RKI Expl. & Prod., LLC v. Ameriflow Energy Servs., LLC, No. 02-20-00384-CV, 2022 Tex. App. LEXIS 4331 (Tex. App. June 23, 2022)
A recent decision by the Court of Appeals of Texas highlights the perils of failing to properly assert a demand for contractual indemnity.
In 2014, a piece of equipment, known as a sand separator, exploded at an oil well in Loving County, TX, killing two individuals and injuring three others. RKI Exploration & Production LLC operated the oil well. RKI contracted with Ameriflow Energy Services LLC and Crescent Services LLC through two master service agreements (MSAs) and a series of work orders.
Ameriflow supplied equipment and services to the wellsite, including the explosive sand separator. Crescent provided safety training and management services to Ameriflow. Notably, it was unclear whether Crescent supplied those services under a subcontract agreement with Ameriflow or whether the two entities were somehow affiliated. It was undisputed Crescent did not perform those services under its MSA with RKI or an associated work order.
The explosion and resulting dispute produced a “maze-like series of indemnity demands, settlements, and judgments” among the injured individuals, RKI, Ameriflow, and Crescent. The dispute culminated in tri-party litigation to determine RKI’s indemnity obligations to Ameriflow and Crescent under their respective MSAs. Broadly construing the indemnity language of the Crescent MSA, the trial court held that Crescent was entitled to indemnity from RKI and awarded Ameriflow and Crescent approximately $11 million.
The Court of Appeals considered, inter alia, whether the lower court had erred by broadly construing the Crescent MSA indemnity clause to encompass claims against Crescent, even though Crescent was not performing under the MSA at the time of the explosion.
RKI argued that because the MSA contemplated that Crescent would perform work pursuant to RKI work orders, and RKI had not issued any work orders at the time of the explosion, Crescent was not performing under the MSA, and therefore, it was not entitled to contractual indemnity from RKI.
Crescent argued that the MSA provided that RKI was to indemnify Crescent against all claims “arising in connection herewith” and a claim arising from Crescent’s supply of safety training and management services to Ameriflow “arose in connection with” — if not under — the Crescent MSA. According to Crescent, the phrase “arising in connection herewith” obligated RKI to indemnify Crescent for any claim arising from “all activities reasonably incident [to] or anticipated by the principal activity of the MSA, which is oil well operation.”
The court began with an extensive review of Texas and federal case law, interpreting the terms “arising” and “in connection herewith.” The court then reasoned that the phrase “arising in connection herewith” meant “originating from the document or writing in which the phrase is contained” rather than the broader view espoused by Crescent and adopted by the trial court. Applying this definition to the MSA, the court concluded that RKI’s indemnity obligations to Crescent were limited to Crescent’s performance under the MSA.
The court explained that the trial court’s interpretation was overly broad because it “untether[ed] the indemnity obligation from the contract containing the provision and [brought] activities independent of the contract within the scope of the indemnity provision simply because they relate to the general subject of the contract.” Such an interpretation would allow Crescent to perform “work for anyone at the wellsite, in as slipshod a manner as it wished, and still claim that RKI owed it indemnity.” The court concluded that because RKI’s indemnity obligation to Crescent was limited to Crescent’s performance under the MSA and because Crescent’s services to Ameriflow were not authorized by an RKI work order, Crescent was not entitled to indemnification from RKI.
The court noted that Crescent may have been entitled to contractual indemnity from RKI as an Ameriflow subcontractor under the terms of the Ameriflow MSA. But because Crescent did not raise this argument and because the precise relationship between Crescent and Ameriflow was unclear, the court could not rule on the issue. Thus, Crescent’s failure to assert its claim through the framework of its relationship with Ameriflow may have barred it from recovering contractual indemnity to which it would otherwise be entitled.
Reprinted from LexisNexis with permission. Copyright 2022 LexisNexis. All rights reserved.