Opinion ID: 4509604
Heading Depth: 2
Heading Rank: 2

Heading: Walter’s Duty to Indemnify Axon

Text: under the Drilling Contract The second indemnity question is whether Walter was required, by virtue of the Drilling Contract, to directly indemnify Axon for the very claims Plaintiffs brought against Axon. Contrary to the district court’s ruling, we conclude that Walter was not required to do so.
Hercules and Walter entered into the Drilling Contract in 2011. 5 Section 501 of the contract outlines “[Walter]’s Standard of Performance.” It provides that “[e]xcept for . . . obligations and liabilities specifically assumed by” Hercules, Walter is “solely responsible and assumes liability for all consequences of operations by both parties while on a daywork basis.” Those consequences include “results and all other risks or liabilities incurred in or incident to or connected with, directly or indirectly, such operations.” Other provisions in the Drilling Contract allocate specific risks between the two parties. Article IX contains several provisions relevant to this appeal. 4 Hercules makes a drive-by assertion that the district court erred by dismissing its counterclaims against Axon for indemnity at law, contribution, and breach of contract. Hercules’ argument on the issue is brief and wholly conclusory, and it fails to respond to Axon’s argument that Hercules has waived the issue. We agree with Axon and hold that the issue is waived. See United States v. Scroggins, 599 F.3d 433, 446–47 (5th Cir. 2010) (argument not pressed on appeal is waived). 5 Under the Drilling Contract, Walter was the “Operator” and Hercules was the “Contractor.” “An operator is the company that serves as the overall manager and decisionmaker of a drilling project.” Zenergy, Inc. v. Performance Drilling Co., 603 F. App’x 289, 290 n.1 (5th Cir. 2015) (unpublished) (cleaned up). “A contractor is the company that owns and operates a drilling rig.” Id. at 290 n.2 (cleaned up). For ease of reading, we substitute “Walter” for “Operator” and “Hercules” for “Contractor” when quoting the contract. 12 Case: 18-20453 Document: 00515318964 Page: 13 Date Filed: 02/21/2020 No. 18-20453 Section 902 6 obligates Walter to indemnify Hercules for damage to or loss of the hole or downhole property. Section 905(b) 7 requires Walter to indemnify Hercules for losses caused directly or indirectly by “pollution or contamination.” Section 906 8 mandates indemnity for Hercules “for the cost of removal of all wreck and debris” and for the cost of “regaining control of any wild well.” And section 907 9 obligates Walter to indemnify Hercules for loss to the mineral formation or strata, as well as the loss of oil, gas, or other minerals that had not yet “been reduced to physical possession above the seabed.” The relevant subsections further specify risks for which Walter is obligated to indemnify not only Hercules, but also its suppliers, contractors, or subcontractors. For example, sections 902, 905(b), and 907 require Walter to 6 “In the event the hole should be lost or damaged at any time, [Walter] shall, except as provided in Paragraph 705(f), be responsible for and hold harmless and indemnify [Hercules] and its suppliers, contractors and subcontractors of any tier from such damage to or loss of the hole, including all downhole property therein.” 7 “[Walter] shall be responsible for and hold harmless and indemnify [Hercules] and its suppliers, contractors and subcontractors of any tier against all claims, demands, causes of action, losses, and liabilities of every kind and character (including without limitation fines, penalties, assessments, third party claims, property damage, and control and removal of the pollutant involved) arising directly or indirectly from all pollution or contamination . . . which may occur including, but not limited to, that which may result from fire, blowout, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance . . . .” 