Deepwater Horizon: Contractual Indemnity for Gross Negligence or Punitive Damages?

U.S. District Judge Carl Barbier recently rendered a very important ruling in the Deepwater Horizon/BP Oil Spill suit that relates to the enforceability of contractual indemnity in the context of GROSS NEGLIGENCE and/or PUNITIVE DAMAGES. 

Judge Barbier addressed whether BP was contractually obligated to defend and indemnify Transocean, owner of the Deepwater Horizon, for pollution claims asserted by third parties.  The drilling contract between BP and Transocean, in pertinent part, required BP to defend and indemnify Transocean for damages and liability from spills “without regard to negligence of any party or parties and specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of” Transocean. 

BP argued to Judge Barbier that its duty to defend and indemnify did not extend to damages caused by Transocean’s gross negligence or to punitive damages that may be awarded against Transocean.  BP asserted that the words “negligence and fault” (as used in the contract) meant “ordinary fault” but not gross negligence or strict liability.  BP also contended that public policy prohibits indemnity for gross negligence and punitive damages. 

In a rather detailed opinion, Judge Barbier accepted BP’s arguments relating to punitive damages but disagreed with respect to gross negligence.  Judge Barbier ruled that public policy bars indemnity for punitive damages.  However, he held that public policy does not prohibit indemnity for gross negligence.  The Court found that the foregoing indemnity wording was intended to emphasize that BP assumed the risk even if caused by Transocean’s negligent conduct but was not intended to limit such conduct to ordinary negligence.  

Interestingly, Judge Barbier noted that, in some instances, gross negligence may indeed render certain contractual language unenforceable where one party agrees in advance to release the other contracting party from liability for damages suffered by the former, as a matter of public policy.  Such provisions are more rightly defined as “releases” rather than indemnity, according to the court.  

Judge Barbier explained that, in general, a “release” surrenders legal rights or obligations between parties to an agreement.  In comparison, a true indemnity agreement determines which party to a contract will ultimately bear the risk of injury to a third party.  In the first instance, the injured party has no recourse.  In the latter instance, the injured party is not restrained from seeking compensation.  Thus, the court ruled that gross negligence will render release language unenforceable, but will not prohibit indemnity. 

This ruling will certainly be appealed to the Fifth Circuit.

In re Oil Spill by the Oil Rig “Deepwater Horizon, MDL No. 2179 (E.D. La. Jan. 26, 2012).

Fifth Circuit Holds That Repair Service Order Validly Incorporated Online Terms And Conditions By Reference

As the Internet continues to play an increasingly important role in commerce, courts have begun to deal with relatively new considerations arising out of contracts formed in whole or in part online.  The United States Fifth Circuit Court of Appeals recently dealt with some of these new considerations in One Beacon Insurance Co. v. Crowley Marine Serv., Inc., 2011 WL 3195292 (5th Cir. 2011).

This case arose out of a dispute over the terms of a ship repair contract and maritime insurance policy.  Crowley Marine Services, Inc. (“Crowley”) hired Tubal-Cain Marine Services, Inc. (“Tubal-Cain”) to perform ship repair work on one of its barges.  Tubal-Cain hired a subcontractor to perform lighting and electrical work.  During repairs to the barge, an employee of the subcontractor was severely injured by an electrical shock and resulting fall.  The injured employee initiated an action in Texas state court alleging that Crowley and Tubal-Cain were negligent.  This prompted Crowley to formally demand defense and indemnity from Tubal-Cain purportedly arising out the ship repair contract between them.  Crowley also sought defense and coverage from One Beacon Insurance Company (“One Beacon”) as an additional insured under Tubal-Cain’s Maritime Comprehensive Liability Policy.

In response to Crowley’s actions, One Beacon denied coverage and filed a declaratory judgment action seeking a ruling that Crowley was not entitled to coverage as an additional insured.  One Beacon alleged that Tubal-Cain never requested that Crowley be added to the policy and did not otherwise qualify for coverage.  Crowley filed a third-party complaint against Tubal-Cain in the declaratory judgment action, alleging that terms and conditions incorporated into a repair service order issued in connection with the repair work required Tubal-Cain to procure certain insurance policies that named Crowley as an additional insured.

