United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS November 18, 2003
FOR THE FIFTH CIRCUIT
Charles R. Fulbruge III
Clerk
No. 02-11124
CLEERE DRILLING COMPANY,
Plaintiff - Counter Defendant - Appellant,
versus
DOMINION EXPLORATION & PRODUCTION, INC.,
Defendant - Counter Claimant - Appellee.
--------------------
Appeal from the United States District Court
for the Northern District of Texas
--------------------
Before WIENER, CLEMENT, and PRADO, Circuit Judges.
WIENER, Circuit Judge:
Cleere Drilling Company (“Cleere”) appeals the district
court’s bench trial judgment, which rejected Cleere’s claims
against Dominion Exploration & Production Inc. (“Dominion”) and
held Cleere liable to Dominion for almost $2 million in damages.
These damages resulted from the blowout of Kenaf Industries Unit
No. 1 Well (the “Well”), which Cleere had contracted to drill for
Dominion. Cleere contends that the district court misconstrued
various provisions of the standard form International Association
of Drilling Contractors (“IADC”) footage drilling contract, July
1998 revision, (the “Contract”), as revised by the parties and
entered into by Cleere as contractor and Dominion as operator.
Cleere also contends that the district court erred in various
findings of fact. We affirm in part, reverse in part, vacate in
part, and remand for further proceedings.
I. Facts and Proceedings
This action arises from the blowout and resulting total loss
of the Well. Central to the action are issues of responsibility
for several categories of resulting losses and damages.
While drilling ahead at a depth of approximately 2500 feet en
route to a “contract footage depth” of 3600 feet, the project got
into trouble after Cleere's toolpusher ordered a “short trip,” in
which “stands” of drill pipe were pulled out of the hole and run
back in to ensure the integrity of the pipe. In the course of this
operation, Cleere’s driller "swabbed" the Well at least twice.1 He
completed the removal of the pipe despite observing an increase in
the flow of drilling mud from the hole. When the driller realized
that a potential well-control situation was developing, he had
Cleere’s crew attempt to activate the blowout preventer. They
failed to do so, however, because they did not first close a
hydraulic bypass valve, a critical prerequisite to the preventer’s
effective operation.
1
A hole is “swabbed” when, in pulling the pipe out of the
well, a drop in pressure is created. “The imposed pressure drop
can create a negative pressure differential between the formation
and the well bore with the well at a lower pressure, and thereby
allow fluid to enter the well.” 8 HOWARD R. WILLIAMS & CHARLES J.
MEYERS, OIL AND GAS LAW 1063 (2002).
2
Cleere’s toolpusher, who had not been present, came to the
drill site promptly after being called and was eventually able to
activate the blowout preventer and shut down the Well. Cleere’s
efforts to maintain control were ultimately unsuccessful, however,
and the well cratered around its casing seven days after the
initial loss of control. The Well eventually blew out through
several surface fissures approximately 600 to 900 linear feet from
the hole, spewing salt water, gas, sand, and chemically treated
drilling mud on and around the drill site. As Cleere had neither
the equipment nor the experience and expertise to control and kill
the Well, Dominion retained the well-control firm of Boots & Coots
to do so, at substantial cost to Dominion.
Cleere sued Dominion in state court, and Dominion removed the
case to the district court based on diversity of citizenship.
Cleere sought to recover for its services under the Contract for
work performed both before and after the blowout. Specifically,
Cleere sought $192,463, which included (1) $50,180 ($20 x 2,509
ft.) for the “value” of the hole that Cleere had drilled before it
lost control of the Well; (2) $77,650 for 10 days and 2 hours
“daywork” after it lost control; and (3) approximately $6,500 for
other items, including 38 joints of drill pipe and 15 drill collars
lost in the hole.
Dominion counterclaimed to recover costs and expenses totaling
$1,955,596 comprising (1) $788,332 for controlling the blowout; (2)
$861,615 for cleanup of the surface location, (3) $188,417 for
3
restoration of the surface location; (4) $52,000 for settlement of
damage claims with the landowner, Kenaf Industries of South Texas
L.P. ("Kenaf"); and (5) $65,232 for the differential between
Dominion’s cost of drilling a replacement well and the Well price
under the Contract.
The district court conducted a bench trial, after which it
ruled in favor of Dominion, awarding the entire amount sought and
rejecting all of Cleere’s claims. Cleere timely filed a notice of
appeal.
II. Analysis
A. Jurisdiction
The district court had jurisdiction by virtue of the diversity
of citizenship provisions of 28 U.S.C. § 1332(a)(1) following
Dominion’s removal of the case from the state court in which Cleere
had originally filed it. We have appellate jurisdiction pursuant
to 28 U.S.C. § 1291.
B. Standard of Review
We review the district court's interpretation of the Contract
de novo, as such an interpretation requires the determination of
legal questions.2 As the district court’s award of compensatory
damages presents an issue of fact (absent an error of law), our
2
See Empire Fire & Marine Ins. Co. v. Brantley Trucking,
Inc., 220 F.3d 679, 681 (5th Cir. 2000).