8 “[Walter] shall at all times be responsible for and hold harmless and indemnify [Hercules] for the cost of removal of all wreck and debris (including [Hercules’] Items as provided below). [Hercules] shall be responsible for and hold harmless and indemnify [Walter] for the cost of wreck and debris removal of [Hercules’] Items to the extent required by law or to prevent interference with [Walter’s] operations. [Walter] shall at all times be responsible for and hold harmless and indemnify [Hercules] for the cost of regaining control of any wild well.” 9 “[Walter] shall at all times be responsible for and hold harmless and indemnify [Hercules] and its suppliers, contractors and subcontractors of any tier from and against any and all claims on account of injury to, destruction of or loss or impairment of any property right in or to oil, gas or other mineral substance or water, if at the time of the act or omission causing such injury, destruction, loss, or impairment, said substance had not been reduced to physical possession above the seabed, and for any loss or damage to any formation, strata, or reservoir beneath the seabed.” 13 Case: 18-20453 Document: 00515318964 Page: 14 Date Filed: 02/21/2020 No. 18-20453 indemnify not only Hercules, but also its “suppliers, contractors, or subcontractors of any tier.” In contrast, section 906 requires indemnification of only Hercules. Two other sections in Article IX need our attention. First, section 911(c) 10 states that the words “be responsible for and hold harmless and indemnify” as used throughout Article IX “shall have no application to claims or causes of action asserted against [Walter] or [Hercules] which arise solely by reason of any agreement of indemnity with a person or entity” that is not a party to the Drilling Contract. Finally, section 912 explains that the provisions of Article IX, together with sections 605, 606, and 805, “shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause.” 11
We read contracts as a whole and give words “their plain meaning unless the provision is ambiguous.” Breaux, 562 F.3d at 364 (quoting Weathersby v. 10 “Except as otherwise provided herein, the parties intend and agree that the phrase ‘be responsible for and hold harmless and indemnify’ or other similar words of release or indemnity (including limitation or exclusion of damages and all other exculpatory provisions) in this Contract including without limitation Paragraphs 605, 606, 805, and 901 through 910 shall have no application to claims or causes of action asserted against [Walter] or [Hercules] which arise solely by reason of any agreement of indemnity with a person or entity not a party hereto. Except as otherwise provided herein, nothing contained herein shall confer any rights upon any third party beneficiary. Nothing contained herein shall confer any right of action in any person not a party hereto or identified as an indemnitee herein.” 11 “The parties recognize that the performance of well drilling, workover and associated activities such as those to be performed under this Contract have resulted in bodily injury, death, damage or loss of property, well loss or damage, pollution, loss of well control, reservoir damage and other losses and liabilities. It is the intention of the parties hereto that the provisions of this Article IX and Paragraphs 605, 606 and 805 shall exclusively govern the allocation of risks and liabilities of said parties without regard to cause (as more particularly specified in Paragraph 911), it being acknowledged that the compensation payable to [Hercules] as specified herein has been based upon the express understanding that risks and liabilities shall be determined in accordance with the provisions of this Contract.” 14 Case: 18-20453 Document: 00515318964 Page: 15 Date Filed: 02/21/2020 No. 18-20453 Conoco Oil Co., 752 F.2d 953, 955 (5th Cir. 1984)). 12 “Disagreement as to the meaning of a contract does not make it ambiguous, nor does uncertainty or lack of clarity in the language chosen by the parties.” Id. (quoting Weir v. Fed. Asset Disposition Ass’n, 123 F.3d 281, 286 (5th Cir. 1997)). Axon makes two general arguments in support of affirmance. First, Axon asserts that, since Hercules did not specifically assume liability for a blowout, Walter assumed those risks under section 501 of the Drilling Contract. According to Axon, it follows that Walter thus assumed the very liability that it now seeks to transfer to Axon by virtue of its products-liability suit. Second, Axon contends that the losses Walter seeks from Axon as damages fall into specific categories of loss for which Walter is required to directly indemnify Axon under the Drilling Contract. Walter disagrees. In its view, the text of section 501 does not mention, and thus fails to create, any indemnity obligations at all. Walter also argues that Axon’s broad reading of section 501 would render many other provisions meaningless. Regarding Axon’s second argument, Walter argues that none of 12 The parties do not appear to contest that maritime law applies to the