Macondo comes to court

In the run up to the Macondo trial, which was to begin in Louisiana late last month, the federal judge hearing the case ruled contracts between well operator BP and its contractors – including Transocean and Halliburton – indemnified the contractors from compensatory damages but not punitive damages or civil penalties. Jennifer Pallanich examines some of the issues. 

Barring settlement between the parties of ‘In re: Oil Spill by the Oil RigDeepwater Horizon in the Gulf of Mexico', the trial's first phase, focused on identifying causes of the accident and assigning responsibility for the disaster, was to kick off in Judge Carl J Barbier's New Orleans courtroom on 27 February, shortly after this issue went to press. It had been speculated that phase one, or the incident phase, would last several months, unless agreement was reached on settlement discussions that were reportedly under way in mid-February.

Phase two, or the source control & quantification of discharge phase, will focus on the amount of oil that was released and where all that oil went; phase three, or the containment phase, will center on the clean up response.

A month and a day before phase one was to open, Barbier, ruling for the US District Court, Eastern District of Louisiana, said BP must indemnify Transocean for all compensatory damages 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 [Oil Pollution Act] OPA and unseaworthiness), negligence, or gross negligence'. The court did not rule whether the drilling contractor will be held ‘strictly liable, negligent, or grossly negligent'.

The ruling leaves BP responsible for pollution that occurred below the surface after the April 2010 blowout.

BP had earlier filed a counterclaim against Transocean seeking $40 billion in damages.

Compensation claims have been brought by fishermen, hotel operators and others who had their livelihoods affected by the Macondo spill. As of the end of January 2012, BP had paid over $7.8 billion in claims, advances and other payments to people, businesses and governments. BP set aside $20 billion in its Gulf Coast restoration fund. BP has said it believes Barbier's recent Halliburton and Transocean decisions ‘should put an end to the attempts . . . to avoid their obligations.'

Beyond compensatory claims are the issues of punitive damages and civil penalties. ‘To require a party, without recompense, to shoulder the burden of egregious conduct by another and hence permit that other to avoid punitive damage liability would make a mockery of the very concept,' Barbier cited from a previous ruling. Saying he agreed with that reasoning, the court said it would not permit the contractual indemnity to extend to any punitive damages that may be assessed against Transocean.

Barbier also excluded civil penalties under the Clean Water Act or OPA from the indemnity protection BP must provide Transocean. Again, the court didn't state whether the drilling contractor would be liable for such damages or penalties.

Penalties for any Clean Water Act violations that are ruled to result from ‘willful misconduct' could run to $4300/bbl of oil spilled. The April 2010 disaster is thought to have released about 5 million barrels of oil into the Gulf of Mexico – or about $21.5 billion in CWA penalty fines at that level of spillage – although the second phase of the trial is set to determine the amount of oil spilled.

Also in the order filed on 26 January, the court said it would not rule yet on BP's arguments that Transocean breached the drilling contract and said BP's duty to defend Transocean does not cover expenses Transocean has spent or will spend proving its right to indemnity. Further, Barbier ruled BP was not obligated to fund Transocean's defense against third party claims.

BP said the ruling makes it ‘clear that contractors will be held accountable for their actions under the law. While all official investigations have concluded that Transocean played a causal role in the accident, the contractor has long contended it is fully indemnified by BP for the liabilities resulting from the oil spill. The court rejected this view.'

Transocean said the ruling ‘confirms that BP is responsible for all economic damages caused by the oil that leaked from its Macondo well and discredits BP's ongoing attempts to evade both its contractual and financial obligations.'

Less than a week after releasing the Transocean ruling, Barbier made similar decisions regarding BP's indemnification of Halliburton.

The ruling states BP must indemnify Halliburton for third-party compensatory claims that ‘arise from pollution or contamination that did not originate from the property or equipment of Halliburton located above the surface of the land or water, even if Halliburton's gross negligence caused the pollution'. Barbier did not state whether Halliburton's conduct ‘amounted to gross negligence or otherwise'.

As with the Transocean case, BP is not liable for any punitive damages or civil penalties assessed against Halliburton.

BP said the indemnity rulings regarding Transocean and Halliburton are a ‘strong signal' that contractors will be held accountable for their actions. ‘All official investigations have concluded that Halliburton played a causal role in the accident, and following this ruling, Halliburton is, at a minimum, responsible for any punitive damages as well as civil penalties to the extent that they may apply under the Clean Water Act,' BP said after the Halliburton order was made public.

In a statement after the ruling, the service company said: ‘Halliburton agreed with the ruling to the extent that it requires BP to honor its contractual indemnity obligations.'

A different issue arose in the Halliburton order: fraud. BP has alleged Halliburton made fraudulent statements and fraudulently concealed information about the cement tests and that based on the fraudulent information Halliburton presented to BP, BP allowed Halliburton to pour unstable cement slurry that led to the blowout. Halliburton said BP's allegations are ‘merely breach of contract claims cloaked as fraud'. BP said the indemnity should not cover fraud, and the court agreed that fraud – because it ‘necessarily includes intentional wrongdoing' – could void an indemnity clause. Barbier did not rule on this issue.

Two weeks before the trial was to begin, the court released all claims against Weatherford, which supplied the float collar used in the production string. In his ruling on Weatherford's motion for summary judgment, Barbier wrote, ‘there is no evidence that the Weatherford float collar used in the production string of the Macondo well was defective and/or that any action or inaction by Weatherford caused or contributed to the cause of the oil spill'.

BP had in June 2011 indemnified Weatherford from any potential claims in a settlement deal that saw Weatherford pay BP $75 million.

BP has also won a preliminary request to prevent evidence of previous accidents from being introduced at the trial to determine fault in the Deepwater Horizon disaster.

Last year, BP struck agreements with partners in the Mississippi Canyon block 252 lease which holds Macondo. In the deal with Mitsui, announced in May 2011, Mitsui, which holds 10% of the lease, agreed to pay BP $1.06 billion to settle claims between the companies in the accident. In the deal with Anadarko, announced in October 2011, Anadarko agreed to pay BP $4 billion to settle claims. Anadarko holds 25% in the lease. OE

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