Academic journal article Defense Counsel Journal

Transferring Risk by Contractual Indemnity: A View from Oil and Energy

Academic journal article Defense Counsel Journal

Transferring Risk by Contractual Indemnity: A View from Oil and Energy

Article excerpt

Preparing clear, comprehensive and effective contracts of indemnity is a complex task, but it pays off by reducing litigation and expense

THE petrochemical and energy resource industries have traditionally subcontracted a large portion of work necessary to locate, capture, transport or refine their products. In almost every contract there is at least one provision designed to either limit or shift potential liability.

Courts have adopted a conservative approach to allowing one party to shift its legal liability to another. Before contractual provisions will be enforced, courts have required that the language used be clear and unequivocal, some even requiring very specific or "talismanic" wording. On the other hand, courts have been far more receptive to allowing one party to obtain insurance coverage from another party's insurers. Perhaps the experience of the oil and energy industries is instructive for other fields in which contractual indemnity is used.

In the 1970s and 1980s, Louisiana and Texas both enacted so-called anti-indemnity statutes, and the Longshore and Harbor Workers' Compensation act was legislatively amended twice to address indemnity claims specifically. Although the Louisiana and Texas statutes have limited the circumstances under which one party may shift its liability to another, with the exception of the Louisiana statute, this legislation has not dramatically affected the ability of one party to transfer its liability to another party's insurers.

Courts continue to enforce indemnity provisions to the extent allowed by the "applicable" law. Therefore, the enforcement of contractual language continues to depend on two factors: (1) whether the intent to shift those particular liabilities is clearly expressed in the contract, and (2) if the intent is clearly expressed, whether that shifting is allowed by the applicable law.

INDEMNITY PROVISIONS

A. Contractual Indemnity Defined

Absent a contract, under admiralty law, responsibility for any loss is allocated to the parties based on the comparative fault of each party. State laws vary. Some allocate fault "by heads," and others are based on the comparative fault of the parties.

Contractual indemnity, on the other hand, alters this allocation of responsibility by agreement--one party agrees to undertake the legal responsibility of another party. For this reason, indemnity contracts are strictly constructed against the party seeking indemnity. Courts will give effect to an indemnity provision only if it clearly and unequivocally indicates that the parties intended to shift that responsibility. This is true for all indemnity contracts, whether they are construed under maritime law or state law.

B. "Talismanic Language" Rule

The primary principle in the interpretation of indemnity contracts is clarity. The party seeking indemnity must have a contract that clearly includes the specific risk for which indemnity is being sought. Although the law does not require that a contract delineate each and every risk, courts have generally looked for "talismanic language"--that is, certain specific terms reflecting the parties' intention that the indemnitee be indemnified for claims caused by its own negligence, strict liability, punitive damages, the unseaworthiness of vessels, or for defects or conditions pre-existing the contract, etc.

1. Negligence

Courts have been loath to find indemnity is owed if the contract does not clearly and unequivocally require the indemnitor to indemnify the indemnitee for the indemnitee's own negligence or fault. Although the laws of some states do not require the specific word "negligence" to be used in order for an indemnity agreement to cover claims based on negligent acts, whatever language is used must clearly indicate an intention that the negligence of the indemnitee be covered.

As an example, in Knapp v. Chevron USA Inc. …

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