contracts at issue. We do not address whether that is correct because it is irrelevant: wherever derived, the applicable principles of contract interpretation are general ones that are broadly applied. See, e.g., Restatement (Second) of Contracts § 202(2) (“A writing is interpreted as a whole, and all writings that are part of the same transaction are interpreted together.”); see also Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133 (Tex. 1994) (“This court is bound to read all parts of a contract together to ascertain the agreement of the parties. The contract must be considered as a whole. Moreover, each part of the contract should be given effect.” (citations omitted)); Lewis v. Hamilton, 652 So. 2d 1327, 1329–30 (La. 1995) (“The words of a contract must be given their generally prevailing meaning . . . . Each provision of a contract must be interpreted in light of the other provisions, and a provision susceptible of different meanings must be interpreted with a meaning that renders it effective rather than one which renders it ineffective.”). 15 Case: 18-20453 Document: 00515318964 Page: 16 Date Filed: 02/21/2020 No. 18-20453 the losses it seeks are covered by specific sections of the Drilling Contract that would require it to directly indemnify Axon. The district court concluded section 501 established that “Walter, as operator, assumes all obligations and ‘shall be solely responsible and assume[] all liability for all consequences of operations[,]’ including Hercules’ subcontractors[,] on any theory of law including strict liability.” We disagree for the following reasons. First, section 501 does not require Walter to directly indemnify Axon. Its plain text does not purport to create any indemnity obligations. Rather, it explains that Walter is solely responsible and assumes liabilities for any consequences of operations by both parties (i.e., Walter and Hercules) that are not elsewhere specifically assumed by Hercules. “A contract of indemnity . . . should not be read to impose liability for those losses or liabilities which are neither expressly within its terms nor of such a character that it can be reasonably inferred that the parties intended to include them within the indemnity coverage.” Corbitt v. Diamond M. Drilling Co., 654 F.2d 329, 333 (5th Cir. Unit A Aug. 1981). 13 Accepting the district court’s interpretation would leave several sections in Article IX without purpose. Take an example. If, on these facts, Walter was required to directly indemnify Axon for the losses it seeks through its lawsuit, what would be left of section 906, which obligates Walter to indemnify 13 See also Int’l Marine, L.L.C. v. Integrity Fisheries, Inc., 860 F.3d 754, 759 (5th Cir. 2017) (reciting same principle “[u]nder federal maritime law”); MEMC Elec. Materials, Inc. v. Albemarle Corp., 241 S.W.3d 67, 71 (Tex. App. 2007) (“Indemnity provisions are to be strictly construed, pursuant to the usual principles of contract interpretation, in order to give effect to the parties’ intent as expressed in the agreement.”); Liem v. Austin Power, Inc., 569 So. 2d 601, 608 (La. Ct. App. 1990) (general contract interpretation principles apply to indemnity agreements; interpretation is determination of common intent of parties “and when the words of the contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made”). 16 Case: 18-20453 Document: 00515318964 Page: 17 Date Filed: 02/21/2020 No. 18-20453 Hercules—but not its subcontractors or contractors, like Axon—“for the cost of removal of all wreck and debris” as well as costs for controlling wild wells? Another hypothetical. Imagine a scenario in which the blowout here caused a massive oil spill. Section 905(b) requires Walter to indemnify Hercules and its contractors for losses caused directly or indirectly by “pollution or contamination.” If section 501 actually means that Hercules must indemnify Axon directly for those losses, what work is section 905(b) doing? There are other examples, but these two make the point: Axon’s reading—and the district court’s—would render much of Article IX redundant. To the extent possible, we interpret contracts to avoid that result. Chembulk Trading LLC v. Chemex Ltd., 393 F.3d 550, 555 (5th Cir. 2004). 