NEW ORLEANS (CN) – BP must indemnify Transocean for third-parties’ compensatory damage claims from the Deepwater Horizon oil spill, even if Transocean is found guilty of gross negligence, but Transocean is still on the hook for what could be billions of dollars in punitive fines, according to the federal judge overseeing the consolidated litigation.
U.S. District Judge Carl Barbier ruled last week on the insurance contract between Transocean, as owner of the Deepwater Horizon drilling rig, and BP, as operator of the rig.
The April 20, 2010 explosion and fired sank the rig 50 miles off the coast of Louisiana, killing 11 and setting off the worst oil spill in U.S. history.
Barbier’s 30-page order puts an end to a longstanding dispute between Transocean and BP over the terms of the insurance policy they shared for the rig.
Barbier found that the “reciprocal nature” of the indemnity clauses in the insurance policy “arguably created an incentive for Transocean to avoid grossly negligent conduct, or at least did not encourage Transocean to act in a grossly negligent manner,” and weaken the argument that the indemnity should be invalidated.
It is too soon to determine either party’s exact liability. The first trial on the matter is slated for Feb. 27.
Barbier’s order states: “BP is required to indemnify Transocean for compensatory damages asserted by third parties against Transocean and related to pollution that did not originate on or above the surface of the water, even if the claim is the result of Transocean’s strict liability (including OPA and unseaworthiness), negligence or gross negligence.” (29) (Parentheses in original; OPA stands for the Oil Pollution Act.)
The order states that Transocean is responsible for any resulting punitive damages and attorney fees.
Predecessors to BP and Transocean entered into a drilling contract for the Deepwater Horizon rig in 1998. Article 24.2 of the contract specifically limited Transocean’s liability to pollution on the water’s surface.
“The court interprets Article 24.2’s phrase, ‘without regard for the negligence of any parties and specifically without regard for whether the pollution or contamination is caused in whole or in part by the negligence or fault of [Transocean],’ as merely emphasizing that BP assumed the risk of subsurface pollution, even if said pollution was caused by Transocean’s negligent conduct,” Barbier found. “However, this language does not reflect an intent to ‘specifically limit’ Article 25.1’s application, and thus is not interpreted as excluding gross negligence, strict liability, or other causes or damages listed in Article 25.1. This interpretation is consistent with Article 24.2’s requirement that BP will assume ‘any loss, damage, expense, claim, fine, penalty, demand, or liability for pollution or contamination … not assumed by [Transocean] in Article 24.1 above. (Emphasis added.)” (Brackets, ellipses and parentheses in ruling.)
Barbier’s order adds: “Article 25.1 expressly requires indemnification for liabilities caused by the indemnitee’s gross negligence: ‘… the indemnifying party shall … indemnify … the indemnified party or parties from and against any and all claims … without regard to the cause or causes thereof, including … the negligence of … the indemnified party, whether such negligence be sole, joint or … gross …'” (Ellipses as in complaint.)
The terms of the contract, however, should be subject to public policy, Barbier found.
“As to the issue of whether public policy prohibits a party from being indemnified for its own gross negligence, the parties have not cited to, and the court has not found, a controlling case,” the order states.
Therefore, “This issue creates tension between two policies: freedom of contract, which weighs in favor or enforcing the indemnity, and a reluctance to encourage grossly negligent behavior, which weighs against enforcing the indemnity. The general rule is that competent persons have the utmost liberty of contracting, and therefore agreements voluntarily and fairly made are upheld. Although a contract can be invalidated on the grounds that it violates public policy, courts are instructed to apply this principal with caution and only in cases plainly within the reasons on which that doctrine rests, because the phrase ‘public policy’ can be vague and variable.
“As to the argument that contractual indemnity for gross negligence contravenes public policy, it is significant that the drilling contract allocated risk to both Transocean and BP, not just BP. For example, Transocean admits that it bears liability for the deaths and injuries to its crew members and the loss of equipment (namely, the Deepwater Horizon) under Articles 21.1 and 22.2. With regards to pollution, Transocean assumed responsibility for pollution originating at or above the water’s surface in Article 24.1. Given these risk allocations, a grossly negligent act by Transocean could result in liability to Transocean as easily as it could have resulted in liability to BP. In other words, the reciprocal nature of these indemnity clauses arguably created an incentive for Transocean to avoid grossly negligent conduct, or at least did not encourage Transocean to act in a grossly negligent manner. These considerations weaken the argument that the indemnity should be invalidated.” (Citations omitted.)
Barbier found that while BP would be responsible for adhering to the contract it made with Transocean, penalties for pollution such as Clean Water Act fines are intended to punish a party responsible for pollution. As such, “Transocean’s right to contractual indemnity does not extend to punitive damages.”
The base fine applicable under the Clean Water Act is $1,100 per barrel. The Deepwater Horizon explosion dumped an estimated 4.9 million barrels of oil into the Gulf of Mexico. So Transocean alone could be subject to a starting fine of $5.5 billion.
During a status conference in December, Department of Justice Senior Attorney Steven O’Rourke told Barbier that the Clean Water Act is simple: “any person who is the owner, operator, or person in charge of any vessel … or offshore facility from which oil is discharged will face Clean Water Act fines.”
O’Rourke said BP, Transocean and Anadarko, as co-owner of the well, will each be subject to separate Clean Water Act fines. If the court finds gross negligence caused the spill, the fine per barrel could go as high as $4,300, or $21.5 billion per company.
The Associated Press reports that BP is in settlement negotiations, hoping to settle before the first trial begins Feb. 27.