Should My MSA Indemnify Against Gross Negligence or Willful Misconduct?

One of the primary goals of an indemnity provision is to avoid a drawn-out legal process and expedite the resolution of any loss or claim. In oilfield Master Service Agreements (“MSAs”), the industry standard indemnity is known as a “knock for-knock” indemnity.  Under this scheme, each party to the MSA is responsible for injuries, losses, or claims for damages to its own people and property and will indemnify and defend the other party for these categories of claims regardless of fault. By excluding fault based liability, the specific facts for each claim and the assignment of fault or blame don’t need to be litigated in a court of law.  This resolves the claims faster and more predictably.  To ensure the enforceability of the indemnities and to add certainty that each party can fulfill its indemnity obligations, carefully crafted insurance requirements for the parties are essential in an MSA.

One often contested point is whether “regardless of fault” includes the party’s gross negligence or willful misconduct seeking indemnity. Philosophically, many companies find it hard to agree to excuse the other party from reckless, egregious, or intentionally bad behavior. More concretely, they may have exclusions in their insurance policies for gross negligence or willful misconduct, meaning they aren’t covered if they assume liability for such claims. Additionally, statutory prohibitions may make indemnities for such behavior unenforceable depending on the contract’s governing law. 

Gross negligence is defined in Texas as an act or omission (A)  which, when viewed objectively from the standpoint of the actor at the time of its occurrence, involves an extreme degree of risk, considering the probability and magnitude of the potential harm to others; and (B) of which the actor has actual, subjective awareness of the risk involved, but nevertheless proceeds with conscious indifference to the rights, safety, or welfare of others.

Willful misconduct is generally defined as a conscious, willful act or failure to act that is deliberately committed with the specific intent to cause known and harmful consequences to the safety of people, property, or the environment.

RR&A is well-versed in all the competing priorities, legal restrictions, and practical realities of oilfield indemnities. We keep up with recent case law, changes in the statutes, and trends in the industry that could affect your bottom line event of a claim.  Let us help guide you in drafting and negotiating the necessary protections in your MSA.

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