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Texas Choice of Law in Oil and Gas Contracts

In general, Texas courts will enforce contracts — including oil and gas contracts — as those contracts are written unless the contract violates statutory law or public policy. These principles apply equally to choice of law provisions that may be inserted into oil and gas contracts. A recent case from the Court of Appeals from the Fort Worth district is a good example. In North American Tubular Service, LLC v. BOPCO, L.P., 2018 WL 4140635 (Tex.Civ.App.- Fort Worth, 2018) the Court of Appeals rejected the argument that New Mexico law applied to indemnity provisions in an oilfield master services contract; the parties contracted for Texas law to apply to any disputes and there was no public policy or other reason to reject that contracting choice.

Texas Oil and Gas Contracts: Choice of Law Principles

 In today’s complex economy and given that oil and gas exploration and production is a nation-wide industry, choice of law issues are common. Because each state has its own set of laws, depending on the circumstances of the lawsuit, different state laws might apply to a given circumstance and when a case is filed, courts must choose which state laws apply. Recognizing which law applies can be important, and so it is common for legal practitioners to insert choice of law provisions into contracts as standard “boilerplate.”

In general, choice of law analysis revolves around questions of whether a given state has a “significant” or “substantial” relationship to the transaction or incident and whether one state has a “materially greater interest” in having its laws applied than another state. Note that choice of law principles can apply to each aspect of a case separately.

In this case, both North American Tubular Services (“NATS”) and BOPCO were Texas corporations. However, the oilfield in question was in New Mexico. In 2016, an accident at the oilfield occurred that resulted in a fatal injury to an oilfield worker who lived in New Mexico. A wrongful death case was filed in New Mexico against BOPCO and others. The master service contract between NATS and BOPCO stated that Texas law would apply to the contract. Specifically at issue in the case was the indemnity provision in the master service contract where the operator of the oilfield — BOPCO — required its subcontractor — NATS — to indemnify and hold harmless the operator — BOPCO — for any injury that results from the operation of the field. In 2017 BOPCO filed suit here in Texas against NATS seeking indemnity from NATS for the wrongful death case filed in New Mexico.

NATS defended by claiming that the indemnity provision was unenforceable. Under both Texas and New Mexico law, in general, such indemnity agreements are not allowed because these clauses in theory reduce the incentives of an oilfield operator to operate safely. However, under Texas law there is an important difference: the indemnity provisions are allowed if the indemnification is furnished by liability insurance coverage purchased by the subcontractor — NATS. This is considered a “safe harbor.” New Mexico law does not have the “safe harbor” exception.

NATS argued that New Mexico law applied and that the indemnity provision was void. BOPCO argued that Texas law applied because the indemnity obligation complied with a “safe harbor” exception and that there was insurance as evidenced by a certificate of insurance that NATS had sent to BOPCO. On summary judgment filings, the trial court held the Texas law applied and ruled in favor of BOPCO. The Court of Appeals affirmed.

Application of Choice of Law Principles

As noted, the Texas Court of Appeals upheld the choice of Texas law in the master services agreement. The Court began by noting that courts “generally honor contracting parties’ bargained-for and expressed choice of which state’s laws govern their performance under the contract.” However, the Court acknowledged that the right to choose which law should apply is “not unlimited.” The parties to a contract cannot choose the law of a state which has no relation whatsoever to them or their agreement.

In this case, the parties chose Texas law which was a state that had some relationship to the parties and to the contract. In evaluating choice of law principals, Texas courts rely on principles set out in the Restatement (Second) of Conflict of Laws. Under those principles, three issue are evaluated:

  • Is use of the chosen law –here Texas — contrary to a “fundamental policy” of the competing state law, i.e. New Mexico?
  • Does the competing state law — New Mexico — a “materially greater interest” than the chosen law for the issue in question?
  • Which state has the “most significant relationship”?

Unless all three questions were answered in favor of New Mexico law, the Texas choice of law provision would be upheld. The Court of Appeals focused on the third question and resolved it in favor of upholding the choice of Texas law. When interpreting contractual obligations, there are five factors that are considered in determining which state has the “most significant relationship”: the place of contracting, the place of negotiation of the contract, the place of performance, the location of the subject matter of the contract, and the domicile and place of business of the parties. After a lengthy discussion, the Court concluded that, taken together, the factors weighed in favor of Texas having the most significant relationship to the contract.

Note that a different result might occur if the focus was on the negligence and the accident (rather than the contract). Under that focus, a higher significance will likely be given to the location of the accident and the citizenship of the fatally injury worker.