Court Nixes Selection of Law Clause in Oil and Gas Indemnity Agreement
Cannon Oil and Gas Well Svcs., Inc. v. KLX Energy Svcs., L.L.C. 2021 WL 5856796 (5th Cir. Dec. 10, 2021); No. 21-20115
This opinion was just released around noon on Friday, December 10, by the Fifth Circuit and involves a conflicts of laws issue. The parties, Cannon Oil, a company based in Wyoming, contracted with KLX Energy, a Texas company with a significant presence in Wyoming, to lease and service drilling equipment. The work was performed in Wyoming for the most part. The indemnity agreement was a reciprocal indemnity agreement requiring each party to indemnify the other for injuries sustained by each party's respective employees. An employee of KLX in Wyoming, who is also a resident of Wyoming, was injured while performing pressure tests on equipment and sued Cannon in state court in Wyoming.
Cannon filed a declaratory judgment action to declare the indemnity agreement enforceable requiring KLX to indemnify it. The problem is that Wyoming statutorily voids oilfield indemnity agreements while Texas law enforces mutual indemnity agreements. The contract contained a choice of law clause selecting Texas law as the applicable law. However, Texas also limits contractual autonomy to elect what law applies. "Parties cannot choose the law of a jurisdiction 'which has no relation whatever to them or their agreement' nor can they 'thwart or offend the public policy of the state the law which ought otherwise to apply'"
To overcome the selection of Texas law, KLX first must show that Wyoming had a more significant relationship. The court ultimately determined that Wyoming has a greater interest in the matter as none of the negotiations occurred in Texas, the work was performed in Wyoming, the accident occurred in Wyoming, and the claimant for personal injuries is a Wyoming resident. Texas's interest in the matter is attenuated.
Furthermore, Cannon must show that the policy of Wyoming to void these indemnity agreements is "fundamental." The panel noted that the statute nullifying these agreements is "against public policy" and is thus a fundamental policy.
Wyoming law applies. The indemnity provision is void.
A copy of the 5th Circuit opinion is attached in PDF format.
