United States Court of Appeals

Fifth Circuit



## FILED

November 18, 2003

Charles R. Fulbruge III

Clerk IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 02-11124

CLEERE DRILLING COMPANY,

Plaintiff - Counter Defendant - Appellant,

versus

DOMINION EXPLORATION & PRODUCTION, INC.,

Defendant - Counter Claimant - Appellee.

-------------------- Appeal from the United States District Court

for the Northern District of Texas

--------------------

Before WIENER, CLEMENT, and PRADO, Circuit Judges.

WIENER, Circuit Judge:

Cleere Drilling Company (“Cleere”) appeals the district

co urt’s bench trial judgment, which rejected Cleere’s claims

against Dominion Exploration & Production Inc. (“Dominion ”) and

held Cleere liable to Dominion for almost $2 million in damages.

These damages resulted from the blowout of Kenaf Industries Unit

No. 1 Well (the “Well”), which Cleere had contracted to drill for

Dominion. Cleere contends that the district court misconstrued

various provisions of the standard form International Association

of Drilling Cont ractors (“IADC”) footage drilling contract, July

1998 revision, (the “Contract”), as revised by the parties and

entered into by Cleere as contractor and Dominion as operator.1 A hole is “swabbed” when, in pulling the pipe out of the

well, a drop in pressure is created. “The imposed pressure drop

can create a negative pressure differential between the formation

and t he well bore with the well at a lower pressure, and thereby

allow fluid to enter the wel l.” 8 H O WARD R. W ILLIAMS & C HARLES J.

M EYERS

, O IL AND G AS L AW 1063 (2002).

2 Cleere also contends that the district court erred in various

findings of fact. We affirm in part, reverse in part, vacate in

part, and remand for further proceedings.

I. Facts and Proceedings

This action arises from the blowout and resulting total loss

of the Well. Central to the action are issues of responsibility

for several categories of resulting losses and damages.

While drilling ahead at a depth of approximately 2500 feet en

route to a “contract footage depth” of 3600 feet, the project got

into trouble after Cleere's toolpusher ordered a “short trip,” in

which “stands” of drill pipe were pulled out of the hole and run

back in to ensure the integrity of the pipe. In the course of this

operation, Cleere’s driller "swabbed" the Well at least twice. 1 He

completed the removal of the pipe despite observing an increase in

the flow of drilling mud from the hole. When the driller realized

tha t a potential well-control situation was developing, he had

Cleere’s crew attempt to activate the blowout preventer. They

failed to do so, however, because they did not first close a

hydraulic bypass valve, a critical prerequisite to the preventer’s

effective operation.3

C leere’s toolpusher, who had not been present, came to the

drill site promptly after being called and was eventually able to

activate the blowout preventer and shut down the Well. Cleere’s

efforts to maintain control were ultimately unsuccessful, however,

and the well cratered around its casing seven days after the

initial loss of control. The Well eventually blew out through

several surface fissures approximately 600 to 900 linear feet from

the hole, spewing salt water, gas, sand, and chemically treated

drilling mud on and around the drill site. As Cleere had neither

the equipment nor the experience and expertise to control and kill

the Well, Dominion retained the well-control firm of Boots & Coots

to do so, at substantial cost to Dominion.

Cleere sued Dominion in state court, and Dominion removed the

case to the district court based on diversity of citizenship.

Cleere sought to recover for its services under the Contract for

work performed both before and after the blowout. Specifically,

Clee re sought $192,463, which included (1) $50,180 ($20 x 2,509

ft.) for the “value” of the hole that Cleere had drilled before it

lost control of the Well; (2) $77,650 for 10 days and 2 hours

“daywork” after it lost control; and (3) approximately $6,500 for

other items, including 38 joints of drill pipe and 15 drill collars

lost in the hole.

Dominion counterclaimed to recover costs and expenses totaling

$1,955,596 comprising (1) $788,332 for controlling the blowout; (2)

$861,615 for cleanup of the surface location, (3) $188,417 for2 See Empire Fire & Marine Ins. Co. v. Brantley Truc king,

Inc. , 220 F.3d 679, 681 (5th Cir. 2000).

4 restoration of the surface location; (4) $52,000 for settlement of

damage claims with the landowner, Kenaf Industries of South Texas

L.P. ("Kena f"); and (5) $65,232 for the differential between

Dominion’s cost of drilling a replacement well and the Well price

under the Contract.

The distr ict court conducted a bench trial, after which it

ruled in favor of Dominion, awarding the entire amount sought and

rejecting all of Cleere’s claims. Cleere timely filed a notice of

appeal.

II. Analysis

A. Jurisdiction

The district court had jurisdiction by virtue of the diversity

of citizenship provisions of 28 U.S.C. § 1332(a)(1) following

Dominion’s removal of the case from the state court in which Cleere

had originally filed it. We have appellate jurisdiction pursuant

to 28 U.S.C. § 1291.

B. Standard of Review

We review the district court's interpretation of the Contract

de novo

, as such an interpretation requires the determina tion of

legal questions. 2 As the district court’s award of compensatory

damages presents an issue of fact (absent an error of la w), our3 See Rhodes v. Guiberson Oil Tools

, 82 F.3d 615, 620 (5 t h

Cir. 1996).

5 review of this aspect of the judgment, like all other factual

findings of the district court, is for clear error. 3

C. Cleere’s Claims

On appeal, Cleere does not contest the district court’s

f inding that Cleere’s negligence caused the blowout, so the

particular facts surrounding the blowout itself are not at issue.

