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Texas Supreme Court decides Superior Snubbing - upholds effect of indemnity provisions in Master Service Agreement

By Andrew Wooley:

Supreme Court of Texas decides Superior Snubbing: In a case of substantial importance to the energy industry, the Supreme Court of Texas held that an oilfield service contractor sued by an injured employee of another contractor is entitled to enforce the indemnity provision in a Master Service Agreement between the operator and the contractor whose employee was injured.

The Texas Workers Compensation Act was extensively revised and codified in 1989. The predecessor provision to § 417.004 of the Texas Labor Code stated that a subscribing employer (i.e., an employer possessing workers’ compensation coverage) could not be liable to indemnify a third party against a personal injury claim by one of its employees “in the absence of a written agreement expressly assuming such liability, executed by the subscriber prior to such injury or death.” As amended in 1989, § 417.004 now provides that a subscribing employer is not liable to indemnify a third party against a personal injury claim by one of its employees “unless the employer executed, before the injury or death occurred, a written agreement with the third party to assume the liability.”

In Energy Service Co. v. Superior Snubbing Services, Inc., the Supreme Court of Texas considered whether, “under section 417.004 of the Texas Labor Code, . . . a subscribing employer’s written agreement to indemnify a person and that person’s contractors [may] be enforced by one of those contractors even though the agreement was not executed by that contractor?”  The majority held that the answer was yes, notwithstanding the current wording in the statute that an employer with workers’ compensation coverage is not liable to indemnify a third party “unless the employer executed . . . a written agreement with the third party to assume the liability.” (emphasis added).

Energy Service Company (“Energy”) and Superior Snubbing Services, Inc. (“Superior”) were both service contractors on a well site operated by Mitchell Energy Corporation (“Mitchell”). One of Superior’s employees was injured on the job. Because Superior was a workers compensation subscriber, Superior’s employee could not sue Superior for his injuries. He did sue Energy, however, which demanded indemnity from Superior for the claim against it by Superior’s employee. Energy and Superior had each executed a (separate) Master Service Agreement (“MSA”) with Mitchell, containing an identical indemnification provision, but no agreement had been executed between Energy and Superior for either to indemnify the other.  Superior acknowledged that the MSA between Superior and Mitchell would have been sufficient to entitle Energy to indemnity from Superior under the pre-1989 version of § 417.004, but asserted that the post-1989 version of § 417.004 barred Energy’s indemnity claim because Superior had not executed a written agreement with Energy to assume liability for claims against Energy by employees of Superior.

A majority of the justices decided that by adopting new wording for § 417.004 in 1989, the Texas Legislature did not intend to make any substantive change in existing law, and that an agreement in a MSA between an operator and a contractor for the contractor to indemnify the operator’s contractors as well as the operator intends for all of the operator’s other contractors to be third-party beneficiaries of the indemnity provision. Hence, a contractor’s claim for indemnity from another contractor whose employee has sued the contractor demanding indemnity is not barred by § 417.004 if the contractor from whom indemnity is sought executed a MSA with the operator containing an agreement to indemnify the operator and its contractors.

Four justices dissented from the court’s holding, arguing that the plain language of § 417.004, as amended in 1989, bars indemnification of one contractor for claims by another contractor’s employees in the absence of a written agreement directly between the contractor seeking indemnity and the contractor from whom indemnity is sought. The dissent also asserted that the court’s holding will undermine the goal of immunizing subscribing employers from common law damage claims and will frustrate the objective of the 1989 amendments to the workers compensation statutes, which, according to the dissent, was to reduce costs to subscribing employers.

The majority decision cited favorably the arguments presented by the Texas Oil and Gas Association (TXOGA) in its amicus brief. Liskow & Lewis represented TXOGA in its amicus filing. 

The majority and dissenting opinions in Energy Service Co. v. Superior Snubbing Services, Inc., on the web site for the Supreme Court of Texas at http://www.supreme.courts.state.tx.us/historical/082407.asp.

Full post as published by The Energy Law Blog on August 27, 2007 (boomark / email).