14 The district court’s reading of section 501 also ignores the fact that Walter and Hercules agreed on a different scope of indemnification for different risks. For some risks, such as damage to the hole, Walter agreed to indemnify Hercules and its subcontractors, contractors, and suppliers. But for other risks, such as the cost of debris removal and costs to control a wild well, Walter agreed to indemnify only Hercules. Further, Axon’s reading conflicts with section 912. As noted above, that section makes the provisions of Article IX, along with sections 605, 606, and 805, the exclusive provisions “govern[ing] the allocation of risks and liabilities of said parties without regard to cause.” Section 501 is not on that list. Whatever work section 501 is doing, then, the parties explicitly agreed that it is not doing the work Axon thinks it is. 14See also In re Deepwater Horizon, 785 F.3d 1003, 1011 (5th Cir. 2015) (contracts to be interpreted to give effect to all terms without rendering any of them meaningless); Ewing Constr. Co. v. Amerisure Ins. Co., 420 S.W.3d 30, 37 (Tex. 2014) (“[I]nterpretations of contracts as a whole are favored so that none of the language in them is rendered surplusage.”); Hamilton, 652 So. 2d at 1330. 17 Case: 18-20453 Document: 00515318964 Page: 18 Date Filed: 02/21/2020 No. 18-20453 Second, we disagree with Axon that Hercules seeks damages for which Walter is required to directly indemnify Axon under Article IX of the Drilling Contract. Axon primarily asserts that three provisions of Article IX—sections 902, 905(b), and 907—give it a right to direct indemnity from Walter against Walter’s own claims. Each of those sections requires Walter to indemnify and release not only Hercules, but also its suppliers, contractors, and subcontractors. Section 902 covers losses for damage to the hole; section 905(b) covers losses caused directly or indirectly by pollution or contamination; and section 907 covers losses for damage to the mineral formation or strata as well as losses from oil, gas, or other minerals that had not been reduced to physical possession above the seabed. See supra notes 6–7, 9. Plaintiffs seek only the cost of regaining control of the well, plugging and abandoning the well, replacing the original platform, and removing the wreckage of the damaged platform. Axon contends these damages fall into categories covered by sections 902, 905(b), or 907, and since Axon asserts it qualifies as a supplier or subcontractor of Hercules, Walter owed Axon direct indemnity under the Drilling Contract between Walter and Hercules. 15 We disagree. Plaintiffs did not seek damages for damage to the hole itself or any downhole equipment or property. So, section 902 does not cover the damages. Similarly, Plaintiffs did not seek damages for the loss of any subsurface oil or gas, so section 907 is not implicated. Thus, neither section requires Hercules to directly indemnify Axon. Neither does section 905(b), on which Axon places particular emphasis. That section provides that Walter “shall be responsible for and hold harmless 15 We assume without deciding that Axon qualifies as either a supplier or subcontractor under the contract. Nothing in our decision precludes the district court reaching a determination on this issue should it be necessary to resolving the case on remand. 18 Case: 18-20453 Document: 00515318964 Page: 19 Date Filed: 02/21/2020 No. 18-20453 and indemnify” Hercules (and its suppliers, contractors, or subcontractors) for liability caused directly or indirectly by “all pollution or contamination . . . which may occur including . . . that which may result from fire, blowout, cratering, seepage or any other uncontrolled flow of oil, gas, water or other substance.” Axon asserts that the losses Plaintiffs seek are all included in this provision’s broad language. Axon’s argument goes like this. The materials ejected during the blowout qualify as pollutants or contaminants. The losses Plaintiffs claim—well control, plugging and abandoning the well, replacing the platform, and removing wreckage—were all caused, directly or indirectly, by the expulsion of those pollutants or contaminants during the blowout, or were caused by attempts to prevent further expulsion of those substances. Thus, Plaintiffs’ claimed damages are all covered by the broad language of section 905(b). We disagree with Axon’s interpretation. First, Axon’s argument is hard to square with the text of the provision itself. Take, for example, Plaintiffs’ damages for the costs of replacing the original platform and removing the wreckage of the old one. Those damages were caused by the fire that resulted from the blowout, not by contamination or pollution. Thus the plain meaning of section 905(b) counsels against Axon’s