Rather, Cleere views the case as one of contractual allocation of

risk that turns primarily on the release and indemnity provisions

of the Contract. Cleere maintains that the Contract allocates to

Dominion responsib ility for much of the damage, irrespective of

whether Cleere was negligent or otherwise at fault. Cleere also

insists that the district court misconstrued the Contract as a

result of misapplying Texas law.

1. Recovery Based on Conversion of the Contract to “Daywork”

Status

One important aspect of Cleere’s theory of recovery against

Dominion is the contention that, by its own terms, the Contract

automatically converted from a “footage” basis to a “daywork”

basis. Conversion to daywork basis would mandate different

contractual allocations of liability, possibly entitling Cleere to

the damages it seeks r elated to the uncompensated-for work it

performed both before and after the blowout occurred, as well as

the value of its lost equipment and materials. Cleere argues that4 The Contract’s Exhibit A states: “It is und erstood that in

the event it becomes necessary ... to raise the mud weight at any

time to 10.0 lbs. per gallon, it will concl usively constitute

‘Abnormal Pressure’ as that term is employed in Subparagraph 12.2

of the Contract.” Cleere argues that a lower mud weight

established abnormal pressure in this case, based on the testimony

of Calvin Barnhill, an expert witness called by Dominion.

6 the district court erred in holding that, as a matter of law, such

a conversion never occurred.

Cleere’s contention that the Contract c onverted to daywork

status is premised on the factual assertion that Cleere encountered

several problematic conditions while drilling the Well, including

abnormal pressure , loss of circulation, and failure of operatorsupplied equipment. The presence of any of these conditions would

have converted the Contract to a daywork status and entitled Cleere

t o collect on its claims for breach of contract. The district

court found that none of these conditions occurred, and C leere’s

arguments that they did are not persuasive. Cleere’s definition of

“abnormal pressure” contradicts the express language of the

Contract and depends entirely on testimony that is not related to

the contractual provisions at issue, but to normal pressure in a

strict engineering sense. 4 Similarly, Cleere’s argument regarding

loss of circulation —— which is entirely different from increased

flow of drilling fluids —— relates to the condition of the well

following Cleere’s actions that resulted in the blowout. As the

district court noted in its order of June 27th, 2002: “Even if

[abnormal pressure or lost circulation] were encountered, they were5 Subparagraph 18.6 states that “should a...blowout

occur...for any cause attributable to Contractor’s operations...

while Contractor is engaged in the performance of work hereunder on

a footage basis, all such loss of or d amage to the hole shall be

borne by Contractor.” If loss of circulation occurred, it did not

occur until aft er Cleere’s actions that caused the blowout.

Because Cleere was still working on a footage basis at that time,

Cleere remained responsible under subparagraph 18.6's allocation of

risks.

7 only encountered after the driller swabbed the Well,” which action

caused the increased flow and left it uncontrolled, leading to the

blowout. We cannot say that the district court clearly erred in

this determination, and the Contract is unambiguous that Cleere is

liable in such a situation. 5 Finally, Cleere’s contention that the

formation surrounding the surface casing shoe

—— which formation is

part of the earth

—— is somehow “operator supplied equipment” is

untenable. We agree with the district court that the Contract

never converted to a daywork basis.

2. Recovery Under Footage Contract Basis

We also agree with the district court’s conclusion that Cleere

cannot recover the damages that it claims under the Contract’s

footage basis. First, Cleere is not entitled to be paid for its

dril l ing services that preceded the blowout because “contract

footage depth” was never reached, a condition precedent to payment

under subparagraph 5.1 of the Contract. Second, Cleere cannot

recover for its post-blowout services because this claim depends on

conversion of the Contract to daywork status which, as noted, never

happened. And, third, under subparagraph 18.2 of the Contract,6 See Klumpe v. IBP, Inc.

, 309 F.3d 279, 281 (5th Cir. 2002).

7 Subparagraph 18.15 add resses all indemnity and release

provisions of the Contract and specifically notes that causation,

including negligence, will not justify disregard of those

provisions:

Indemnity obligation: Except as otherwise expressly

limited herein, it is the intent of parties hereto that

all releases, indemnity obligations and/or liabilities

assumed by such parties...including without limitation

Subparagraphs 18.1 through 18.14 hereof, be without limit

and without regard to the cause or causes thereof

(including preexisting conditions),...breach of contract

8 Cleere alone is responsible for any loss of its own “in-hole”

equipment while the Contract is in footage status. Therefore,

Cleere cannot recover from Dominion for the loss of drill pipe,

collars, and the like. We affirm the part of the district court’s

judgment that rejects each of Cleere’s dama ge claims against

Dominion.

D. Dominion’s Claims

1. Recovery Based on Cleere’s Negligence (¶18.15)

Th e district court held Cleere liable to Dominion after

finding that Cleere’s negligence caused the Well to blowout. In

its discussion of this point, the district court correctly stated

that, because this is a diversity case, Texas law governs all

substantive contractual questions. 6 In its application of Texas

contract law, the district court gave two reasons why Dominion

recovers under these circumstances. First, held the district

court, the overarching indemnity and release provisions contained

in subparagraph 18.15 (“18.15") 7 do not, as a matter of law, meetor the negligence of any party or parties....

8 725 S.W.2d 705 (Tex. 1987).