The district court, trying the case on written submission, ruled for Crowley on its contractual defense and indemnity claim against Tubal-Cain and on its claim that  Tubal-Cain failed to perform is obligation under their agreement to procure the required insurance coverage.  The court also held that Crowley did not qualify as an additional insured under the policy and granted One Beacon’s declaratory judgment claim.  Tubal-Cain and Crowley cross-appealed the district court’s judgment.  While it was undisputed that a ship repair agreement existed between the parties, there was a dispute as to whether a written agreement existed requiring Tubal-Cain to defend, indemnify and procure insurance for Crowley.

Executives and management for the two companies met in March 2007 to discuss the necessary barge repairs.  The companies had previously entered into similar agreements for minor repairs on eight prior occasions and contracted an additional fifteen times following the disputed agreement.  Each time, Crowley issued a repair service order (“RSO”) to Tubal-Cain outlining the scope of repairs.  The RSOs did not include pricing terms and were not signed by the parties.  The RSOs all contained a prominently displayed notice that they were issued in accordance with the purchase order terms and conditions on Crowley’s website unless the parties agreed otherwise in writing.  The terms and conditions, which were displayed in four-point font on a subpage of the website, required contractors to defend and indemnify Crowley for injury or damage even if alleged to be caused by the sole active negligence of Crowley.  The terms and conditions also included the provision requiring contractors to purchase certain policies of insurance and name Crowley as an additional insured.  The terms and conditions were never discussed and no hard copy was ever provided to Tubal-Cain.

On appeal, Tubal-Cain argued that an oral agreement was reached between the parties and the RSO merely confirmed that agreement.  Since defense, indemnity, and insurance were never made a part of the oral agreement, the RSO could not confirm more than what was already agreed to orally.  Further, the RSO was sent after Tubal-Cain had already commenced work and they did not have an opportunity to review and assent to it before beginning performance on the contract.

The Fifth Circuit noted that in construing maritime contracts, it has held that where parties share a history of business dealings and standardized provisions have become a part of those dealings, such familiar provisions within purchase order issued after performance are binding where they are accepted without objection.  Responding to Tubal-Cain’s argument that the relatively brief business dealings between the parties could not have established a course of dealing, the Fifth Circuit noted that courts have found a course of dealing between parties based on receipt of as few as three or four bills of lading.  Accordingly, the court concluded that the district court did not err in holding that the parties had established a course of dealing from which the court could infer that Crowley’s terms and conditions were implied in every contract.

Tubal-Cain also disputed the lower court’s finding that the RSO was sufficient to put Tubal-Cain on notice of the insurance and indemnity terms.  Specifically with respect to the indemnity, Tubal-Cain argued that indemnity provisions which purport to indemnify a party for its own negligence must be conspicuous to be enforceable.  The court explained that under general contract principles, where a contract expressly refers to and incorporates another instrument in specific terms clearly showing an intent to incorporate the instrument, both instruments are to be construed together.  The court held that maritime contracts may validly incorporate by reference terms from a website in the same manner that they may incorporate terms from a paper document.  Although Crowley could have been clearer in providing directions to the location of the terms and conditions, notice of the terms was reasonable under the facts of the case.

The Fifth Circuit also went on to affirm the district court’s additional holdings that the indemnity provision was sufficiently clear and conspicuous as to be enforceable and that the RSO terms and conditions supplemented the oral agreement.

One Beacon Ins. Co. v. Crowley Marine Services, Inc., — F.3d —-, 2011 WL 3195292 (5th Cir. July 28, 2011).

Contractual Liability – Indemnity Agreements

There are several devices which are used by contracting parties to shift liability for damages from one party to another, regardless of which party is at fault.  One such method of shifting liability is the indemnity contract.  An indemnity contract is a contract whereby one party undertakes and agrees to indemnify the other against loss or damage arising out of some contemplated act on the part of the indemnitor or from some responsibility assumed by the indemnitee or from the claim or demand of a third person, that is, to make good to him some pecuniary damage he may suffer.  Simply stated, contractual indemnity agreements are those whereby one party assumes the liability inherent in a situation and relieves the other party from responsibility.

