The Analysis of Legal Limitations on Indemnity Clause: The U.S. Oil and Gas Case Study

Document Type : ISI

Authors

1 Associate Profesor, Department of Private and Islamic Law, Faculty of Law and Political Science, University of Tehran, Tehran, Iran.

2 Ph.D. Student in Oil and Gas Law/ Faculty of Law and Political Sciences, University of Tehran

Abstract

Introduction
The indemnity clause is a key element in any industrial contract. The application of this clause results in the transfer of legal liabilities due to negligence from the indemnitee to the indemnitor, thereby allocating a significant portion of contractual risks. The use of indemnity clauses in oil and gas industry contracts is highly beneficial. However, in oil-producing states in the United States, including such clauses for negligence is subject to several legal restrictions. The primary goals of state legislators in applying these restrictions have been to eliminate bargaining power inequality between contracting parties and to promote safety considerations. However, adopting this approach in the oil and gas industry has long been contentious, as it complicates the process of contractual risk allocation, leads to contract uncertainty in the event of accidents, and increases the costs of lawsuits. The first part of this article describes anti-indemnity acts across various U.S. states. Generally, these acts can be divided into three categories: permissive, strict, and moderate.
Method
This article combines descriptive and analytical dimensions. In the first part, using a descriptive approach, we examine anti-indemnity acts in four U.S. oil-producing states: Wyoming, New Mexico, Louisiana, and Texas. Based on their legislative approaches, these laws are divided into three categories: permissive, strict, and moderate. In the second part, taking an analytical perspective, we examine these legislative approaches and analyze the effects of each act on oil and gas industry contracts.
Results
Although permissive acts initially void indemnity clauses, it is still possible to obtain an insurance policy covering the negligence of the parties to the contract. Through this legal loophole, indemnity is effectively replaced by insurance, achieving the same effect as an indemnity clause. Conversely, strict-approach acts are incompatible with the requirements of the oil and gas industry, as they prevent parties from using any contractual mechanism to assess and allocate risks, leading to an increase in lawsuits and a lack of comprehensive contractual protection in accidents. The Marcel exception in Louisiana also proves inadequate due to its uncertainty and ambiguity. In legal disputes, differing interpretations of the exception can lead to outcomes that diverge from established precedents. Consequently, in Louisiana, it is plausible that parties obtain insurance policies based on the Marcel exception, only for the court to declare them void and unenforceable. In contrast, the Texas anti-indemnity act, while using a moderate approach, avoids the ambiguities found in Louisiana’s legal system. This act specifically caps insurance coverage for negligence. According to Texas law, if the indemnity is unilateral, the insurance cap is limited to $500,000. If the indemnity is mutual, the cap is based on the mutual coverage of both parties.
Conclusion
The enactment of anti-indemnity laws regarding negligence has consistently faced opposition from U.S. oil and gas exploration and production companies. From their perspective, pre-accident risk allocation is a core requirement for oil and gas operations. Overly restrictive laws hinder this process, potentially causing significant harm to the industry. Meanwhile, state lawmakers increasingly aim to limit indemnity clauses. Today, the invalidation of indemnity clauses extends beyond the oil and gas sector to industries like construction. The most desirable way to resolve this conflict appears to be adopting a moderate approach. Legislation should aim to address issues such as balancing bargaining power and promoting safety while also preserving some contractual freedom for the parties. In this respect, Texas law provides an exemplary model.
 Mixed methods research
This research implements Mixed methods research by an embedded design. From a quantitative point of view, it is worth mentioning that as of right now, invalidation of indemnity clauses extends beyond the oil and gas sector to industries like construction in 38 U.S. states. On the other hand, qualitative data indicates that in the permissive approach, indemnity clauses for negligence are void, but obtaining insurance is allowed. Currently, Wyoming adopts this permissive approach. In the strict approach, not only is the use of indemnity clauses prohibited, but any related insurance policy is also void. New Mexico is one state that follows the strict approach. In contrast, the moderate approach declares the indemnity clause void but allows insurance policies under specific conditions. The Marcel exception, based on precedent in Louisiana, and the insurance policy ceiling in Texas are examples of this moderate approach.
 

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References

منابع
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Journal Of Researches Energy Law Studies
Volume 9, Issue 2
February 2024
Pages 245-267

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