4
review of this aspect of the judgment, like all other factual
findings of the district court, is for clear error.3
C. Cleere’s Claims
On appeal, Cleere does not contest the district court’s
finding that Cleere’s negligence caused the blowout, so the
particular facts surrounding the blowout itself are not at issue.
Rather, Cleere views the case as one of contractual allocation of
risk that turns primarily on the release and indemnity provisions
of the Contract. Cleere maintains that the Contract allocates to
Dominion responsibility for much of the damage, irrespective of
whether Cleere was negligent or otherwise at fault. Cleere also
insists that the district court misconstrued the Contract as a
result of misapplying Texas law.
1. Recovery Based on Conversion of the Contract to “Daywork”
Status
One important aspect of Cleere’s theory of recovery against
Dominion is the contention that, by its own terms, the Contract
automatically converted from a “footage” basis to a “daywork”
basis. Conversion to daywork basis would mandate different
contractual allocations of liability, possibly entitling Cleere to
the damages it seeks related to the uncompensated-for work it
performed both before and after the blowout occurred, as well as
the value of its lost equipment and materials. Cleere argues that
3
See Rhodes v. Guiberson Oil Tools, 82 F.3d 615, 620 (5th
Cir. 1996).
5
the district court erred in holding that, as a matter of law, such
a conversion never occurred.
Cleere’s contention that the Contract converted to daywork
status is premised on the factual assertion that Cleere encountered
several problematic conditions while drilling the Well, including
abnormal pressure, loss of circulation, and failure of operator-
supplied equipment. The presence of any of these conditions would
have converted the Contract to a daywork status and entitled Cleere
to collect on its claims for breach of contract. The district
court found that none of these conditions occurred, and Cleere’s
arguments that they did are not persuasive. Cleere’s definition of
“abnormal pressure” contradicts the express language of the
Contract and depends entirely on testimony that is not related to
the contractual provisions at issue, but to normal pressure in a
strict engineering sense.4 Similarly, Cleere’s argument regarding
loss of circulation —— which is entirely different from increased
flow of drilling fluids —— relates to the condition of the well
following Cleere’s actions that resulted in the blowout. As the
district court noted in its order of June 27th, 2002: “Even if
[abnormal pressure or lost circulation] were encountered, they were
4
The Contract’s Exhibit A states: “It is understood that in
the event it becomes necessary ... to raise the mud weight at any
time to 10.0 lbs. per gallon, it will conclusively constitute
‘Abnormal Pressure’ as that term is employed in Subparagraph 12.2
of the Contract.” Cleere argues that a lower mud weight
established abnormal pressure in this case, based on the testimony
of Calvin Barnhill, an expert witness called by Dominion.
6
only encountered after the driller swabbed the Well,” which action
caused the increased flow and left it uncontrolled, leading to the
blowout. We cannot say that the district court clearly erred in
this determination, and the Contract is unambiguous that Cleere is
liable in such a situation.5 Finally, Cleere’s contention that the
formation surrounding the surface casing shoe —— which formation is
part of the earth —— is somehow “operator supplied equipment” is
untenable. We agree with the district court that the Contract
never converted to a daywork basis.
2. Recovery Under Footage Contract Basis
We also agree with the district court’s conclusion that Cleere
cannot recover the damages that it claims under the Contract’s
footage basis. First, Cleere is not entitled to be paid for its
drilling services that preceded the blowout because “contract
footage depth” was never reached, a condition precedent to payment
under subparagraph 5.1 of the Contract. Second, Cleere cannot
recover for its post-blowout services because this claim depends on
conversion of the Contract to daywork status which, as noted, never
happened. And, third, under subparagraph 18.2 of the Contract,
5
Subparagraph 18.6 states that “should a...blowout
occur...for any cause attributable to Contractor’s operations...
while Contractor is engaged in the performance of work hereunder on
a footage basis, all such loss of or damage to the hole shall be
borne by Contractor.” If loss of circulation occurred, it did not
occur until after Cleere’s actions that caused the blowout.
Because Cleere was still working on a footage basis at that time,
Cleere remained responsible under subparagraph 18.6's allocation of
risks.
7
Cleere alone is responsible for any loss of its own “in-hole”
equipment while the Contract is in footage status. Therefore,
Cleere cannot recover from Dominion for the loss of drill pipe,
collars, and the like. We affirm the part of the district court’s
judgment that rejects each of Cleere’s damage claims against
Dominion.
D. Dominion’s Claims
1. Recovery Based on Cleere’s Negligence (¶18.15)
The district court held Cleere liable to Dominion after
finding that Cleere’s negligence caused the Well to blowout. In
its discussion of this point, the district court correctly stated
that, because this is a diversity case, Texas law governs all
substantive contractual questions.6 In its application of Texas
contract law, the district court gave two reasons why Dominion
recovers under these circumstances. First, held the district
court, the overarching indemnity and release provisions contained
in subparagraph 18.15 (“18.15")7 do not, as a matter of law, meet
6
See Klumpe v. IBP, Inc., 309 F.3d 279, 281 (5th Cir. 2002).