9 the Texas public policy requirement of “fair notice” for release

and indemnity agreements to be binding. The fair notice doctrine

requires contract language of “express negligence” that is

“ conspicuous.” The district court held that the Contract failed

both prongs of this test for fair notice of indemnity clauses of a

contract, and was therefore inadequate to release Cleere from

damages resulti ng from its own negligence. Second, held the

district court, the materials deposited on the drill site by the

b lowout did not constitute pollution or contamination as thos e

terms are used in the Contract, absent which subparagraph 18.12

(“18.12") is not available to shift responsibility for those items

from Cleere t o Dominion, whether or not the Contract’s indemnity

and release provisions are enforceable under Texas law. We

disagree with both determinations and shall discuss them in turn.

a. Fair Notice: Express Negligence; Conspicuousness

The district court based its holding that the release and

indemnity provisions of 18.15 do not meet the “fair notice”

requirement on the decision of the Supreme Court of Texas in Ethyl

Corporation v. Daniel Construction Company

. 8 The test for “fair

notice” established in that c ase has two conjunctive prongs: (1)

“express negligence,” which requires that “a party seeking9 Enserch Corp. v. Parker , 794 S.W.2d 2, 8 (Tex. 1990); s ee

also Ethyl Corp. , 725 S.W.2d at 708.

10 See Enserch Corp. , 794 S.W.2d at 8.

10 indemnity from the consequences of its own negligence must express

that intent in specific terms within the four corners of the

contract” 9 ; and (2) “conspicuousness,” which requires that the

release and indemnity provisions at issue be sufficiently

conspicuo us to ensure the parties’ conscious awareness of such

provisions. 10 On appeal, Dominion concedes that the contractual

language at issue meets the “express negligence” prong. Dominion

nevertheless continues to contend on appeal that the release and

indemnity language of paragraph 18 fails the conspicuousness prong.

As the fair notice doctrine can be trumped by the jurisprudentially

recognized exception of “actual knowledge,” we now address that

exception to determine whether it is applicable in this case.

Even if we assume wit hout conceding that the pertinent

language of the Contract is not s ufficiently conspicuous to meet

the second prong of the subject test, we are convinced that the

requirement of fair notic e —— both elements, i.e., express

negligence and conspicuousness

—— is irrelevant in the face of

Dominion’s actual knowledge of the subjec t provisions of the

Contract. The Supreme Court of Texas explained in D r esser

Industries, Inc. v. Page Petr oleum, Inc. that “[t]he fair notice

requirements are not applicable when the indemnite e establishes11 853 S.W.2d 505, 508 n.2 (Tex. 1993). Because we are

convinced that, as a matter of law, Dominion had “actual...

knowledge” of these provisions, we do not address whether the

format of the July, 1998 version of the IADC standard form domestic

footage drilling contract

—— replete with a boldface, all-capitals

legend, “THIS AGREEMENT CONTAINS PROVISIONS RELATING TO INDEMNITY,

RELEASE OF LIABILITY, A ND ALLOCATION OF RISK” t hat appears

prominently on page 1 of the Contract, and the smaller but likewise

bold and capitalized ti tle of paragraph 18, “ RESPONSIBILITY FOR

LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF

RISK.” —— is sufficient to satisfy the “conspicuousness” prong of

the test. Similarly, our finding of “actual...knowledge” obviates

any need to consider whether the Contract’s language meets the

“express negligence” prong, apart from the fact that Dominion has

conceded (as Cleere has contended) that it does.

11 that the indemnitor possessed actual notice or knowledge of the

indemnity agreement.” 11

The record contains a surfeit of evidence to support Cleere's

c ontention that Dominion had actual knowledge of the release and

indemnity provisions of the Contract. Testimony at trial revealed

that contract negotiations between Cleere and Dominion included

consideration of and changes to several provisions of the IADC

printed form, including a number in paragraph 18. As noted, 18.15

contains the Contract’s provision for release and indemnity and

18.12 covers responsibility for pollution and contaminati on, the

latter of which we address below. Furthermore, the acts of agents

of the parties in making and initialing numerous changes to the

printed form is facially evident on several pages of the Contract.

Among the many changes were additions to or d eletions from

subparagraphs 18.3, 18.12, and 18.15, each of which was initialed

by Dominion’s representatives, David Linger and Richard Miller, as12

well as by a representative of Cleere. In addition, the several

changes made in paragraph 18 are bracketed by changes made in

preceding paragraphs 4, 6, and 16, and in following paragraph 29.

Dominion nevertheless attempts to avoid a holding that it had

actual knowledge by implying that its Mr. Linger, who was directly

involved in the negotiation and confection of the Contract as well

as the changes to it, was not a lawyer and thus had no ability or

responsibility for “the legal aspects o f the contract.” This

feeble effort to maintain that Mr. Linger was somehow disqualified

from understanding and therefore from having actual knowl edge of

the import of the indemnity provisions and the changes that he

negotiated and made to those provisions

—— that, because he is not

a lawyer, he could not and need not realize what he was doing

—— is

specious. As noted in footnote 11 above, paragraph 18 is labeled

“RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY

AND ALLOCATION OF RISK.” Mr. Linger and Mr. Miller made changes

for Dominion that directly addressed indemnity and release,

including the revision of 18.15, to which the phrase “but excluding

wilful [sic] misconduct” was inserted i n the margin to preclude

indemnity or release under such circumstances. And, these

revisions were initialed not only by Mr. Linger but also by Mr.

Miller, the representative who signed the Contract for Dominion.

We find inescapable the conclusio n that Dominion had actual

knowledge of the contents and purposes of the entirety of paragraph13

18 (allocation of risk and responsibility), including specifically

18.12 and 18.15, through the acts of Mr. Linger and Mr. Miller in

negotiating on behalf of Dominion and personally initialing changes

that deal directly with the indemnity provisions contained therein.

