Cudd and its insurer hope to avoid Cudd's promise to indemnify for an oilfield accident.
A Master Service Agreement between Sonat Exploration and Cudd Pressure Control contemplated that Cudd would provide oilfield services to Sonat in several states, including Louisiana, New Mexico, and Texas. Th MSA required Cudd to indemnify Sonat for claims that Cudd employees might bring against Sonat (and vice versa). But it didn't specify a choice of law to govern the entire contract or the indemnity provisions.
In October 1998, one of Sonat's wells in Louisiana blew out and killed seven workers, including four Cudd employees, whose survivors sued Sonat in Texas state courts. Sonat paid around $28 million to settle the claims against it and tapped Cudd for indemnity. Cudd refused. The trial court applied Texas law and held Cudd's indemnity obligation to Sonat valid. (The relevant Texas statute generally allows mutual oilfield indemnities but limits them to the amount of insurance coverage.) The court awarded Sonat about $21 million on its indemnity claim.
The court of appeals concluded that Louisiana law controlled and therefore reversed and remanded. (Louisiana law generally bars oilfield indemnities if the underlying claim arises from the indemnitees' negligence or strict liability.) The Supreme Court of Texas agreed. It pointed to a paragraph in an exhibit to the MSA, which paragraph required Cudd to name Sonat and its affiliates as "additional insureds" under Cudd's existing policies with respect to operations in and offshore Louisiana. "Because contracts should be governed by the law the parties had in mind when the contract was made, we hold in these circumstances that Louisiana law applies." Sonat Exploration Co. v. Cudd Pressure Control, Inc., No. 06-0979, slip op. at 11 (Tex. Nov. 21, 2008) (footnote omitted).
Blawgletter finds the way Their Unanimous Honors arrived at the result too clever by half. Their rationale boiled down to the notion that the parties' effort to wire around possible invalidity of the indemnity under Louisiana law necessarily means they expected Louisiana law to govern the validity question, presumably regardless of the state in which an indemnity-triggering accident occurred. That strikes us as bizarre.
Perhaps the court intended a more modest pronouncement — that the parties expected Louisiana law would govern indemnity only for claims that arose from operations in Louisiana. But, even so, does the bare fact that the MSA includes protection against the possibility that Louisiana law might apply really signify an expectation that it would apply? And does the law that governs the indemnity really vary according to where an accident happens?
The court of appeals decided the case with a holistic view of all the circumstances, including the fact that the indemnity-triggering event arose out of work that the MSA contemplated would take place in Louisiana. That approach seems to us a lot more sensible than seizing on a couple of paragraphs in an exhibit to the main contract to infer as a matter of law that the parties expected what they manifestly wanted to avoid.
Why does the question of what law applies matter? Because Texas law would require Cudd (and its insurer) to make good on the indemnity, but Louisiana law probably would not. The decision thus goes a long way towards letting the insurer off the hook.
Imagine our surprise.
