Indemnification clause in oil field contract overruled by Wyoming law

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A Wyoming oil exploration company cannot use Texas law to avoid liability for injuries sustained by an employee of its subcontractor, a panel of the Court of Appeals of the United States of America ruled. 5th United States Tour.

Cannon Oil and Gas Well Services’ lease agreement with KLX Energy Services required each company to compensate the other if employees were injured by drilling equipment that KLX leased from Cannon, regardless of fault. But Wyoming law prohibits oilfield compensation agreements because they fear they may cause drillers to pay attention to workplace safety.

The 5th Circuit ruled on Friday that, because Cannon only operates in Wyoming, the provision of its contract with KLX that states Texas law governs is not valid.

“The underlying legal process – in which a Wyoming resident was injured in Wyoming by the alleged negligence of a Wyoming oil company – involves Wyoming policy precisely,” the notice reads. “Enforcement of the indemnification provision would discourage what Wyoming hopes to encourage – Cannon is taking action to avoid injury in its oilfield operations.”

The contract dispute stems from a December 2017 accident that injured KLX employee Joshua Batchelor while performing a pressure test on a Cannon-owned oil well in Carbon County, Wyoming. Bactchelor and his wife filed a lawsuit against Cannon in Wyoming state court.

Cannon, relying on his contract with KLX, asked the Houston-based company to compensate him. The two companies had both carried liability insurance of at least $ 2 million to ensure they could meet the terms of the lease.

Cannon filed a lawsuit in federal court seeking a declaration that KLX was obligated to honor the contract. But the district court judge ruled that the compensation provision was not absolute. The contract stipulated that compensation could be limited by “applicable law”. The court ruled that the indemnification provision was inapplicable because Wyoming law prohibits oilfield compensation agreements.

The 5th Circuit panel noted that Texas law allows parties to enter into contracts governed by the law of other states, but also limits “contractual autonomy.” The parties cannot choose the law of a jurisdiction which had no relation to them or the agreement and cannot “thwart or offend” the public order of the state whose laws would otherwise apply.

The panel said for Wyoming law to trump Texas law:

  1. Wyoming must have a bigger relationship with the parties than Texas.
  2. Wyoming must have a significantly greater interest in law enforcement than Texas.
  3. Enforcement of Texas law must be against Wyoming policy.

All three statements are true, the opinion says. Prior to negotiating the contract, Cannon contacted KRX employees based in Wyoming. All of the drilling done with the KRX equipment took place in Wyoming. And finally, Wyoming has an interest in promoting worker safety in its oil fields, the panel said.

“Wyoming’s interest in promoting worker safety in its oil fields is at its peak on these facts,” the opinion says.

The panel upheld the trial court’s ruling, which means Cannon must defend itself against the lawsuit in Wyoming state court.

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