Except di singenuously, Dominion cannot argue that, through its

designated agents, it did not acqui re actual knowledge of those

provisions. If Dominion was uncomfortable with the qualifications

of the two individuals who negotiated and signed off on the changes

to the indemnity provisions on its behalf, it never made such

qualms known to Cleere and cannot now be heard to disavow the acts

of its agents.

In sum, we cannot affirm the district court’s ruling that the

release and indemnity provisions of the relevant subparagraphs of

paragraph 18 do not apply for failure of the Contract to meet the

fair notice requirements of Texas law. Dominion had actual

knowledge of each of paragraph 18's subparagraphs that are relevant

to this case, including 18.15's provisions governing indemnity and

release a nd overriding the fault of the indemnified and released

party. Dominion’s actual knowledge of all pertinent provisions of

paragraph 18 satisfie s that exception to the fair notice

requirement and makes that doctrine inoperable here. We hold that

18.15 applies in this case; stated differently, that as to 18.15,

requirement of “fair notice ” is rendered inapposite by virtue of

the a ctual knowledge exception to that doctrine, and the parties12 Dominion also argues on appeal that, because no changes were

made to 18.12's subsection (b), the subsection relied on by Cleere

to absolve itself from cleanup and restoration liability, there is

no proof of Dominion’s actual knowledge of the contents of that

particular subsection, making it inoperable becaus e of the fair

notice doctrine. As we discussed in section II(D)(1)(a) above,

this argument is spurious as to 18.15, and it is even more so with

regard to 18.12. The fact that Dominion’s agents negotiated, made,

and initia led changes to 18.12(a) (albeit not to subsection (b)

thereof), as well as other subparag raphs of paragraph 18 that

either precede or follow it, is more than probative of Dominion’s

direct advertence to (and therefore actual knowledge of) the entire

text of paragraph 18, including subsection (b) of 18.12.

14 are therefore bound by the provisions of paragraph 18 and each of

its subparagraphs.

2. Recovery Based on Absence of Pollution or Contamination

(¶18.12)

Dominion insists that it is entitled to recover its costs of

cleanup and restoration of the drill site, including damages paid

in settlement with the landowner, because

—— as held by the

district court —— the “mess” on the surface was neither pollution

nor contamination. Noting that, under 18.12, responsibility for

any damages arising from “pollution or contamination” that

originated below the “surface of the land” is allocated to Dominion

alone, Cleere counters that the costs of the extensive cleanup and

restoration of the surface location are the direct result of

pollution or contamination (or both) that originated below the

surface of the earth. In addition to holding that, as a matter of

law, the Contract’s indemnity and release provisions on which

Cleere relies are ineffectual under the Texas fair-notice doctrine

(a holding we have reversed above), 12 the district court also heldDominion’s attempt to micro-parse the revisions to the printed form

down to the subsection of the subparagraph at issue is specious at

best, akin to arguing that Dominion had no knowledge of the first

clause of subsection (a) of 18.12 because it made changes only to

the second clause.

13 As a preliminary matter, we note that our affirmance of the

district court's holding that the Contract never converted to a

daywork basis is not material to the question of responsibility for

damages arising from pollution or contamination. The language of

18.12, titled “ Pollution and Contamination ,” declares expressly

that its provisions supersede all other contractual provisions,

except for paragraph 15 and subparagraph 18.13, neither of which is

relevant to this case. The introductory clause of 18.12 states

that “[n]otwithstanding anything to the contrary contained

herein...the responsibility for pollution and contamination shall

be as follows.” Thus, whether the Contract might have converted

from footage to daywork does not affect the applicability of 18.12,

which applies whenever damage arises from pollution o r

contamination, regardless of whether drilling operations are then

being conducted on a footage or a daywork basis.

15 that the spoliation of the surface location constituted neither

pollution nor contamination as those terms are us ed in the

Contract. Cleere’s responsibility for costs and expenses incurred

by Dominion in cleaning up and restoring the surface of the land at

and in the vicinity of the drill site thus turns on whether the

salt water, sand, and drilling mud deposited on the surface of the

land as a result of t he blowout constitutes “pollution or

contamination” for purposes of 18.12. 13

The pertinent text of 18.12, “ Pollution and Contamination,”

specifies:

Notwithstanding anything to the contrary contained

herein,...it is understood and agree d by and between

[Cleere] and [Dominion] that the responsibility for

pollution and contamination shall be as follows:

(a)... [Cleere] shall assume all responsibility for

... causes of action of every kind...arising from pollution16

or contamination, which originates above the surface of

the land or water...

(b) [Dominion] shall assume all responsibility for

, including co ntrol and removal of, and shall protect,

d efend and indemnify [Cleere] from and against all

claims, demands, and causes of action of every kind and

character arising directly or indirectly from all other

pollution or contamination which may occur duri ng the

conduct of operations hereunder, including

, but not

limited to, that which may result from fire, bl owout

, cratering

, seepage or any other uncontrolled flow of oil,

gas, water or other substance, as well as the use or

disposition of all dr illing fluids, including , but not

limited to, oil emulsion, oil base or chemically treated

drilling fluids

,.... [Dominion] shall release [Cleere] of

any liability for the foregoing (emphasis added).

