A court case involving Transocean, BP’s partner in the Deepwater Horizon disaster in the Gulf of Mexico, is causing lawyers across the globe to prick up their ears. This case, which is likely to take years to decide, has huge implications for contract law. It is about the fight to get BP to honor the indemnify clauses in its contracts with Transocean.
Why is this so important? The answer is simple, though the case is likely to be labyrinthine in its twists and turns in the coming months and years. BP’s indemnify clauses, on the face of it, seemed, at the time they were written, to be intended to give Transocean a great deal of comfort and a great deal of protection. So, if they turn out to be something that BP manages to wriggle out of, this will raise massive doubts about the value of any indemnify clause in any contract anywhere - provided the party doing the indemnifying has sufficient resources to put them in dispute later. If BP manages to walk away, a major component of contract law will in all probability be left in ruins as a result.
According to The Wall Street Journal, Transco summed up its position plainly enough in its court filings. Its question to BP is simple: “Why have you (BP) signed so many contracts, reviewed by an army of your lawyers and businessmen, that you have no intention of honoring?”
The implied intentions of the parties rank highly with the courts in contract disputes, so BP starts on the back foot here, no question. Its position is that Transocean has been found to have some fault in the oil spill, thus negating the indemnify clauses, which immediately gets one into the deep philosophical technicalities of just what the devil an indemnify clause is supposed to offer.
Blot on the page
Fault is like an ink stain in water. It spreads everywhere. In a major disaster, it is rare for any of the parties involved to come away looking whiter than white. The power of an indemnify clause is that offered by a major player to a minor player. It offers the junior partner protection if things go horrendously wrong. “Let’s say, if the wheels fall off, it will be down to me to put things right,” is what the clause purports to say. The power of an indemnify clause comes from its uncompromising positioning of any burden or costs which might result from things going wrong. If the courts were to decide that an indemnify clause can be “poisoned” with doubt, the whole practice would have no value and no further place in contract law. This would undoubtedly make it a lot more difficult for parties to form joint ventures to work together and the only gainers would be the lawyers, who would have to devise new and ever-more-complex work-around.
An article by Ian Cooper on Seeking Alpha back in August 2010 went directly to the indemnify clauses and found that the language looked, on the face of it, to be massively supportive of Transocean’s position. Cooper gives the exact clause:
“Except to the extent any such obligation is specifically limited to certain causes elsewhere in this contract, the parties intend and agree that the phrase 'shall protect, release, defend, indemnify, and hold harmless the indemnified party or parties from and against any and all claims, demands, causes of action, damages, costs, expenses (including reasonable attorneys fees), judgments and awards of any kind or character, without limit and without regard to the cause or causes thereof, including pre-existing conditions, whether such conditions be patent or latent, the unseaworthiness of any vessel or vessels (including the drilling unit), breach of representation or warranty, expressed or implied, breach of contract, strict liability, tort, or the negligence of any person or persons, including that of the indemnified party, whether such negligence be sole, joint or concurrent, active, passive or gross or any other theory of legal liability and without regard to whether the claim against the indemnity is the result of an indemnification agreement with a third party.' "
Cooper felt that ultimately the sweeping nature of this indemnify clause would nail BP, irrespective of what arguments it puts up. He may well be right in the end, but the lawyers are going to have a field day for the next few years as this one grinds slowly through the courts. Definitely one to watch.
Further reading on contracts and liability:
- Dispute Resolution: The Forum Selection Clause by Elisabeth de Nadal and Víctor Manuel Sánchez
- Multiparty and Multicontract Arbitration by Stavros Brekoulakis
- The Value and Management of Intellectual Property, Intangible Assets, and Goodwill by Kelvin King
- BP Disaster Shows that Environmental and Social Risks are also Financial Risks, by Ian Fraser
Tags: BP , business contracts , contract law , Deep Water Horizon , Deepwater Horizon , Gulf of Mexico , indemnify clauses , indemnity , liability , oil spill , Transocean , Wall Street Journal , WSJ