7
Subparagraph 18.15 addresses all indemnity and release
provisions of the Contract and specifically notes that causation,
including negligence, will not justify disregard of those
provisions:
Indemnity obligation: Except as otherwise expressly
limited herein, it is the intent of parties hereto that
all releases, indemnity obligations and/or liabilities
assumed by such parties...including without limitation
Subparagraphs 18.1 through 18.14 hereof, be without limit
and without regard to the cause or causes thereof
(including preexisting conditions),...breach of contract
8
the Texas public policy requirement of “fair notice” for release
and indemnity agreements to be binding. The fair notice doctrine
requires contract language of “express negligence” that is
“conspicuous.” The district court held that the Contract failed
both prongs of this test for fair notice of indemnity clauses of a
contract, and was therefore inadequate to release Cleere from
damages resulting from its own negligence. Second, held the
district court, the materials deposited on the drill site by the
blowout did not constitute pollution or contamination as those
terms are used in the Contract, absent which subparagraph 18.12
(“18.12") is not available to shift responsibility for those items
from Cleere to Dominion, whether or not the Contract’s indemnity
and release provisions are enforceable under Texas law. We
disagree with both determinations and shall discuss them in turn.
a. Fair Notice: Express Negligence; Conspicuousness
The district court based its holding that the release and
indemnity provisions of 18.15 do not meet the “fair notice”
requirement on the decision of the Supreme Court of Texas in Ethyl
Corporation v. Daniel Construction Company.8 The test for “fair
notice” established in that case has two conjunctive prongs: (1)
“express negligence,” which requires that “a party seeking
or the negligence of any party or parties....
8
725 S.W.2d 705 (Tex. 1987).
9
indemnity from the consequences of its own negligence must express
that intent in specific terms within the four corners of the
contract”9; and (2) “conspicuousness,” which requires that the
release and indemnity provisions at issue be sufficiently
conspicuous to ensure the parties’ conscious awareness of such
provisions.10 On appeal, Dominion concedes that the contractual
language at issue meets the “express negligence” prong. Dominion
nevertheless continues to contend on appeal that the release and
indemnity language of paragraph 18 fails the conspicuousness prong.
As the fair notice doctrine can be trumped by the jurisprudentially
recognized exception of “actual knowledge,” we now address that
exception to determine whether it is applicable in this case.
Even if we assume without conceding that the pertinent
language of the Contract is not sufficiently conspicuous to meet
the second prong of the subject test, we are convinced that the
requirement of fair notice —— both elements, i.e., express
negligence and conspicuousness —— is irrelevant in the face of
Dominion’s actual knowledge of the subject provisions of the
Contract. The Supreme Court of Texas explained in Dresser
Industries, Inc. v. Page Petroleum, Inc. that “[t]he fair notice
requirements are not applicable when the indemnitee establishes
9
Enserch Corp. v. Parker, 794 S.W.2d 2, 8 (Tex. 1990); see
also Ethyl Corp., 725 S.W.2d at 708.
10
See Enserch Corp., 794 S.W.2d at 8.
10
that the indemnitor possessed actual notice or knowledge of the
indemnity agreement.”11
The record contains a surfeit of evidence to support Cleere's
contention that Dominion had actual knowledge of the release and
indemnity provisions of the Contract. Testimony at trial revealed
that contract negotiations between Cleere and Dominion included
consideration of and changes to several provisions of the IADC
printed form, including a number in paragraph 18. As noted, 18.15
contains the Contract’s provision for release and indemnity and
18.12 covers responsibility for pollution and contamination, the
latter of which we address below. Furthermore, the acts of agents
of the parties in making and initialing numerous changes to the
printed form is facially evident on several pages of the Contract.
Among the many changes were additions to or deletions from
subparagraphs 18.3, 18.12, and 18.15, each of which was initialed
by Dominion’s representatives, David Linger and Richard Miller, as
11
853 S.W.2d 505, 508 n.2 (Tex. 1993). Because we are
convinced that, as a matter of law, Dominion had “actual...
knowledge” of these provisions, we do not address whether the
format of the July, 1998 version of the IADC standard form domestic
footage drilling contract —— replete with a boldface, all-capitals
legend, “THIS AGREEMENT CONTAINS PROVISIONS RELATING TO INDEMNITY,
RELEASE OF LIABILITY, AND ALLOCATION OF RISK” that appears
prominently on page 1 of the Contract, and the smaller but likewise
bold and capitalized title of paragraph 18, “RESPONSIBILITY FOR
LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF
RISK.” —— is sufficient to satisfy the “conspicuousness” prong of
the test. Similarly, our finding of “actual...knowledge” obviates
any need to consider whether the Contract’s language meets the
“express negligence” prong, apart from the fact that Dominion has
conceded (as Cleere has contended) that it does.
11
well as by a representative of Cleere. In addition, the several
changes made in paragraph 18 are bracketed by changes made in
preceding paragraphs 4, 6, and 16, and in following paragraph 29.