There can be no dispute that (1) the putative contaminants in

question (salt water, sand, gas, and mud, i.e., “chemically treated

drilling fluids”) originated hundreds of feet below the surface of

the land, or (2) subsection (b) of 18.12 makes Dominion, as

"Operator," responsible for all pollution an d contamination that

does not originate at or above the surface of the land. Dominion

is therefore responsible for all damages resulting from the deposit

of the subject sub-surface materials on the surface of the land

unless

, as held by the district court, the presence of those

materials does not constitute pollution or contamination within the

intendment of the Contract. Furthermore, by virtue of 18.15,

Dominion's responsibility for such damage to the surface is not

negated by Cleere’s having caused the blowout that resulted in the

deposit of such materials on the surface. Thus, the only way for

Cleere to be held responsible under subsection (b) of 18.12 for

damages resulting from the spread of salt water, sand, and17

chemically treated drilling fluids on t he land, would be for

Dominion to prevail

—— as it did in the d istrict court —— on its

contention that the presence of those materials did not amount to

either pollution or contamination.

a. Pollution

The Contract does not define pollution or contamination. The

district court acknowledged the presence of salt water, sand, and

chemically treated drilling fluid on the land, but neverth eless

held that, under the Contract, the presence of this foreign matter

did not rise to the level of pollution or c ontamination of the

surface of the land at or near the drill site, absent which Cleere

could not rely on 18.12 for relief from liability. Cleere contests

that holding, insisting that the blowout’s deposit of those

subsurface materials onto the surface of the land constituted

“pollution” or “contamination,” or both, within the meaning of

18.12. Consequently, insists Cleere, the costs that Dominion

incurred in cleaning up and restoring the drill site and

s urrounding areas, and in settling with the landowner for its

surface damages, must be borne by Dominion alone.

Not surprisingly, Dominion supports the district court’s

holding of no pollution or contamination as those terms are used in

18.12, asserting that the “mess” left by the blowout did not rise

to the level of pollution o r contamination. Dominion emphasizes

that the substances in ques tion are relatively benign and not

environmental threats.14 See

, e.g.

, Heritage Res., Inc. v. NationsBank , 939 S.W.2d

118, 121 (Tex. 1996); N. Natural Gas C o. v. Conoco, Inc. , 986

S.W.2d 603, 606 (Tex. 1998).

15 B LACK ’ S L AW D ICTIONARY 1159 (6th ed. 1990)(emphasis added).

18 We have not previously considered the meaning of pollution or

contamination in the context of oil and gas drilling contracts. In

doing so today, we heed the cano n of contractual interpretation

that require s words and phrases in a contract to be given their

plain meanings unless the document demo nstrates that the parties

intended for the terms to be employed in some special or technical

sense, 14 which is not the case here. B lack’s Law Dict i onary

defines "pollution" as “ [c]ontamination of the environment by a

variety of sources including but not limited to hazardous

substances, organic wastes and toxic chemicals. Pollution is

legally controlled and enforced through various federal and state

laws and agencies.” 15 Noting that independent soil testing

determined that there did not appear to be a “significant impact”

to the surface area from the blowout, Dominion reasons that this

fact and the absence of an environmental remediation order from the

Texas Rai lroad Commission is further proof that there was no

pollution or contamination at the site.

Any persuasiveness of Dominion’s logic regarding pollution

——

given the typical focus of that word on harm to the environment,

and no such harm appearing to have occurred here

—— is

significantly less when applied to contamination . Subsection (b)16 See Heritage Res.

, 939 S.W.2d at 121; N. Natural Gas Co.

,

986 S.W.2d at 606.

17 B LACK ’ S L AW D ICTIONARY 318 (6th ed. 1990).

18 W EBSTER ’ S T HIRD N EW I NTERNATIONAL D ICTIONARY 491 (1986).

19 of 18.12 refers disjunctively to “pollution o r contamination” a s

words of different meanings, not as synonyms. Cognizant of another

canon of interpretation that requires courts to give effect to each

contractual term so that none is rendered meaningless, 16 we must

determine whether either pollution or contamination occurred here.

b. Contamination

When we examine the Contract’s us e of the term

“contamination,” we are not con vinced that any sort of

environmental harm is required. In contrast to its definition of

pollution, Black’s Law Dictionary defines contamination as a

“[c]ondition of impurity resulting from mixture or contact with

foreign substance.” 17 And, B lack’s definition of pollution as an

enhanced subcategory of contamination supports Cleere’s contention

that environmental harm is not an essential e lement of all

contamination; rather, it is an exacerbating element that makes

pollution a more noxious subcategory of contamination. Similar to

Black’s

, Webster’s Third New International Dictionary defines the

verb, "to contaminate" as “to soil, stain, corrupt, or infect by

contact or associ ation...to render unfit for use by the

introduction of unwholesome or undesirable elements.” 18 In sum, all

pollution is contamination, but not all contamination is pollution.19 Had Dominion performed the cleanup solely in anticipation

of some regulatory compliance, any cognizant agency would have to

have deemed such foreign substances to be contaminants, if not

pollutants.

20 Even if we assume arguendo that the materials disgorged onto

the drill site and its surroundings are not so noxious as to be

deemed pollutants b ecause their presence either did not or could

not cause environmental damage, their presence certainly meets the

definition of “contamination.” Relative to the surface of the

drill site, the salt water, sand, and drilling mud (with its

associated chemical additives) indisputably were “foreign

substances.” It is equally indisputable that these substances were

“undesirable elements” that rendered the surface area soiled,

stained, impure, and almost certainly unfit for its intended use.

If this were not true, we ask rhetorically, why would Dominion have

spent hundreds of thousands of dollars on the expedited removal of

those substances, and, in addition, have paid the landowner a cash

settlement for surface damages? 19

Dominion argues that such a definition of contamination gives

the term too wide a scope; that even though the blowout created a

“sub stantial and obvious condition which had to be cleaned up,”

that “condition” was only a “mess” and did not amount to

contamination. Scope is clearly critical to this issue. There

could be many situations that come within the common definitions of

“contamination” yet fall outside the range of circumstances

intended by the parties to be covered by that term.20 976 F.2d 1037 (7th Cir. 1992).

