Choice of Law Matters in an Oilfield Indemnity Suit

Originally published by Charles Sartain.

Did Texas law or New Mexico law apply to knock-for-knock indemnity provisions of a Master Work and Services Agreement?  When a contract itself explicitly calls for Texas law, that is likely to be the outcome, as it was in North American Tubular Services LLC v. BOPCO, LP.

Takeaways

• Decide before something bad happens what law you want to apply to a transaction.
• Think about it. You’ll have to live with the choice.
• Providing a safe work place is a moral imperative; financial risk goes a long way toward assuring the imperative is satisfied.
• (Better left for another post: Does that also apply to leaking methane?)
• The parties’ choice of law was was bolstered because under the contract the indemnity and insurance requirements would be liberally construed in order to effectuate their enforceability.
• It would have helped the choice of law if the contract had also said that the choice was without regard for the chosen state’s conflict of law provisions.

Why was the choice important?

Both states prohibit agreements that purport to allow indemnity for an oilfield indemnitee’s sole or concurrent negligence. An indemnitee (here, BOPCO the operator) will not be allowed to delegate to a subcontractor (North American) the duty to see that a well location is safe for workers. Texas has a safe harbor exception which allows such indemnification if the obligation is supported by liability insurance coverage furnished by the indemnitor. New Mexico law invalidates such agreements.

Both companies are domiciled in Texas. The MWSA was to be governed by Texas law. A North American employee was fatally injured on a wellsite in New Mexico. His heirs sued BOPCO in New Mexico. BOPCO sought defense and indemnity and North American refused.

North American argued that the Restatement (Second) Conflict of Laws favored New Mexico law because for several reasons New Mexico had a superior interest in the dispute.

If I’m losing you, the rest of this piece is for the lawyers

The Restatement allows parties to contractually agree on choice of law unless:

• the chosen state has no substantial relationship to the transaction, or
• the law of the chosen state would be contrary to the fundamental policy of a state with a materially greater interest than the chosen state any particular issue.

There is a three-pronged test for this rule:

• Whether application of Texas law would be contrary to a fundamental policy of New Mexico.
• Whether New Mexico had a materially greater interest than Texas in the issue.
• Whether Texas had the most significant relationship to the transaction and the parties.

The parties’ choice of law carried the day unless all three prongs favored New Mexico.

Five factors came into play when considering which state had the most significant relationship to the transaction. (See opinion, pp 16-22). These factors, when taken together, favored Texas. The court didn’t examine the other two prongs.

Was the obligation void under Texas law?

No. North American argued that even if Texas law applied, the agreement to carry insurance was ineffective. The insurance provision connected the parties’ obligations to obtain insurance to the legality of the indemnity obligation in New Mexico, the jurisdiction where the work was performed. Thus, North American could not agree to provide insurance coverage to BOPCO.  This argument was rejected. The plain language of the agreement created unambiguous obligations that satisfied Texas law.

Sure, New Mexico is to the West, but today we cross the Sabine for our musical interlude.  …  and the Mississippi.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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