interpretation. See Breaux, 562 F.3d at 364 (words in contracts given plain meaning unless ambiguous); Restatement (Second) of Contracts § 202(3) (“Unless a different intention is manifested, . . . where language has a generally prevailing meaning, it is interpreted in accordance with that meaning.”). Axon does not argue that 905(b) is ambiguous, and we find no ambiguity. Second, Axon’s reading of section 905(b) would render other provisions in Article IX meaningless, an outcome courts strive to avoid. See Chembulk, 393 F.3d at 555. Under Axon’s reading, any possible expenses incurred by Walter as a result of the blowout would be covered by section 905(b) because 19 Case: 18-20453 Document: 00515318964 Page: 20 Date Filed: 02/21/2020 No. 18-20453 they would have been caused, directly or indirectly, by the escape of materials qualifying as contaminants or pollutants. For example, Axon’s reading would render part of section 906, which requires indemnity for the cost of controlling a wild well, superfluous—all costs of controlling a wild well would conceivably be costs incurred trying to prevent further escape of pollutants or contaminants. If section 905(b) was meant to be read that broadly, why include section 906 at all? Third, Axon’s reading again ignores the careful allocation of liability evidenced by Article IX. Hercules and Walter agreed that for some damages, Walter would indemnify only Hercules, while for others, Walter would also indemnify suppliers, contractors, and subcontractors. Reading section 905(b) as broadly as Axon does would make Hercules liable to contractors, subcontractors, and suppliers in essentially all instances, instead of only in those instances delineated in the particular sections of Article IX. For these reasons, we hold that the district court erred by granting summary judgment to Axon on the ground that Walter was required to directly indemnify Axon for the claims Walter itself brought against Axon. We make no determination as to which provision or provisions of Article IX apply to Plaintiffs’ claimed damages. We hold only that Axon’s interpretation of sections 501 and 905(b)—with which the district court apparently agreed—do not justify summary judgment in its favor. We therefore reverse the summary judgment in Axon’s favor on this ground. C. Walter’s Duty to Release and Indemnify Hercules under the Drilling Contract The third indemnity question we address is whether Walter was required by the contract to release and indemnify Hercules for the claims Axon brought against Hercules—resulting in “circular indemnity,” where liability is simply passed from Walter, to Axon, to Hercules, and then back to Walter. This 20 Case: 18-20453 Document: 00515318964 Page: 21 Date Filed: 02/21/2020 No. 18-20453 interpretation, which Axon urges, would essentially extinguish any liability from Axon to Walter. We conclude that the contract does not support this interpretation, and so we reverse the judgment in Axon’s favor on this issue. 1. The provisions of the Drilling Contract discussed in Part III(B) are also relevant here. The key section is 911(c), which establishes that the indemnity provisions of the contract “shall have no application to claims or causes of action asserted against [Walter] or [Hercules] which arise solely by reason of any agreement of indemnity with a person or entity not a party hereto.” The district court held that, notwithstanding this language, Walter was required to defend and indemnify Hercules against Axon’s claims because “Axon’s suit against Hercules is triggered by Underwriters’ suit against Axon. In turn, Axon’s suit against Hercules is based on contractual obligations between Hercules and Axon contained in an indemnity agreement.” 2. Walter argues on appeal that the district court’s conclusion ignored section 911(c) and destroyed the careful distribution of liability in Article IX. We agree. Section 911(c) exempts Walter from any obligation to indemnify Hercules for any claims brought by a third party against Hercules arising “solely by reason of any agreement of indemnity.” As the district court itself acknowledged, Axon’s claims against Hercules primarily arise out of the agreement between the two parties—the Seahawk Contract. See supra Part III(A). Although Axon’s complaint against Hercules also references claims for indemnity at law and common law contribution, creative pleading cannot disguise the fact that Axon’s claim for indemnity against Hercules arises out of the Seahawk Contract. 