21 Id. at 1043 (quoting Westchest er Fire Ins. Co. v. City of

Pittsburg , 768 F. Supp. 1463, 1470 (D. Kan. 1991)).

22 112 F.3d 184, 188 (5th Cir. 1997).

23 In that c ontext, the need to limit the scope of

“contamination” is even more p ressing than in the instant case,

because the insurance clause at issue barred recovery only for

those claims resulting from pollution; contamination was discussed

only insofar as it made up part of the overriding definition of the

first term. Contamination in that context could not be viewed as

something distinct from and lesser in degree than pollution,

whereas here the two terms are used in the disjunctive, making

21 Although, as ob served earlier, we have not addressed

contamination in the context of drilling contracts, we and other

courts have considered the scope of “contaminant” in the context of

p ollution exclusions in insurance contracts. In P ipefitt ers

Welfare Education Fund v. Westchester Fire Insurance Company

, 20 the

Seventh Circuit addressed the issue in the following way:

The terms “irritant” and “contaminant,” when viewed in

isolation, are virtually boundless, for “there is

virtually no substance or chemical in existence that

would not irritate or damage some person or property.”

Without some limiting principle, the pollution exclusion

clause would extend far beyond its intended scope

.... 21

In Certain Underwriter s at Lloyd’s London v. C.A. Turner

Construction Company

, we agreed with the Seventh Circuit’s “commonsense approach” to this problem. 22

The issue in Cert ain Underwriters was whether the temporary

release of a gas

—— which quickly dissipated but not before causing

injury —— was pollution and therefore exempted from coverage by a

policy exclusion. 23 We concluded that the release of gas wascontamination properly viewable as a separate contractual item.

24 Certain Underwriters , 112 F.3d at 188.

25 Pipefitters Welfare Educ. Fund , 976 F.2d at 1043.

22 pollution and therefore excluded from t he policy’s coverage,

explaining that such a conclusion did not conflict with the Seventh

Circuit’s a pproach “in view of the substantial nature of the

discharge that occurred.” 24

We perceive the instant situation to be analogous. Obviously,

neither pollution nor contamination is the cause of “bodily

injuries suffered by one who slips and falls on the spilled

contents of a bottle of Drano, [or]...bodily injury caused by an

allergic reaction to chlorine in a public pool,” despite the fact

that both Drano and chlorine coul d probably be classified as

contaminants in those situations. 25 Similarly, fresh water that

would evaporate in a matter of days, or a fine layer of sand that

would cause no impairment to the use of the surface of rural land,

should not be considered contamination. The instant situation is

far different, however.

Testimony at trial revealed that temporary dams had to be

constructed and that vacuum trucks removed fluid waste “24 hours a

day” to “keep it from going all over the country.” In all,

Dominion hauled away and disposed of more than 3900 barrels of

waste fluids resulting from the blowout. These actions obviously

were taken to minimize both the surface damage from the blowout and26 Although Dominion argues that subparag raph 18.6 allocates

the entire risk of loss to Cleere under the footage provisions of

the Contract, subparagraph 18.6 actually discusses only damage to

the hole itself, explaining how expenses related to any replacement

well are allocated:

18.6 The Hole-Footage Basis: ...[S]hould a fire or blowout

o ccur or should the hole for any cause attributable to

[Cleere’s] operations be lost or damaged while [Cleere]

is engaged in the performance of work hereunder on a

footage basis, all such loss of or damage to the hole

shall be borne by [Cleere]; and if the hole is not in

condition to be carried to the contract depth...[Cleere]

shall...commence a new hole without delay at [Cleere’s]

cost.... (emphasis added).

The presence of salt w ater, sand, gas, and drilling mud a t the

surface cannot be classified as “damage to the hole.” This

con clusion comports with the structure of the Contract:

Responsibility for damage to the hole and the cost of any

replacement well are allocated based on whether the Contract is

proceeding on a footage or a daywork basis, but surface problems

resulting from pollution or contamination constitute an altogether

separate category of damages, not dependent on that conversion.

23 the need to eliminate foreign substances and undesirable elements

that might render the surface of the land unfit or undesirable for

use, indefinitely if not permanently.

Our legal conclusion that contamination occurred comports with

the overall structure of the Contract. The only subparagraph that

could be applicable to the surface restoration and cleanup costs at

issue is 18.12. For example, subparagraphs 18.1 through 18.5

address surface and in-hole equipment, and subparagraphs 18.6 and

18.7 address damages to the hole itself. 26 Similarly, subparagraphs

18.8 and 18.9 address underground damage and inspection of damage,

respectively. The remaining subparagraphs of paragraph 18 are

likewise inapplicable. As the foreign matter at issue here can be27 For support of this positio n, Dominion cites an Eighth

Circuit case, Day v. Toman

, 266 F. 3d 831, 836 (8th Cir. 2001).

(“Release is an affirmative defense which will be considered by the

court only if properly pleaded.”)(quoting Watts v. Butte Sch. Dist.

No. 5 , 939 F. Supp. 1418, 1424 (D. Neb. 1996)).

