Sonat Exploration Co. v. Cudd Pressure Control, Inc., # 06-0979 (Tex. November 21, 2008) see Sonat Decision.
I try to steer away from decisions strictly about legal procedure, but this Texas Supreme Court decision illustrates two things: (1) a choice-of-law determination can make or break an insurance or contract-indemnity dispute; (2) the determination of which state's law applies can be shockingly subjective, as shown by this result. So bear with me.
First, what is choice-of-law? Unless and until insurance regulation is federalized (see my discussion: Federal Office of Insurance Information), the rules governing the interpretation of insurance polcies often vary from state to state. In the Sonat case, Texas law would enforce the indemnification agreement at issue; Louisiana's law would not. "Choice-of-law" is the body of principles and rules for establishing which state's laws apply to particular parties and disputes. The choice-of-law rules themselves often vary from state to state. For example, Texas applies complex sets of principles in the Restatement (Second) of Laws - Conflict of Law, published by the American Law Institute, a perpetual society of leading judges, lawyers, and teachers founded in 1923 (see About ALI). Florida, by contrast, is old fashioned and applies the mostly outdated "place of the contract" (lex loci contractus in Latin) to say which law governs contract disputes. Luckily, the selection of which choice-of-law rule apply is automatic: a court applies the choice-of-law rule of the state in which it sits.
In Sonat, an oil & gas developer signed a servicing contract with a drilling contractor to develop wells in several states. The contract required each party to indemnify the other for injuries to the indemnifying party's employees. An explosion at one of Sonat's Louisiana wells killed four of the the contractor's employees, whose families sued Sonat (they were barred from suing the contractor due to the workers compensation bar preventing negligence lawsuits against the employer). Sonat sought indemnity from contractor (and its insurer) for a settlement payment of $29 million.
A Louisiana statute (La. RS 9:2780) says indemnification agreements are invalid if the party seeking indemnity was negligent or strictly liable; Texas law provides that such indemnities are OK if backed by insurance, as this was. So which state's law applied?
Under Texas's rules, in the absence of a choice-of-law clause in the parties' contract, the principles of the Restatement (referred to by the cumbersome name, "Most Significant Relationship Test") are applied: There are two sets of principles, those applying only to contract disputes, and a set of general, more abstract, principles that apply to all disputes. To contract disputes only, courts should look to:
- the place of negotiation of the contract,
- the place of performance,
- the place of contracting,
- the location and subject matter of the contract,
- and the domicile, residence, nationality, place of incorporation, and place of business of the parties
The general principles include:
- the needs of the interstate and international systems,
- the relative policies of the forum,
- the relative policies of other interested states and the relative interest of those states in the determination of a particular issue,
- the protection of unjustified expectation,
- the basic policies underlying the particular field of law,
- certainty, practicability, and uniformity or result, and
- ease in the determination and application of the law to be applied.
Both Sonat and contractor, and their operations are all over the place. Both are incorporated in Delaware, Sonat's headquarters appear to be in Texas, the contract was signed in Texas, the contract operations were in Texas, New Mexico, Louisiana, and perhaps elswhere. The injuries occurred in Louisiana. Contractor's president submitted an affidavit that its principal location was Louisiana, but Sonat put into evidence an earlier affidavit submitted by the same officer in an unrelated lawsuit swearing that "nearly all high level decisions were made in Georgia, its main office in is Houston, and most department heads are located in Houston or Louisiana." The Court concluded, "Suffice it to say [contractor's] place of business appears to be flexible."
Let's cut to the chase. The Court went round and round with all the various contacts and principles, rejecting each one as dispositive, until it seized on a provision requiring contractor to add Sonat as an additional insured for the Lousiana work under contractor's insurance policies. This must be, reasoned the Court, because the parties expected their cross-indemnities might not be enforceable in Louisiana. "Why insert this special provision applicable only to Louisiana jobs?" The additional-insured requirement would be superfluous if the parties exepcted the indemities to be enforceable. So, held the Court, Louisiana applied to this dispute because the parties had Louisiana in mind when the contract was made.
Maybe. But the parties also had Texas and New Mexico in mind because the contract expressly applied Texas law to Texas operations and New Mexico law to New Mexico operations. The Court could easily have inferred an intention not to apply Louisiana law because they omitted a specific selection of that law for those operations. Also, even if the additional-insured requirement applied only to Louisiana operations, the indemnity, which is the disputed provision, appears to apply to the multistate operations. The arguments could go either way.
This is the point. Choice-of-law is often a crap shoot. Be on the look out for choice-of-law traps (or opportunities), because I can assure you that the other side is looking. Most of the time, the applicable law is not, and could not be, in dispute. But when it is, the outcome of the case may depend on it.