread in oilfield contracts (hence their inclusion in IADC form contracts). Both operators and drilling contractors have urged the Texas Legislature to encourage indemnity provisions under certain conditions.⁵ A comparison with situations in which there is no indemnity suggests why.

Drilling sites, of course, can be hazardous places. When injuries occur, it is often difficult to tell who is at fault due to the complex nature of the enterprise, the large number of subcontractors usually involved, difficult questions regarding the right to control,⁶ and the intersection of premises liability and agency law in drilling operations.⁷ As a result, there are usually two disputes to resolve — one pitting the injured party against all those potentially responsible, and another among the defendants to allocate fault and the resulting burden of any settlement or judgment.

Mutual indemnity provisions (if routinely enforced) eliminate the latter dispute. In the standard drilling contract, they allocate costs and liability according to who hired the injured party, not who caused the accident. This eliminates liability and coverage disputes between drilling operators and contractors. In the event of a lawsuit, they need not file cross-actions for contribution, conduct discovery between themselves, or even hire separate lawyers. This may result in a "united front" against a plaintiff, but it may also work to a plaintiff's advantage by shifting money from duplicative defense costs to settlement funds.

But indemnity provisions often fall short of this purpose. This Court and others have been kept busy in recent years resolving indemnity disputes.⁸ In the choice-of-law analysis that follows, it must be kept in mind that these clauses will never accomplish their primary purpose as long as there is substantial uncertainty about whether they will be enforced.

II. The Conflicting Indemnity Laws

The parties disagree whether their indemnity clauses should be judged by Texas or Louisiana law.⁹ They also disagree whether it makes any difference. As we need not decide which law applies if it makes no difference, we first review the law of each state.

A. Texas Law

Under Texas law, oilfield indemnity clauses are generally void. TEX. CIV. PRAC. & REM.CODE § 127.003. But there are several exceptions, including one for indemnities that are mutual and supported by liability insurance. Id. § 127.005; Ken Petroleum Corp. v. Questor Drilling Corp., 24 S.W.3d 344, 346 (Tex.2000). Additionally, indemnity clauses must meet certain fair notice requirements. Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 509 (Tex.1993). Chesapeake does not dispute that these clauses meet the former, but argues they fail to comply with the latter.

To give fair notice, an exculpatory indemnity clause must be express and conspicuous. Id. at 508-09. Compliance with these requirements is a question of law for the court. Id. at 510. The operative indemnity language here meets the "express" requirement, as it is identical to words the Texas Supreme Court has approved. See Maxus Exploration Co. v. Moran Bros., Inc., 817 S.W.2d 50, 56 (Tex. 1991) (holding indemnity "without limit and without regard to the cause or causes thereof or the negligence of any party or parties" met express negligence test).¹⁰ The second requirement — conspicuity — is immaterial if Chesapeake had actual knowledge of the indemnity clauses. Cate v. Dover Corp., 790 S.W.2d 559, 561-62 (Tex.1990). Chesapeake did, because its representative initialed a specific change to the indemnity provisions in this contract. We find Nabors' indemnity claim would be enforceable under Texas law.

B. Louisiana Law

By a similar statute, Louisiana declares oilfield indemnity clauses void and unenforceable if they operate in favor of a negligent party. LA.REV.STAT. ANN. § 9:2780(B) (West 1991). Nabors argues this statute applies only to contractors domiciled in Louisiana, and thus does not apply here. But the statute's language is not so limited. Id. (providing that "[a]ny provision contained in, collateral to, or affecting an agreement pertaining to a well for oil, gas, or water ... is void and unenforceable").

In the Fritz case, the jury found Nabors negligent (though only twenty percent at fault). In the Alms case, we presume a jury may find Nabors negligent, since Nabors' motion failed to prove it was not negligent as a matter of law. In either case, Nabors' indemnity claim would be unenforceable under Louisiana law.

C. Choosing the Law

Because of these differences, this appeal turns on which state's law applies. In determining the law applicable to oilfield indemnity clauses, Texas courts look to sections 187 and 188 of the Restatement (Second) of Conflict of Laws. Maxus, 817 S.W.2d at 53. As relevant for this appeal, those sections provide:

• In a contract without an express choice of law, indemnity is governed by the law of "the state which, with respect to that issue, has the most significant relationship to the transaction," applying the principles stated in Restatement section 6 to the contacts listed in Restatement section 188(2). See Maxus, 817 S.W.2d at 53; RESTATEMEN...