Texas and Wyoming are leading oil producing states. Like other leading energy states, they both regulate the use of indemnity agreements in their oil fields with anti-indemnity Acts. Wyoming, concerned that compensation deters safety, bans oil field replacement agreements. Texas, worried that large oil companies will use their leverage to claim damages from independent operators, also disapproves of the agreements. But that does not completely forbid them. To solve the problem of bargaining power, it allows compensation in limited situations, including when the compensation is mutual and backed by insurance. IC Advertisement Oil and Gas Well Services, Incorporated v. KLX Energy Services, LLC, No. 21-20115, United States Court of Appeals, Fifth Circuit (December 10, 2021), the Fifth Circuit was asked to enforce damages agreements in contract.
Wyoming and Texas have different laws regarding oil field damages laws
A contract for the leasing and service of drilling equipment includes a mutual indemnity agreement that complies with Texas law but which could not be enforced under Wyoming's general prohibition. Although the agreement states that Texas law will govern, most of the work performed under the Wyoming contract was done without anything in Texas. And compensation is sought for a lawsuit in Wyoming filed by a Wyoming resident injured in a Wyoming oil field operated by a company in Wyoming.
Cannon Oil and Gas Well Services is a Wyoming oil and gas exploration company. When Cannon needed to rent drilling equipment, they entered into agreements with Texas-based KLX Energy Services.
The parties recalled their agreement in a "Master Equipment Rental Agreement", which regulates "all equipment rented". . . and all services provided by [KLX to Cannon]. " The document contains a choice of law clause that presupposes that Texas law governs the agreement. It also contains a compensation provision according to which Cannon and KLX must "protect, defend, [and] indemnify" each other against losses involving damages incurred by the other employee, regardless of who is at fault.
Unlike the main agreement, the Work Order's compensation provision does not contain a separate clause limiting the parties' liability for damages "to the maximum extent permitted by applicable law."
The first discussions on the agreement took place entirely in Wyoming, where KLX has a significant presence. Cannon later executed the documents in Wyoming; KLX did it in West Virginia. An employee from KLX's office in Wyoming performed a pressure test on KLX equipment at an oil well in Cannon in southern Wyoming. The employee was injured. He then sued Cannon in the state court of his home state of Wyoming.
QUESTIONS: Which state's statute applies
Cannon sued to seek a declaratory judgment to enforce KLX's liability for damages in Wyoming.
After the parties filed motions for summary judgments, the district court ruled in KLX's favor. Because Wyoming prohibits oilfield compensation, the tort clause in the principal agreement was unenforceable. Cannon would thus have to defend himself in the state court of Wyoming.
The Fifth Circuit, which read the main agreement, acknowledged that even under applicable Texas law, tort law will not always be enforced.
Enforcing what the parties negotiated promotes efficiency and security. However, when it comes to maintaining a contractual provision under the law, contractual freedom values conflict with a state's interest in regulating behavior within its borders. State laws governing contracts would lose much of their bite if the parties could dismiss them by agreeing to apply laws from a favorable jurisdiction. If regulation is desirable, choice of law creates a race to the bottom by eroding efforts to eliminate social harm.
Texas choice of law rules, which we apply as a federal court sitting in diversity, harmonize this tension. The conflict of law principle of limited party autonomy. Accordingly, although Texas courts allow choice-of-law agreements and the default position is that they are enforceable, it is not uncommon for a party to overcome them. to decide whether a contractual choice of law is to be executed. DeSantis 793 S.W.2d at 677-78. According to that section, three things must be true for Wyoming law to override the parties' choice of Texas law.
- Wyoming must have a more significant relationship with the parties and the transaction than Texas does under section 188 of the Restatement.
- Wyoming must have a "materially greater interest" than Texas in applying its law to this set of facts.
- Applying Texas law must be contrary to a basic policy in Wyoming. Central to these inquiries is each state's interest in the specific issue to be resolved – here, indemnity.
To overcome the parties' choice of law in Texas, Wyoming must have a "more significant relationship" with Cannon and KLX's damages agreement. In other words, would Wyoming's law apply if the parties had not chosen Texas?
The place of achievement benefits Wyoming. The Supreme Court of Texas has not decided whether the relevant place of performance in damages cases is where the drilling or lawsuit takes place. The difference does not matter here because Wyoming is the place for both the drilling and the atmosphere. The contacts thus benefit Wyoming overwhelmingly. Four prefer Wyoming with a neutral. No one favors Texas.
The parties generally expect the law of the place of negotiation, contracting and performance – none of which was Texas here – to apply. Although the protection of legitimate expectations favors the application of Texas law, these expectations can be overcome if they are substantially outweighed by the interests of the state with the invalidating rule.
The extent of a state's interest in having its rule applied. determined in the light of the purpose pursued by the rule and of the relationship between the transaction and the parties to that State. Wyoming's concern that compensation undermines security has great strength in a dispute seeking compensation for an injury to one of its residents in one of its oil fields. In the absence of a choice of law clause, Wyoming law would apply to this claim for damages in a Wyoming lawsuit brought by a Wyoming resident who performs state work for a Wyoming company.
To overcome the parties' opposite choice of Texas law, KLX must then show that Wyoming's interest in this compensation issue is "materially greater" than Texas'. It's easy. Wyoming prohibits oil field compensation provisions so that oil and gas companies "internalize the cost of their own operations" and become "more aware of employee safety." Lexington Ins. Co. v. Precision Drilling Co. 830 F.3d 1219, 1220 (10th Cir. 2016). This policy stems from Wyoming's deep experience of the "dangerous commitment" of drilling and mining.
Wyoming's interest in promoting worker safety in its oil fields is at the forefront of these facts. The underlying state court proceedings – in which a Wyoming resident was injured in Wyoming by a Wyoming oil company's alleged negligence – implicate Wyoming's policy with precision. Maintaining the indemnity clause would discourage Wyoming from hoping the Cannons take action to avoid injury in their oilfield operations. Since Wyoming has taken the unusual step of explicitly stating the policy in a charter and will refuse to enforce an agreement that violates the policy even when other states affiliated to the agreement maintain it, the compensation policy is a fundamental one.  The Fifth Circuit therefore concluded that Wyoming law applies. Its Oilfield Anti-Indemnity Act does not allow Cannon's claims for compensation.
Texas allows compensation agreements if insurance is available. Wyoming does not. Texas believes its people would be protected by insurance. Wyoming set out a general policy in a charter and does not believe that access to insurance will protect its oilfield workers. After an injury, Wyoming's general policy was applied and the attempt to choose Texas law failed. bad faith and insurance fraud almost equally for insurers and policyholders.
He also acts as an arbitrator or media
for insurance-related disputes. He practiced law in California for more than 44 years as a lawyer for insurance coverage and claims management and more than 54 years in the insurance industry.
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