Bloomberg News

Transocean Asks Judge to Force BP to Indemnify Spill Damages

December 19, 2011

(Updates with BP lawyer’s remarks in fifth paragraph.)

Dec. 16 (Bloomberg) -- Transocean Ltd.’s drilling contract with BP Plc promised indemnification for damages from oil spilled below the surface of the Gulf of Mexico and should be enforced for claims over the Deepwater Horizon accident, the rig owner told a judge.

Claiming the drilling contractor shares blame for the disaster, London-based BP sued Transocean in April to recover part of more than $40 billion in damages and costs from the 2010 spill. Transocean accused BP of breaching their contract by failing to defend the rig owner and hold it harmless against claims.

“What Transocean seeks is to hold BP to its promise,” John M. Elsley, a lawyer for Transocean, told U.S. District Judge Carl Barbier at a hearing in New Orleans federal court today. “BP does not want that to happen.”

BP has argued that Transocean’s conduct voided the agreement. Transocean, based in Vernier, Switzerland, denies willful misconduct and claims the indemnity provision requires BP to pay virtually all damages and cleanup costs because it was a subsurface spill.

“The court must rule Transocean cannot be indemnified if there is gross negligence,” Andrew Langan, a lawyer for BP, told the judge today. “The drilling contract does not, cannot provide for indemnification from damages,” Langan said. “We think maritime law prohibits indemnification for gross negligence, regardless.”

Ruling Postponed

Barbier didn’t rule on the issue today and said he would take it “under advisement.”

The April 2010 Macondo well blowout and the explosion that followed killed 11 workers and set off the worst offshore oil spill in U.S. history. The sinking of Transocean’s Deepwater Horizon drilling rig and spill led to hundreds of lawsuits against BP and its partners and contractors.

The defendants in the cases also include Cameron International Corp., which made the blow-out prevention equipment used for the Macondo well, and Halliburton Co., which provided cementing services.

Cameron also sought indemnity, citing its contract with Transocean. Cameron settled with BP today, paying $250 million to the London-based company. BP agreed to indemnify Cameron for claims other than fines, penalties or punitive damages.

The lawsuits for injuries, economic and environmental loss are combined before Barbier in New Orleans. Barbier will determine liability and apportion fault at a nonjury trial scheduled to start in February.

‘Pollution Obligations’

Transocean said in court papers last month that BP promised to indemnify it “for any and all pollution obligations” except those originating on or above the surface of the water. This included any “loss, damage, expense, claim, fine, penalty, demand or liability,” Transocean said, citing the contract.

The drilling contract required Transocean to defend and pay for injury or death of the rig owner’s employees, Transocean said. “Transocean also accepted the liability and agreed to indemnify BP for loss or damage to the drilling unit,” the company said.

BP is “discharged from any duty to indemnify if Transocean’s conduct in causing the Deepwater Horizon accident materially increased risks” to the company or breached the terms of the drilling contract, BP lawyer Don Haycraft said in a Dec. 7 court filing.

‘Against Public Policy’

Transocean can’t claim indemnification from punitive damages, or fines or penalties under the federal Clean Water Act, BP said in court papers. Federal law “prohibits” such indemnification, BP said in the Dec. 7 filing.

“Any attempt to seek indemnity for fines and penalties” would be “against public policy,” Langan said at today’s hearing.

The indemnity provision doesn’t cover liabilities that resulted from willful misconduct, the U.S. Justice Department said in court papers last week.

“We’ve sued both parties in this contract,” Steven O’Rourke, a government lawyer, told the judge today, saying the U.S. opposed indemnity for Transocean against any future fines and civil penalties the rig owner may incur for pollution under the Clean Water Act.

“The parties being punished should be the parties being punished,” O’Rourke said. “They shouldn’t be able to pawn that off.”

Gross Negligence

Transocean said in court papers Dec. 12 that “the drilling contract does not provide for indemnity in the event of intentional or willful misconduct in excess of gross negligence.” Transocean is indemnified for negligence, even gross negligence, the company said.

Barbier should determine that the contract grants indemnification as a matter of public policy, Elsley, Transocean’s lawyer, argued today. “Unless the contract is enforced, every time somebody alleges gross negligence” similar agreements in the offshore oil and gas industry “will fall apart,” he said.’’

The company “remains liable,” Elsley said. The federal Oil Pollution Act makes clear the responsibility for pollution is allocated “according to contractual obligations,” he said.

Transocean’s lawyer asked the judge to enforce the drilling contract with BP, which would indemnify Transocean against claims for pollution “below the waterline.” Transocean is liable for pollution “above the waterline,” he said.

Insurance Ruling

Barbier “recognized” this in his ruling Nov. 15 in an insurance dispute, Elsley said today.

The Deepwater Horizon incident was a subsurface release, Barbier said in a decision last month, concluding that BP couldn’t use Transocean’s insurance coverage to pay costs related to the spill.

“The court finds that BP, under the drilling contract, assumed responsibility for Macondo well oil release pollution liabilities,” Barbier said Nov. 15.

The drilling contract “allocates to Transocean liabilities for pollution originating on or above the surface of the water,” Barbier said. “The Deepwater Horizon Incident entailed a subsurface release; thus, Transocean did not assume pollution liabilities arising from the incident.”

The case is In Re Oil Spill by the Oil Rig Deepwater Horizon in the Gulf of Mexico on April 20, 2010, MDL-2179, U.S. District Court, Eastern District of Louisiana (New Orleans).

--With assistance from Laurel Brubaker Calkins in Houston. Editors: Michael Hytha, Stephen Farr

To contact the reporters on this story: Margaret Cronin Fisk in Detroit at mcfisk@bloomberg.net; Allen Johnson Jr. in New Orleans at allenmct@gmail.com

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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