28 See United States v. Shanbaum , 10 F.3d 305, 312 (5th Cir.

1994) (“Whether an issue has been tried with the implied consent of

the parties depends upon whether the parties recognized th at the

unp leaded issue entered the case at trial, [and] whether the

24 considered contaminants under these circumstances, the structure of

t he Contract further supports the conclusion that, for today’s

purposes, they are contaminants: Either (1) the Contract fails to

account for this category of damage entirely, despite its otherwise

comprehensive attention to contingencies and potential losses, or

(2) this kind of damage is meant to come within the p urview of

18.12. We conclude that this type of damage is covered by 18.12.

Finally, Dominion argues that because subsection (b) of 18.12

contains release provisions, and release is an affirmative defense,

Cleere had to plead release expressly but failed to do so

. 27 As

Cleere correctly points out, however, three of the Pretrial Order’s

contested issues of law ineluctably impli cate release when they

address the allocation of risk and shifting of liability. More to

the point, the record confirms that the issues of indemnity and

release were tried in the district court by implicit consent of the

parties. Dominion never objected to testimony concerning the

negotiations surrounding, and the changes made to, the Contract’s

indemnity and release provisions; and the district court’s opinion

discu sses those provisions extensively. 2 8 The validity of theevidence that supports the unpleaded issue was introduced at trial

without objection ....”).

29 Id. at 313 (emphasis added).

25 indemnity and release provisions is an issue that was tried without

objection to the district court, and we must take th e issues as

they come to us: “We do not adjudicate by labels. We adjudicate

cases on the facts and law as they fit and support each other i n

the trial as the case progresses .” 29 In short, Dominion’s argument

on this hypertechnical point is wholly unpersuasive.

At oral argument, Dominion suggested in the alternative that,

if we should conclude that the surface eruptions of salt water,

sand, gas, and drilling mud constituted pollution or contamination,

we should remand for a determination by the district court of

exactly what damages were caused by those items and thus, under

18.12 , are the responsibility of Dominion. We agree. It is

counterintuitive that any substantial part of the cleanup and

restoration costs did not “aris[e] directly or indirectly” from the

surface presence of these subsurface contaminants. Still, Dominion

should have the opportunity to demonstrate that at least some of

its restoration and cleanup efforts —— as, for example, repairing

and restoring the physical character of the land at the locations

of the fissures where the Well blew out through the surface

—— and

thus the costs of such work, are more properly attributable to

something other than contaminat ion, and are therefore Cleere’s

responsibility.26

Whether based on the existing record or on the record as

supplemented on remand, t he district court should make these

determinations in the first place. We therefore remand the case to

the district court for it to conduct a closer examination and

allocation of the nature and costs of cleanup and restoration of

the surface, and their relationship (or lack ther eof) to

contamination. The district court shall do so, of course, in the

context of our holding that the salt water, gas, sand, and drilling

mud that erupted onto the drill site and vicinity are contaminants,

as that term is used in 18.12, even if not pollutants as well. And

we defer to the district court to decide, in its discretion,

whether additional evidence is necessary or desirable. If the

district court finds that any aspects of Dominion's cleanup or

restoration involved damage that did not result from contamination,

the court shall assign responsibility therefor to Cleere or

Dominion, as the case may be, depending on which provisions of the

Contract are applicable. In any case, however, the court shall

assign to Dominion responsibility for all cleanup and restoration

necessitated directly or indirectly by contamination.

c. Settlement with the Landowner

A few weeks after the blowout, Dominion entered into a

settlement agreement with Kenaf, the owner of the surface and the

mineral rights of the land on which the Well was drilled. This

agreement reflects Dominion’s payment of $52,000 to Kenaf in full

settlement of all claims for damages to the land on which the Well27

was drilled, resulting from “an incident” (obviously referring to

the blowout). Although there can be no question that the need to

clean up and restor e the surface was a direct consequence of the

blowout, neither the surface damages settlement agreement between

Dominion and Kenaf Industries nor other record evidence that we

have located or has been referred to us identifies the specific

nature of the particular damages sustained by Kenaf as landowner,

over and above or in addition to the contamination and the physical

damage to the surface, all of which Dominion cleaned up and

restored in kind. We harbor no doubt that any damages to Kenaf’s

ownership interests resulted from the blowout, either directly or

indirectly. Yet we cannot determine from the record —— and refuse

simply to assume —— that the damage to Kenaf's property interests

for which it was paid $52,000 was caused (1) entirely, or (2)

partially, or (3) not at all, by contamination

.

We do hold, however, as a matter of law based on our

interpretation of the Contract, that Cleere is responsible to

Dominion for necessary and reasonable costs incurred in settling

with Kenaf for its surface damages to the extent, if any

, that any

of such blowout-related damage to the landowner’s interest did not

result from contamination. Like contamination-caused cleanup and

restoration costs, any contamination-caused landowner damages would

remain the responsibility o f Dominion under 18.12 and thus would

not be recoverable by Dominion from Cleere.28

We therefore remand the issue of landowner damages to the

district court for it to determine whethe r all, some, or none of

Kenaf’s damages resulted from contamination. If the court should

conclude that any portion of such damages did not result from

contamination, it then must determine (1) how much of the $52,000

that Dominion paid to Kenaf was for any such non-contamination

landowner damages and (2) how much of that was necessary and

reasonable, and thus reimbursable to Dominion by Cleere.

d. Killing the Well

Our plenary review satisfies us that the district court

correctly held that Cleere's loss of the Well prior to reaching

contract footage depth makes Cleere responsible for the necessary

and reasonable costs and expenses occasioned by that lost control.

T his responsibility is not otherwise allocated by the Contract.

Cleere's loss of control of the Well, coupled with Cleere's

inability to bring the Well under control, left Dominion no choice

but to hire a contractor capable of controlling and killing the

Well. The district court correctly held Cleere responsible for the

reasonable costs of this necessary operation.

e. Drilling the Replacement Well

In the same vein, even though the Well was eventually brought

under control and killed, it was nevertheless unusable for purposes

of drilling the Kenaf Industries No. 1 to contract footage depth.