21 Case: 18-20453 Document: 00515318964 Page: 22 Date Filed: 02/21/2020 No. 18-20453 The Drilling Contract’s provisions—specifically, section 501—do not expressly obligate Walter to indemnify Hercules for purely contractual claims brought by third parties against Hercules. “[E]xpress notice is required where a party seeks to shift his contractual liability to indemnify a third party.” Corbitt, 654 F.2d at 333. 16 No provision in the Drilling Contract provides such notice. And section 911(c) expressly prohibits that scenario. In Corbitt, we stated that indemnity agreements “should not be read to impose liability for those losses or liabilities which are neither expressly within its terms nor of such a character that it can be reasonably inferred that the parties intended to include them within the indemnity coverage.” Id. Because the contract at issue there provided for indemnity “against all claims, suits, liabilities and expenses on account of personal injury . . . arising out of or in connection with performance of this Order,” but did not “expressly provide” for indemnification against claims brought by third parties, we held that Sladco (analogous here to Walter) was not bound to indemnify Shell (analogous to Hercules) for claims arising out of “Shell’s own separate contractual obligations.” Id. So too here. Section 501 says nothing about Walter being required to indemnify Hercules for claims brought by third parties against Hercules that arise out of a contract. In fact, section 501 says nothing about indemnity at all. Adopting Axon’s reading of section 501 would impose liability on Walter for Hercules’ liability to Axon, a third party, and it would do so without any express acceptance of that responsibility by Walter. That interpretation would contravene the rule set forth in Corbitt. To read section 501 as broadly as Axon and Hercules urge would also destroy the distinction carefully drawn between situations where Walter is 16 See also MEMC Elec. Materials, 241 S.W.3d at 71; Liem, 569 So. 2d at 608. 22 Case: 18-20453 Document: 00515318964 Page: 23 Date Filed: 02/21/2020 No. 18-20453 required to indemnify only Hercules and situations where Walter must also indemnify Hercules’ suppliers, contractors, or subcontrators. As previously discussed, section 906 requires Walter to indemnify Hercules—and only Hercules—for costs associated with the removal of wreckage and debris and for the costs to control any wild wells. Those are precisely the sorts of damages claimed by Plaintiffs here. To read section 501 as requiring Walter to indemnify Hercules for Axon’s claims would be to ignore the limitation imposed by section 906. We decline to do so. See Chembulk, 393 F.3d at 555. A limitation that can be avoided simply by having a third party sue Hercules is no limitation at all. Axon’s and Hercules’ arguments to the contrary are unavailing. They assert that section 501 expressly provides that all liabilities not specifically assumed by Hercules are to be borne by Walter. Since Hercules did not specifically assume the risk of removing debris or controlling a wild well, the argument goes, Walter must ultimately bear the costs. But that argument ignores section 911(c), in which Hercules did specifically assume liabilities caused by third-party claims arising out of agreements of indemnity between Hercules and those third parties. Hercules also argues that section 906 demonstrates that Walter expressly assumed any costs to remove wreck or debris or the costs of controlling any wild well. But, as with the previous argument, this argument also fails to account for section 911(c), under which, as just discussed, Hercules assumed liabilities caused by third-party claims arising out of contract. If Hercules brought its own claim for the costs of removing debris or controlling a wild well, those costs may well be covered by section 906. But to read section 23 Case: 18-20453 Document: 00515318964 Page: 24 Date Filed: 02/21/2020 No. 18-20453 906 as requiring indemnification for third-party claims is to ignore section 911(c). 17 Because section 911(c) specifically forecloses the possibility that Walter is required to indemnify Hercules for contractual obligations to third parties, and nothing else in the contract expressly provides otherwise, we hold that Walter is not obligated to indemnify Hercules for the claims Axon brings against it. We therefore conclude that the district court’s contrary conclusion was error and reverse the summary judgment in Hercules’ favor on this issue.