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Quote of the Day - You can't kiss an oil well. - Joseph J. DioGuardi

Court Upholds Contract That Limits One Party's Liability

Oil well drilling can be a dangerous job.  As a conseqence of the danger, several types of contracts exist that allocate the risk differently, and allocate it between the parties differently.  The adage "the big print giveth and the small print taketh away" never had such a close examination by a court. 

This case involves a blow-out, contamination and a death.  The employee's death is the subject of an entirely separate suit, however.  We're just going to talk about the allocation of risk between the two companies. TEG Oil and Gas (the owner/operator) and CAZA Drilling (the contractor/driller) signed what's known in the industry as a Daywork Drilling Contract.  There are other types of contracts, too.

According to the Court's opinion, "Besides the standard 'Daywork Drilling' contract there are standard 'Turnkey' contracts and 'Footage' contracts, and that operators sometimes prepare their own agreements. Under a Turnkey contract, the contractor hires a geologist and formulates a drilling plan, but under a Daywork Drilling contract, 'the Operator is in control' and '[t]he Contractor receives all of its direction from the Operator.'  [CAZA's area manager] stated that standard provisions are negotiable and that if a company wished to place responsibility for damage caused to the geologic structure on CAZA, 'CAZA [would] allow such a change in exchange for a dramatically increased drilling cost to the Operator'."

So there you have it. 

Let's look at the conditions in the Daywork Drilling contract, and perhaps learn why the court was so willing to look past Civil Code section 1668, which generally prohibits a party from "exempt[ing] any one from responsibility for his own fraud, or willful injury to" another.  The driller pointed to one provision:

"[e]xcept for such obligations and liabilities specifically assumed by [CAZA], [TEG] shall be solely responsible and assume liability for all consequences of operations by both parties."   The court hung its hat on that paragraph, in my mind in large part because there were a number of other paragraphs that allocated other specific risks differently between the parties.  As an example, "the contractor (CAZA) "assume[s] liability" for "damage to or destruction of Contractor's surface equipment."

Whether you're drilling oil wells or dealing with other risky operations, it pays to read the contract,, and perhaps even more so to have a lawyer look at it. 

The opinion is much more complicated than I've laid out here, and if you're looking for specifics, you should read the opinion

Posted by J. Craig Williams on 8/31/2006 at 00:44 Comments (0)


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