The risks associated with people, property and the environment during drilling operations drive operators and contractors to use contracting practices such as mutual indemnity agreements to allocate risks. The management of these physical exposures is without regard to negligence, and most times, the gross negligence of parties. For obvious reasons, the non-reference to a party’s grossly negligent conduct is not compatible with public policy as it reduces the incentive to use good oilfield practice that could prevent the risk of harm. It also makes a party not at fault to bear the loss arising from another party’s gross negligence. Mutual indemnity agreements should apply subject to gross negligence to align with public policy objectives so that the party at fault will be liable through a principled route. The party at fault will now bear liability for its seriously wrongful conduct. Nevertheless, this will be up to a stated cap, to balance the risk and reward system and the different status of the parties in the oil industry. The proportionality element of distributive justice, as adapted, supports this underpinning through the use of a cap. Mechanically, it means that where there is gross negligence, the party at fault cannot rely on mutual indemnity agreement as a shield against liability. To ensure compliance, oil and gas laws, and model clauses or model PSCs could provide for indemnity agreements to apply subject to gross negligence. In this way, gross negligence is a term of art, thus, promoting good oilfield practice and de-incentivizing seriously wrongful conducts to achieve public policy objectives.
Rethinking Operator-Contractor Risk Allocation in a post-Macondo Era
Azubuike, S. (Author). 2019
Student thesis: Doctoral Thesis › Doctor of Philosophy