The Deepwater Horizon oil spill that flooded the Gulf of Mexico with nearly 5 million barrels of crude oil happened nearly two years ago. But the companies involved, including BP, Transocean and Halliburton, continue to fight it out in the courts as to whole will have to pay the billions of dollars in clean-up and recovery costs.
Indemnification agreements between these companies are, not surprisingly, playing a big role in the division of costs. Recently , a federal court in New Orleans ruled that BP, who was leasing the rig from owner company Transocean, will have to indemnify Transocean for compensatory damages related to the spill. Then, that same court also found that BP will have to indemnify Halliburton for some of the $40 billion in direct damage costs originally levied against Halliburton. Neither of these decisions, however, spoke to the apportionment of punitive damages that might be awarded against the various companies involved. Nor do the decisions affect any civil penalties that might be charged to the companies under the Clean Water Act.
As this extremely complex—and high stakes—litigation demonstrates, indemnification clauses are a key part of construction contracts between companies. These clauses attempt to anticipate problems that could arise during or post-construction and assign responsibility for them before they ever arise. In other words, indemnification clauses try to determine from the outset of a contractual relationship who is going to pay for which damages in the unfortunate event that they occur. In this sense, indemnification clauses are all about deciding which parties to the contract are going to shoulder the risk of something going wrong with the construction project. Often, they involve fairly specific lists of the type of harm or damage each party agrees to take responsibility for.
Of course—as the Deepwater Horizon litigation demonstrates—when harm does occur, the indemnification clause doesn’t always completely settle the issue. Especially when billions of dollars are at stake, there is often disagreement over interpretation of the terms of these agreements. For example, with Deepwater Horizon, the judge has drawn a distinction between oil spilled above the ocean’s surface and oil spilled below the water’s surface.
But putting aside the complexity that sometimes arises in the interpretation of indemnification clauses, they are a critical component of any construction agreement. When more than one company is at play, it’s wise to clearly define who is responsible for what undesirable outcomes.