Dominion nevertheless attempts to avoid a holding that it had
actual knowledge by implying that its Mr. Linger, who was directly
involved in the negotiation and confection of the Contract as well
as the changes to it, was not a lawyer and thus had no ability or
responsibility for “the legal aspects of the contract.” This
feeble effort to maintain that Mr. Linger was somehow disqualified
from understanding and therefore from having actual knowledge of
the import of the indemnity provisions and the changes that he
negotiated and made to those provisions —— that, because he is not
a lawyer, he could not and need not realize what he was doing —— is
specious. As noted in footnote 11 above, paragraph 18 is labeled
“RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY
AND ALLOCATION OF RISK.” Mr. Linger and Mr. Miller made changes
for Dominion that directly addressed indemnity and release,
including the revision of 18.15, to which the phrase “but excluding
wilful [sic] misconduct” was inserted in the margin to preclude
indemnity or release under such circumstances. And, these
revisions were initialed not only by Mr. Linger but also by Mr.
Miller, the representative who signed the Contract for Dominion.
We find inescapable the conclusion that Dominion had actual
knowledge of the contents and purposes of the entirety of paragraph
12
18 (allocation of risk and responsibility), including specifically
18.12 and 18.15, through the acts of Mr. Linger and Mr. Miller in
negotiating on behalf of Dominion and personally initialing changes
that deal directly with the indemnity provisions contained therein.
Except disingenuously, Dominion cannot argue that, through its
designated agents, it did not acquire actual knowledge of those
provisions. If Dominion was uncomfortable with the qualifications
of the two individuals who negotiated and signed off on the changes
to the indemnity provisions on its behalf, it never made such
qualms known to Cleere and cannot now be heard to disavow the acts
of its agents.
In sum, we cannot affirm the district court’s ruling that the
release and indemnity provisions of the relevant subparagraphs of
paragraph 18 do not apply for failure of the Contract to meet the
fair notice requirements of Texas law. Dominion had actual
knowledge of each of paragraph 18's subparagraphs that are relevant
to this case, including 18.15's provisions governing indemnity and
release and overriding the fault of the indemnified and released
party. Dominion’s actual knowledge of all pertinent provisions of
paragraph 18 satisfies that exception to the fair notice
requirement and makes that doctrine inoperable here. We hold that
18.15 applies in this case; stated differently, that as to 18.15,
requirement of “fair notice” is rendered inapposite by virtue of
the actual knowledge exception to that doctrine, and the parties
13
are therefore bound by the provisions of paragraph 18 and each of
its subparagraphs.
2. Recovery Based on Absence of Pollution or Contamination
(¶18.12)
Dominion insists that it is entitled to recover its costs of
cleanup and restoration of the drill site, including damages paid
in settlement with the landowner, because —— as held by the
district court —— the “mess” on the surface was neither pollution
nor contamination. Noting that, under 18.12, responsibility for
any damages arising from “pollution or contamination” that
originated below the “surface of the land” is allocated to Dominion
alone, Cleere counters that the costs of the extensive cleanup and
restoration of the surface location are the direct result of
pollution or contamination (or both) that originated below the
surface of the earth. In addition to holding that, as a matter of
law, the Contract’s indemnity and release provisions on which
Cleere relies are ineffectual under the Texas fair-notice doctrine
(a holding we have reversed above),12 the district court also held
12
Dominion also argues on appeal that, because no changes were
made to 18.12's subsection (b), the subsection relied on by Cleere
to absolve itself from cleanup and restoration liability, there is
no proof of Dominion’s actual knowledge of the contents of that
particular subsection, making it inoperable because of the fair
notice doctrine. As we discussed in section II(D)(1)(a) above,
this argument is spurious as to 18.15, and it is even more so with
regard to 18.12. The fact that Dominion’s agents negotiated, made,
and initialed changes to 18.12(a) (albeit not to subsection (b)
thereof), as well as other subparagraphs of paragraph 18 that
either precede or follow it, is more than probative of Dominion’s
direct advertence to (and therefore actual knowledge of) the entire
text of paragraph 18, including subsection (b) of 18.12.
14
that the spoliation of the surface location constituted neither
pollution nor contamination as those terms are used in the
Contract. Cleere’s responsibility for costs and expenses incurred
by Dominion in cleaning up and restoring the surface of the land at
and in the vicinity of the drill site thus turns on whether the
salt water, sand, and drilling mud deposited on the surface of the
land as a result of the blowout constitutes “pollution or
contamination” for purposes of 18.12.13
The pertinent text of 18.12, “Pollution and Contamination,”
specifies:
Notwithstanding anything to the contrary contained
herein,...it is understood and agreed by and between
[Cleere] and [Dominion] that the responsibility for
pollution and contamination shall be as follows:
(a)...[Cleere] shall assume all responsibility for...
causes of action of every kind...arising from pollution
Dominion’s attempt to micro-parse the revisions to the printed form
down to the subsection of the subparagraph at issue is specious at
best, akin to arguing that Dominion had no knowledge of the first
clause of subsection (a) of 18.12 because it made changes only to
the second clause.