Dom inion had no choice (other than abandoning the prospect30 Subparagraph 18.6 of the Contract specifies that if a

blowout occurs while Cleere is operating under a footage basis

“[Cleere] shall...commence a new hole without delay at [Cleere’s]

cost.... ” Cleere does not complain, however, that another

contractor was selected to drill the replacement well , focusing

i nstead on the reasonableness and necessity of that contra ctor’s

charges.

29 altogether) but to move over and drill a replacement well. 30 Thus,

as yet another natural consequence of Cleere's loss of the Well,

Dominion experienced an additional necessary cost equal to the

differential between the contract price for Cleere to drill the

Well and the reasonable cost of retaining another contr actor to

drill the replacement well. We agree with the district court's

determination t hat Cleere is responsible to Dominion for the

reasonable cost of this differential. We thus affirm the district

court 's holding that Cleere is liable to Dominion for the

differential in the costs between the contract price with Cleere

and the reasonable cost of drilling the replacement well.

3. Necessity and Reasonableness of Dominion's Expenditures

Cleere’s final contention is that the quantum of the district

court’s awards to Dominion for the costs and expenses it incurred

following the blowout are not supported by record evidence. Cleere

does not question that Dominion actually paid the dol lar amounts

reflected on the invoices submi tted by Dominion. Rather, Cleere

insists that the record is devoid of evidence showing that those

expenditures were necessary and reasonable

. In response, Dominion30

contests each of the foregoing assertions by Cleere and urges that

we affirm the judgment of the district court in all respects.

The record confirms that Dominion prese nted essentially no

evidence to prove that the amounts it admittedly expended following

the blowout were necessary and reasonable. Thus, on remand, the

district court must determine

—— in addition to (1) which, if any,

of the cleanup or restoration items that Dominion paid for were not

the result of contamination from the blowout; (2) which, if any, of

the items of landowner damages for which Dominion paid Kenaf a

total of $52,000 were not the result of contamination from the

blowout; and (3) whether the dollar amounts spent by Dominion on

any non-contamination items of (a) cleanup and restoration or (b)

landowner damages were necessary and reasonable —— whether and to

what extent the concededly necessary costs of controlling and

killing the Well and having the replacement well drilled were

reasonable.

The required inquiry into the necessity and reasonableness of

expenditu res is a very fact-intensive process, making it prudent

for us to allow the district court, in its role as factfinder, to

have the first opportunity to consider that aspect of any damage

awards. We therefore leave these determinations to the district

court. In regard to categorizing the various aspects of cleanup,

restoration, and landowner damage as either contamination or noncontamination, and to determining which of Dominion’s expenditures

on these items were necessary and reasonable, we leave to the31

discretion of the district court whether the record is adequate or

in need of supplementation. The same applies to the court’s

determination of the reasonablen ess of the concededly necessary

costs of controlling and killing the Well and drilling a

replacement.

III. Conclusion

For the foregoing reasons, we affirm that part of the district

court’s judgment that holds that the Contract never converted from

a footage to a daywork basis. We also affirm the part that rejects

Cleere’s claims for (1) pre-blowout drilling serv ices (because

Cleere never reached “contract footage depth”), (2) d aywork

services (because the Contract never converted to a daywork basis),

and (3) the loss of its own property in the hole (because, under

subparagraph 18.2, Cleere remains responsible for any loss of its

in-hole equipment while performing on a footage basis). And we

affirm the p art of the court's judgment that holds Cleere

responsible for all necessary and reasonable co sts incurred by

Dominion in controlling and killing the Well and for the

differential between the contract cost of drilling the Well and the

reasonable cost of drilling the replacement well; but we vacate the

quantum of the court’s awards to Dominion for these items and

remand for the district court to determine how much of Dominion’s

e xpenditures on these necessary items was reasonable, and thus

reimbursable by Cleere.32

Furthermore, we reverse the part of the district court’s

judgment that holds the Contract’s indemnity and release provisions

inapplicable for lack of “fair notice”; and we hold that doctrine

irrelevant because Dominion had actual knowledge of the indemnity

and release provisions of the Contract. We also reverse that part

of the judgment that holds the salt water, sand, and drilling mud

that the blowout spread on the surface of the land did no t

constitute contamination of the drill site and the surrounding area

within the mean ing of the Contract; we hold that the presence of

the materials in question did constitute contamination within the

meaning of the Contract.

Next, we vacate the quantum of the district court’s awards to

Dominion for costs incurred in the cleanup and restoration of the

surface, and remand for the court to determine (1) whether,

consistent with this opinion, any portion of Dominion’s

expenditures for cleanup or resto ration of the drill site and

surrounding areas is not attributable to contamination and is

therefore Cleere’s responsibility under the Contract; and, (2) if

so, how much of each such non-contamination expenditu re is

necessary and reasonable, and therefore reimbursable by Cleere. We

likewise vacate the quantum of the district court's award to

Dominion in reimbursement of payments to Kena f for landowner

damages, and remand for the court to determine (1) whether,

consistent with this opinion, any portion of such landowner damages

to Kenaf is not attributable to contamination and is therefore33

Cleere’s responsibility under the Contract; and (2) if so, how much

of such non-contamination landowner damages is necessary and

reasonable, and therefore reimbursable by Cleere.

AFFIRMED in part; REVERSED in part; VACATED in part; and REMANDED

with instructions.