Throughout the oil patch, it has become common for parties to enter into agreements that contain Texas choice-of-law provisions, regardless of where the work is being performed or the extent of the parties’ sometimes tenuous relationship to the state of Texas. In Wyoming, parties will occasionally use Texas choice-of-law provisions as a vehicle to bypass the state’s restrictive anti-indemnity act, which forbids oilfield indemnity agreements outright, to instead avail themselves of the less restrictive Texas Oilfield Anti-Indemnity Act, which allows oilfield indemnity agreements to stand in limited circumstances. See Tex. Civ. Prac. & Rem. Code § 127.005. However, on Dec. 10, 2021, the Fifth Circuit Court of Appeals issued an opinion suggesting that these exercises in circumvention are inappropriate, even under Texas law.

The case, Cannon Oil and Gas Well Services Inc. v. KLX Energy Services LLC, No. 21-20115, 2021 WL 5856796 (5th Cir. Dec. 10, 2021), concerns a Master Equipment Rental Agreement (Agreement) entered into by Wyoming-based exploration company Cannon Oil and Gas Well Services (Cannon) and Texas-based KLX Energy Services (KLX). The Agreement contained a mutual indemnity provision under which Cannon and KLX agreed to “protect, defend [and] indemnify” each other against losses involving injuries sustained by the other’s employees. Cannon, 2021 WL 5856796 at *1. It also contained a choice-of-law provision stating that Texas law governs the Agreement. Id.

In 2018, a Wyoming-based KLX employee suffered injuries at Cannon’s Wyoming oilfield and brought suit against Cannon in Wyoming state court. Id. at *2. Cannon subsequently turned to KLX for indemnity under the Agreement and filed a declaratory action in the U.S. District Court for the Southern District of Texas to enforce the parties’ indemnity agreement. Id. The central dispute between the parties concerned which state’s law should apply to their mutual indemnity agreement. Id. Under Texas law, KLX could be required to defend and indemnify Cannon in accordance with indemnity language contained in the Agreement. Id. at *1-2. Under Wyoming law, KLX’s agreement to indemnify Cannon would be deemed unenforceable pursuant to Wyoming’s Oilfield Anti-Indemnity Act. Id. at *1-2. Ultimately, the district court ruled in KLX’s favor, finding that Wyoming law applied and, therefore, KLX’s agreement to indemnify Cannon was unenforceable. Id. at *2. Cannon appealed, arguing that Texas law should govern. Id.

Writing for the panel, U.S. Circuit Judge Gregg Costa acknowledged that Cannon and KLX had contractually agreed Texas law should govern the scope of the parties’ indemnity obligations, but raised the question of “whether the parties’ choice of Texas law is enforceable for [a] Wyoming-centered indemnity dispute.” Id. at *3. Although the panel noted that courts “usually enforce contracts as written,” contractual autonomy has its limits. Id. As stated by the court, “[p]arties cannot choose the law of a jurisdiction ‘which has no relation whatever to them or their agreement’ nor can they ‘thwart or offend the public policy of the state the law of which ought otherwise to apply.’” Id. (citing DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 677 (Tex. 1990)).

The court, applying Texas choice-of-law rules, turned to Section 187(2)(b) of the Restatement (Second) of Conflict of Laws to determine whether to enforce the parties’ Texas choice-of-law provision. Id. at *4. Under the Restatement, three prongs must be satisfied for Wyoming law to override the parties’ choice of Texas law. Id.

First, Wyoming must have a “more significant relationship” with the parties and transaction than Texas does under Section 188 of the Restatement. Id. The Fifth Circuit panel held that this prong was satisfied, in large part because the Agreement (1) was negotiated and executed in Wyoming and (2) required substantial performance in Wyoming. Id. at *4-5.

Second, Wyoming must have a “materially greater interest” than Texas in applying its law to the set of facts. Id. at 7. The Fifth Circuit panel held that this prong was easily satisfied because the dispute directly implicates Wyoming’s codified policy interest in promoting worker safety in its oilfields. Id.

Third, applying Texas law must be contrary to a fundamental policy of Wyoming. Id. The Fifth Circuit panel held that this final prong was also satisfied, stating, “Because Wyoming ‘has taken the unusual step of stating [the policy] explicitly’ in a statute, and ‘will refuse to enforce an agreement’ contrary to the policy even when other states connected to the agreement would enforce it, the anti-indemnity policy is a fundamental one.” Id. (internal citations omitted).

The Fifth Circuit affirmed the district court’s ruling and held that Wyoming law applies to nullify KLX’s indemnity obligation — even though the parties had expressly agreed to a mutual indemnity scheme interpreted under Texas law. Id. at *8.

The Takeaway

Parties cannot rely on Texas choice-of-law provisions to circumvent state oilfield anti-indemnity acts where there exists no reasonable relationship between Texas and the subject transaction or services provided. The Fifth Circuit’s opinion in Cannon is consistent with previous state court rulings, and legislative action, in which greater weight has been given to the state’s policy objectives set forth in its anti-indemnity act than to the parties’ right to contract. See, e.g., Pina v. Gruy Petroleum Mgmt., 136 P.3d 1029, 1034 (N.M. Ct. App. 2006) (“Accordingly, a choice-of-law provision … that purports to apply Texas’ anti-indemnity statute to validate an otherwise prohibited indemnification agreement pertaining to work to be performed at a New Mexico oil well site is itself void as against public policy.”).