13
As a preliminary matter, we note that our affirmance of the
district court's holding that the Contract never converted to a
daywork basis is not material to the question of responsibility for
damages arising from pollution or contamination. The language of
18.12, titled “Pollution and Contamination,” declares expressly
that its provisions supersede all other contractual provisions,
except for paragraph 15 and subparagraph 18.13, neither of which is
relevant to this case. The introductory clause of 18.12 states
that “[n]otwithstanding anything to the contrary contained
herein...the responsibility for pollution and contamination shall
be as follows.” Thus, whether the Contract might have converted
from footage to daywork does not affect the applicability of 18.12,
which applies whenever damage arises from pollution or
contamination, regardless of whether drilling operations are then
being conducted on a footage or a daywork basis.
15
or contamination, which originates above the surface of
the land or water...
(b) [Dominion] shall assume all responsibility for,
including control and removal of, and shall protect,
defend and indemnify [Cleere] from and against all
claims, demands, and causes of action of every kind and
character arising directly or indirectly from all other
pollution or contamination which may occur during the
conduct of operations hereunder, including, but not
limited to, that which may result from fire, blowout,
cratering, seepage or any other uncontrolled flow of oil,
gas, water or other substance, as well as the use or
disposition of all drilling fluids, including, but not
limited to, oil emulsion, oil base or chemically treated
drilling fluids,.... [Dominion] shall release [Cleere] of
any liability for the foregoing (emphasis added).
There can be no dispute that (1) the putative contaminants in
question (salt water, sand, gas, and mud, i.e., “chemically treated
drilling fluids”) originated hundreds of feet below the surface of
the land, or (2) subsection (b) of 18.12 makes Dominion, as
"Operator," responsible for all pollution and contamination that
does not originate at or above the surface of the land. Dominion
is therefore responsible for all damages resulting from the deposit
of the subject sub-surface materials on the surface of the land
unless, as held by the district court, the presence of those
materials does not constitute pollution or contamination within the
intendment of the Contract. Furthermore, by virtue of 18.15,
Dominion's responsibility for such damage to the surface is not
negated by Cleere’s having caused the blowout that resulted in the
deposit of such materials on the surface. Thus, the only way for
Cleere to be held responsible under subsection (b) of 18.12 for
damages resulting from the spread of salt water, sand, and
16
chemically treated drilling fluids on the land, would be for
Dominion to prevail —— as it did in the district court —— on its
contention that the presence of those materials did not amount to
either pollution or contamination.
a. Pollution
The Contract does not define pollution or contamination. The
district court acknowledged the presence of salt water, sand, and
chemically treated drilling fluid on the land, but nevertheless
held that, under the Contract, the presence of this foreign matter
did not rise to the level of pollution or contamination of the
surface of the land at or near the drill site, absent which Cleere
could not rely on 18.12 for relief from liability. Cleere contests
that holding, insisting that the blowout’s deposit of those
subsurface materials onto the surface of the land constituted
“pollution” or “contamination,” or both, within the meaning of
18.12. Consequently, insists Cleere, the costs that Dominion
incurred in cleaning up and restoring the drill site and
surrounding areas, and in settling with the landowner for its
surface damages, must be borne by Dominion alone.
Not surprisingly, Dominion supports the district court’s
holding of no pollution or contamination as those terms are used in
18.12, asserting that the “mess” left by the blowout did not rise
to the level of pollution or contamination. Dominion emphasizes
that the substances in question are relatively benign and not
environmental threats.
17
We have not previously considered the meaning of pollution or
contamination in the context of oil and gas drilling contracts. In
doing so today, we heed the canon of contractual interpretation
that requires words and phrases in a contract to be given their
plain meanings unless the document demonstrates that the parties
intended for the terms to be employed in some special or technical
sense,14 which is not the case here. Black’s Law Dictionary
defines "pollution" as “[c]ontamination of the environment by a
variety of sources including but not limited to hazardous
substances, organic wastes and toxic chemicals. Pollution is
legally controlled and enforced through various federal and state
laws and agencies.”15 Noting that independent soil testing
determined that there did not appear to be a “significant impact”
to the surface area from the blowout, Dominion reasons that this
fact and the absence of an environmental remediation order from the
Texas Railroad Commission is further proof that there was no
pollution or contamination at the site.
Any persuasiveness of Dominion’s logic regarding pollution ——
given the typical focus of that word on harm to the environment,
and no such harm appearing to have occurred here —— is
significantly less when applied to contamination. Subsection (b)
14
See, e.g., Heritage Res., Inc. v. NationsBank, 939 S.W.2d
118, 121 (Tex. 1996); N. Natural Gas Co. v. Conoco, Inc., 986
S.W.2d 603, 606 (Tex. 1998).
15
BLACK’S LAW DICTIONARY 1159 (6th ed. 1990)(emphasis added).
18
of 18.12 refers disjunctively to “pollution or contamination” as
words of different meanings, not as synonyms. Cognizant of another
canon of interpretation that requires courts to give effect to each
contractual term so that none is rendered meaningless,16 we must
determine whether either pollution or contamination occurred here.
b. Contamination
When we examine the Contract’s use of the term
“contamination,” we are not convinced that any sort of
environmental harm is required. In contrast to its definition of
pollution, Black’s Law Dictionary defines contamination as a
“[c]ondition of impurity resulting from mixture or contact with
foreign substance.”17 And, Black’s definition of pollution as an
enhanced subcategory of contamination supports Cleere’s contention
that environmental harm is not an essential element of all
contamination; rather, it is an exacerbating element that makes
pollution a more noxious subcategory of contamination. Similar to
Black’s, Webster’s Third New International Dictionary defines the
verb, "to contaminate" as “to soil, stain, corrupt, or infect by
contact or association...to render unfit for use by the
introduction of unwholesome or undesirable elements.”18 In sum, all
pollution is contamination, but not all contamination is pollution.
