Opinion ID: 4561254
Heading Depth: 3
Heading Rank: 2

Heading: Rig Failures and EQT’s Early Termination

Text: In 2015, both Rig 17 and Rig 18 began drilling. Subsequently, there were four key dropped block incidents on Rig 18.5 Three dropped blocks occurred on September 25, 4 These three conditions permit EQT to terminate early per Exhibit A, section 7.3 without “pay[ing] an early termination amount” if any one of the conditions can be satisfied, for example, the second condition is if: “(b) [Orion] suffers involuntary or voluntary bankruptcy, is insolvent or subject to receivership or similar insolvency proceedings.” JA355, 390; see also Orion Drilling, 2019 WL 4273861, at . 5 “A dropped block is an uncontrolled descent of approximately 50,000 pounds of the drill’s top drive, traveling block, and associated equipment in the mast[.]” Orion Drilling, 2019 WL 4273861, at  (citation and quotation marks omitted); see also id. at –6 (referencing evidence from trial detailing not only the “peril” of such incidents, which “raise significant safety concerns for the lives and well-being of any contractors or employees working on the drilling platform below,” but also the “rarity” of even a single incident). In addition to the dropped block incidents, there were also other safety concerns regarding both rigs—documented by EQT via letters to Orion—that EQT believed were “directly related to the [Integrated Drive Systems (“IDS”)] or [were] premature equipment failures of critical components necessary to efficiently and safely execute [the] drilling program.” JA3355; see also Orion Drilling, 2019 WL 4273861, at  (noting that each rig was equipped with the IDS control system); Appellee Br. 7 (explaining that 4 2015 (“Incident One”), October 10, 2015 (“Incident Two”), and June 7, 2016 (“Incident Three”). The fourth key dropped block occurred after EQT terminated the Drilling Contracts. After each incident, there was correspondence between the two companies. See generally Orion Drilling, 2019 WL 4273861, at –9 (providing a more detailed recount of the parties’ communication). Of particular relevance are the following three interactions: First, after Incident One, EQT sent a notice of default letter to Orion referencing section 6.5(1)(F) of the Rig 18 drilling contract, as well as the applicable cure period, and stressing that Orion needed to cure the problem “to EQT’s satisfaction,” JA3343. Second, after Incident Two, EQT sent Orion a letter noting in part that due to Orion’s failure to timely cure the block malfunction pursuant to the first notice of default—as evidenced by the occurrence of Incident Two—Orion was in default of the Rig 18 Drilling Contract per section 6.5 of the drilling contract. 6 Third, after Incident Three, EQT sent Orion written notice that Rig 18 was to be shut down for “environmental, health and safety protection and due to material unsafe conditions,” JA3396, after a “third party contractor on the drilling floor when the Rig such systems “control the operation—indeed, every function—of drilling rigs, including ensuring that the rigs’ blocks travel at a safe speed”). 6 After Incident Two, it was determined that an IDS “programming error had been entered into the control system” and that this error was “likely the cause” of both Incident One and Incident Two. Orion Drilling, 2019 WL 4273861, at . 5 failed was nearly killed when the blocks landed inches away,” id., and noting that Orion was in default per subsections 6.5(1)(F) and 6.5(1)(H) of the Rig 18 drilling contract. 7 The parties engaged in extensive communication regarding rig issues after each incident in an attempt to resolve these problems. See, e.g., Orion Drilling, 2019 WL 4273861, at –9 (recounting in greater detail the parties’ interactions). Relevant to this appeal, and in addition to EQT’s three letters just discussed, is a letter agreement the parties’ reached on June 16, 2016 (herein the “Letter Agreement”), after Incident Three occurred and EQT sent a shutdown letter. In the Letter Agreement, the parties agreed to various conditions which “document[ed] the steps to be taken by Orion to address EQT’s stated concerns for the safety of its employees and contractors.” Id. at .8 One of the conditions was that an independent safety engineering firm, Aberdeen Drilling Consultants, Ltd. (“ADC”), would conduct an investigation. After ADC investigated Rig 18 and “identified 11 7 In this letter, EQT also “request[ed] that Orion perform a formal investigation and root cause analysis of this latest block dropping failure,” noting that the “shut down and suspension of Rig [18] operations [would] continue until Orion” met certain conditions. JA3396. 8 Additional agreements included the extension of the cure period specified in subsections 6.5(1)(F) and 6.5(1)(H) of the Rig 18 drilling contract to “July 9, 2016, or seven days after the written assessment described” later in the Letter Agreement was delivered, and the completion, by Orion, of any “additional repairs or preventative measures” that Aberdeen Drilling Consultants, Ltd. (“ADC”) deems necessary for the “safe operation of” Rig 18, subject to the “satisfaction of EQT and ADC prior to the expiration of the extended cure period[.]” JA3402. The Letter Agreement also stated that: “Except as set forth herein, all terms and conditions of the Contract and any prior Amendments remain in force and in effect between the parties.” JA3403. Orion refers to this Letter Agreement as the “Fourth Amendment to the Rig 18 Drilling Contract.” Appellant Br. 9. 6 nonconformance issues and made several key conclusions that raised serious concerns with the safety of the hardware and software of the IDS control system,” id. at , EQT proceeded to send four additional crucial letters to Orion. See id. (noting that ADC’s report indicated that “even if [Orion did] everything” that ADC prescribed, there was still uncertainty regarding whether “the rig could operate safely” (alteration in the original) (citation and quotation marks omitted)). First, EQT sent a letter to Orion shutting down Rig 17—as that rig relied on the same IDS control system as Rig 18. Next, EQT sent Orion a notice of default and breach letter for Rig 17 pursuant to both section 6.5 and Exhibit A, section 7.3 of the Rig 17 drilling contract. See also id. at  (detailing how this “notice identified 16 serious safety incidents on Rig 17, including erratic brake operation and at least one instance where the brakes did not engage, resulting in a dropped block.”). Then, EQT sent Orion a termination letter for Rig 18. 9 And finally, EQT sent Orion a termination letter for Rig 17. 10