In addition to indemnity contracts and hold harmless agreements, a party may agree to waive his right of subrogation (and request that his insurer also waive subrogation) against another party that caused the damage complained of and/or may agree to name the other party as an additional assured on his liability policy by means of an endorsement to that policy.

The classification of a contract as maritime or non-maritime is essential in determining the effect of its provisions.  Generally, if the nature of the contract is maritime, it falls within the jurisdiction of federal maritime principles. Conversely, if it is not of a maritime nature, then it is governed by the law of the applicable state.  It is not unusual to have “mixed” contracts wherein maritime aspects may be governed by federal maritime law and others governed by state law.  State and federal law, when applied to interpretation of indemnity agreements, share certain principles.  First, the courts should not construe an indemnity clause to impose liability for a loss not expressly within its terms.  Further, indemnity clauses, especially indemnifying the indemnitee against his own negligence are strictly construed.  Additionally, the courts will not presume that a mere agreement to indemnify includes indemnity for one’s own negligence.  Last, and perhaps most important, the intent to be indemnified for one’s own negligence must be in clear and unequivocal language stating that the indemnitee’s intent is to be held harmless for its own negligence in order to shift liability.  Any ambiguities may be construed against the indemnitee.

All too often, attorneys and those charged with preparing indemnity clauses, go to great lengths to try to cover every conceivable situation.  The resulting indemnity agreement oftentimes is so complex and so convoluted that not only is it difficult for the parties to the contract to interpret their meaning, but it is equally difficult for the attorneys and courts to sort them out.  If the parties to the contract have a difficult time interpreting the meaning then so will the courts which played no part in the negotiations leading to the contract.  The likely result is that the court will refuse to enforce the obligations.

LIGA Held Liable Under Last Responsible Carrier Rule

In a recent decision issued by the Fifth Circuit, the Court addressed whether the “last responsible employer/carrier” rule applied to the Louisiana Insurance Guaranty Association (“LIGA”).  The “last responsible employer/carrier” rule states that the “employer during the last employment in which the claimant was exposed to injurious stimuli should be liable for the full amount of the award.”  See New Orleans Stevedoes v. Ibos, 317 F.3d 480, 483 n.2 (5th Cir. 2003).  Further, carrier liability is treated the same as employer liability.  For example, if a single employer has multiple carriers, the carrier on the risk during the last exposure assumes the liability for the full award. 

LIGA is a state-created guarantee association that appeared in place of the insolvent National Insurance Company, which insured the Employer during the period of time when Claimant was subjected to his “last injurious stimuli.”  The National Insurance Company, had it not become insolvent in 1994, would have been liable for the entirety of Claimant’s injuries as a result of the “last responsible employer/carrier” rule.  Due to the Carrier’s insolvency, LIGA appeared in its place.  LIGA argued that the “last responsible employer/carrier” rule should not apply to it because it does not constitute a “carrier.”  LIGA therefore contended that a pro-rata recovery scheme would be the appropriate recourse in this matter.

The Fifth Circuit found LIGA liable to the same extent that National Insurance Company would have been, had it not become insolvent.  The Court reasoned that the statute that created LIGA provided that LIGA would step into the shoes of an insolvent carrier “to the extent of [the insolvent insurer’s] obligation on the covered claims and to such extent shall have all rights, duties and obligations of the insolvent insurer as if the insurer had not become insolvent…”  La. Rev. Stat. Ann. §  22:2058(A)(2) (2010).  Because the applicable law of allocation would have assigned all liability to National Insurance Company as the last responsible carrier, the Administrative Law Judge did not err in placing full responsibility for liability upon LIGA.

Louisiana Insurance Guaranty Association v. Director, OWCP, — F.3d —-, 2010 WL 3125810 (5th Cir. 2010) (published).

Disclosure: Patrick E. Costello of Mouledoux, Bland, Legrand & Brackett represented the Employer in this litigation.