16
See Heritage Res., 939 S.W.2d at 121; N. Natural Gas Co.,
986 S.W.2d at 606.
17
BLACK’S LAW DICTIONARY 318 (6th ed. 1990).
18
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 491 (1986).
19
Even if we assume arguendo that the materials disgorged onto
the drill site and its surroundings are not so noxious as to be
deemed pollutants because their presence either did not or could
not cause environmental damage, their presence certainly meets the
definition of “contamination.” Relative to the surface of the
drill site, the salt water, sand, and drilling mud (with its
associated chemical additives) indisputably were “foreign
substances.” It is equally indisputable that these substances were
“undesirable elements” that rendered the surface area soiled,
stained, impure, and almost certainly unfit for its intended use.
If this were not true, we ask rhetorically, why would Dominion have
spent hundreds of thousands of dollars on the expedited removal of
those substances, and, in addition, have paid the landowner a cash
settlement for surface damages?19
Dominion argues that such a definition of contamination gives
the term too wide a scope; that even though the blowout created a
“substantial and obvious condition which had to be cleaned up,”
that “condition” was only a “mess” and did not amount to
contamination. Scope is clearly critical to this issue. There
could be many situations that come within the common definitions of
“contamination” yet fall outside the range of circumstances
intended by the parties to be covered by that term.
19
Had Dominion performed the cleanup solely in anticipation
of some regulatory compliance, any cognizant agency would have to
have deemed such foreign substances to be contaminants, if not
pollutants.
20
Although, as observed earlier, we have not addressed
contamination in the context of drilling contracts, we and other
courts have considered the scope of “contaminant” in the context of
pollution exclusions in insurance contracts. In Pipefitters
Welfare Education Fund v. Westchester Fire Insurance Company,20 the
Seventh Circuit addressed the issue in the following way:
The terms “irritant” and “contaminant,” when viewed in
isolation, are virtually boundless, for “there is
virtually no substance or chemical in existence that
would not irritate or damage some person or property.”
Without some limiting principle, the pollution exclusion
clause would extend far beyond its intended scope ....21
In Certain Underwriters at Lloyd’s London v. C.A. Turner
Construction Company, we agreed with the Seventh Circuit’s “common-
sense approach” to this problem.22
The issue in Certain Underwriters was whether the temporary
release of a gas —— which quickly dissipated but not before causing
injury —— was pollution and therefore exempted from coverage by a
policy exclusion.23 We concluded that the release of gas was
20
976 F.2d 1037 (7th Cir. 1992).
21
Id. at 1043 (quoting Westchester Fire Ins. Co. v. City of
Pittsburg, 768 F. Supp. 1463, 1470 (D. Kan. 1991)).
22
112 F.3d 184, 188 (5th Cir. 1997).
23
In that context, the need to limit the scope of
“contamination” is even more pressing than in the instant case,
because the insurance clause at issue barred recovery only for
those claims resulting from pollution; contamination was discussed
only insofar as it made up part of the overriding definition of the
first term. Contamination in that context could not be viewed as
something distinct from and lesser in degree than pollution,
whereas here the two terms are used in the disjunctive, making
21
pollution and therefore excluded from the policy’s coverage,
explaining that such a conclusion did not conflict with the Seventh
Circuit’s approach “in view of the substantial nature of the
discharge that occurred.”24
We perceive the instant situation to be analogous. Obviously,
neither pollution nor contamination is the cause of “bodily
injuries suffered by one who slips and falls on the spilled
contents of a bottle of Drano, [or]...bodily injury caused by an
allergic reaction to chlorine in a public pool,” despite the fact
that both Drano and chlorine could probably be classified as
contaminants in those situations.25 Similarly, fresh water that
would evaporate in a matter of days, or a fine layer of sand that
would cause no impairment to the use of the surface of rural land,
should not be considered contamination. The instant situation is
far different, however.
Testimony at trial revealed that temporary dams had to be
constructed and that vacuum trucks removed fluid waste “24 hours a
day” to “keep it from going all over the country.” In all,
Dominion hauled away and disposed of more than 3900 barrels of
waste fluids resulting from the blowout. These actions obviously
were taken to minimize both the surface damage from the blowout and
contamination properly viewable as a separate contractual item.
24
Certain Underwriters, 112 F.3d at 188.
25
Pipefitters Welfare Educ. Fund, 976 F.2d at 1043.
22
the need to eliminate foreign substances and undesirable elements
that might render the surface of the land unfit or undesirable for
use, indefinitely if not permanently.
Our legal conclusion that contamination occurred comports with
the overall structure of the Contract. The only subparagraph that
could be applicable to the surface restoration and cleanup costs at
issue is 18.12. For example, subparagraphs 18.1 through 18.5
address surface and in-hole equipment, and subparagraphs 18.6 and
18.7 address damages to the hole itself.26 Similarly, subparagraphs
18.8 and 18.9 address underground damage and inspection of damage,
respectively. The remaining subparagraphs of paragraph 18 are
likewise inapplicable. As the foreign matter at issue here can be
26
Although Dominion argues that subparagraph 18.6 allocates
the entire risk of loss to Cleere under the footage provisions of
the Contract, subparagraph 18.6 actually discusses only damage to
the hole itself, explaining how expenses related to any replacement
well are allocated:
18.6 The Hole-Footage Basis:...[S]hould a fire or blowout
occur or should the hole for any cause attributable to
[Cleere’s] operations be lost or damaged while [Cleere]
is engaged in the performance of work hereunder on a
footage basis, all such loss of or damage to the hole
shall be borne by [Cleere]; and if the hole is not in
condition to be carried to the contract depth...[Cleere]
shall...commence a new hole without delay at [Cleere’s]
cost.... (emphasis added).
The presence of salt water, sand, gas, and drilling mud at the
surface cannot be classified as “damage to the hole.” This
conclusion comports with the structure of the Contract:
Responsibility for damage to the hole and the cost of any
replacement well are allocated based on whether the Contract is
proceeding on a footage or a daywork basis, but surface problems
resulting from pollution or contamination constitute an altogether
separate category of damages, not dependent on that conversion.
23
considered contaminants under these circumstances, the structure of
the Contract further supports the conclusion that, for today’s
purposes, they are contaminants: Either (1) the Contract fails to
account for this category of damage entirely, despite its otherwise
comprehensive attention to contingencies and potential losses, or
(2) this kind of damage is meant to come within the purview of
18.12. We conclude that this type of damage is covered by 18.12.
Finally, Dominion argues that because subsection (b) of 18.12
contains release provisions, and release is an affirmative defense,
Cleere had to plead release expressly but failed to do so.27 As
Cleere correctly points out, however, three of the Pretrial Order’s
contested issues of law ineluctably implicate release when they
address the allocation of risk and shifting of liability. More to
the point, the record confirms that the issues of indemnity and
release were tried in the district court by implicit consent of the
parties. Dominion never objected to testimony concerning the
negotiations surrounding, and the changes made to, the Contract’s
indemnity and release provisions; and the district court’s opinion
discusses those provisions extensively.28 The validity of the
27
For support of this position, Dominion cites an Eighth
Circuit case, Day v. Toman, 266 F.3d 831, 836 (8th Cir. 2001).
(“Release is an affirmative defense which will be considered by the
court only if properly pleaded.”)(quoting Watts v. Butte Sch. Dist.
No. 5, 939 F. Supp. 1418, 1424 (D. Neb. 1996)).
28
See United States v. Shanbaum, 10 F.3d 305, 312 (5th Cir.
1994) (“Whether an issue has been tried with the implied consent of
the parties depends upon whether the parties recognized that the
unpleaded issue entered the case at trial, [and] whether the
24
indemnity and release provisions is an issue that was tried without
objection to the district court, and we must take the issues as
they come to us: “We do not adjudicate by labels. We adjudicate
cases on the facts and law as they fit and support each other in
the trial as the case progresses.”29 In short, Dominion’s argument
on this hypertechnical point is wholly unpersuasive.
At oral argument, Dominion suggested in the alternative that,
if we should conclude that the surface eruptions of salt water,
sand, gas, and drilling mud constituted pollution or contamination,
we should remand for a determination by the district court of
exactly what damages were caused by those items and thus, under
18.12, are the responsibility of Dominion. We agree. It is
counterintuitive that any substantial part of the cleanup and
restoration costs did not “aris[e] directly or indirectly” from the
surface presence of these subsurface contaminants. Still, Dominion
should have the opportunity to demonstrate that at least some of
its restoration and cleanup efforts —— as, for example, repairing
and restoring the physical character of the land at the locations
of the fissures where the Well blew out through the surface —— and
thus the costs of such work, are more properly attributable to
something other than contamination, and are therefore Cleere’s
responsibility.
evidence that supports the unpleaded issue was introduced at trial
without objection ....”).
29
Id. at 313 (emphasis added).
25
Whether based on the existing record or on the record as
supplemented on remand, the district court should make these
determinations in the first place. We therefore remand the case to
the district court for it to conduct a closer examination and
allocation of the nature and costs of cleanup and restoration of
the surface, and their relationship (or lack thereof) to
contamination. The district court shall do so, of course, in the
context of our holding that the salt water, gas, sand, and drilling
mud that erupted onto the drill site and vicinity are contaminants,
as that term is used in 18.12, even if not pollutants as well. And
we defer to the district court to decide, in its discretion,
whether additional evidence is necessary or desirable. If the
district court finds that any aspects of Dominion's cleanup or
restoration involved damage that did not result from contamination,
the court shall assign responsibility therefor to Cleere or
Dominion, as the case may be, depending on which provisions of the
Contract are applicable. In any case, however, the court shall
assign to Dominion responsibility for all cleanup and restoration
necessitated directly or indirectly by contamination.
c. Settlement with the Landowner
A few weeks after the blowout, Dominion entered into a
settlement agreement with Kenaf, the owner of the surface and the
mineral rights of the land on which the Well was drilled. This
agreement reflects Dominion’s payment of $52,000 to Kenaf in full
settlement of all claims for damages to the land on which the Well
26
was drilled, resulting from “an incident” (obviously referring to
the blowout). Although there can be no question that the need to
clean up and restore the surface was a direct consequence of the
blowout, neither the surface damages settlement agreement between
Dominion and Kenaf Industries nor other record evidence that we
have located or has been referred to us identifies the specific
nature of the particular damages sustained by Kenaf as landowner,
over and above or in addition to the contamination and the physical
damage to the surface, all of which Dominion cleaned up and
restored in kind. We harbor no doubt that any damages to Kenaf’s
ownership interests resulted from the blowout, either directly or
indirectly. Yet we cannot determine from the record —— and refuse
simply to assume —— that the damage to Kenaf's property interests
for which it was paid $52,000 was caused (1) entirely, or (2)
partially, or (3) not at all, by contamination.
We do hold, however, as a matter of law based on our
interpretation of the Contract, that Cleere is responsible to
Dominion for necessary and reasonable costs incurred in settling
with Kenaf for its surface damages to the extent, if any, that any
of such blowout-related damage to the landowner’s interest did not
result from contamination. Like contamination-caused cleanup and
restoration costs, any contamination-caused landowner damages would
remain the responsibility of Dominion under 18.12 and thus would
not be recoverable by Dominion from Cleere.
27
We therefore remand the issue of landowner damages to the
district court for it to determine whether all, some, or none of
Kenaf’s damages resulted from contamination. If the court should
conclude that any portion of such damages did not result from
contamination, it then must determine (1) how much of the $52,000
that Dominion paid to Kenaf was for any such non-contamination
landowner damages and (2) how much of that was necessary and
reasonable, and thus reimbursable to Dominion by Cleere.
d. Killing the Well
Our plenary review satisfies us that the district court
correctly held that Cleere's loss of the Well prior to reaching
contract footage depth makes Cleere responsible for the necessary
and reasonable costs and expenses occasioned by that lost control.
This responsibility is not otherwise allocated by the Contract.
Cleere's loss of control of the Well, coupled with Cleere's
inability to bring the Well under control, left Dominion no choice
but to hire a contractor capable of controlling and killing the
Well. The district court correctly held Cleere responsible for the
reasonable costs of this necessary operation.
e. Drilling the Replacement Well
In the same vein, even though the Well was eventually brought
under control and killed, it was nevertheless unusable for purposes
of drilling the Kenaf Industries No. 1 to contract footage depth.
Dominion had no choice (other than abandoning the prospect
28
altogether) but to move over and drill a replacement well.30 Thus,
as yet another natural consequence of Cleere's loss of the Well,
Dominion experienced an additional necessary cost equal to the
differential between the contract price for Cleere to drill the
Well and the reasonable cost of retaining another contractor to
drill the replacement well. We agree with the district court's
determination that Cleere is responsible to Dominion for the
reasonable cost of this differential. We thus affirm the district
court's holding that Cleere is liable to Dominion for the
differential in the costs between the contract price with Cleere
and the reasonable cost of drilling the replacement well.
3. Necessity and Reasonableness of Dominion's Expenditures
Cleere’s final contention is that the quantum of the district
court’s awards to Dominion for the costs and expenses it incurred
following the blowout are not supported by record evidence. Cleere
does not question that Dominion actually paid the dollar amounts
reflected on the invoices submitted by Dominion. Rather, Cleere
insists that the record is devoid of evidence showing that those
expenditures were necessary and reasonable. In response, Dominion
30
Subparagraph 18.6 of the Contract specifies that if a
blowout occurs while Cleere is operating under a footage basis
“[Cleere] shall...commence a new hole without delay at [Cleere’s]
cost....” Cleere does not complain, however, that another
contractor was selected to drill the replacement well, focusing
instead on the reasonableness and necessity of that contractor’s
charges.
29
contests each of the foregoing assertions by Cleere and urges that
we affirm the judgment of the district court in all respects.
The record confirms that Dominion presented essentially no
evidence to prove that the amounts it admittedly expended following
the blowout were necessary and reasonable. Thus, on remand, the
district court must determine —— in addition to (1) which, if any,
of the cleanup or restoration items that Dominion paid for were not
the result of contamination from the blowout; (2) which, if any, of
the items of landowner damages for which Dominion paid Kenaf a
total of $52,000 were not the result of contamination from the
blowout; and (3) whether the dollar amounts spent by Dominion on
any non-contamination items of (a) cleanup and restoration or (b)
landowner damages were necessary and reasonable —— whether and to
what extent the concededly necessary costs of controlling and
killing the Well and having the replacement well drilled were
reasonable.
The required inquiry into the necessity and reasonableness of
expenditures is a very fact-intensive process, making it prudent
for us to allow the district court, in its role as factfinder, to
have the first opportunity to consider that aspect of any damage
awards. We therefore leave these determinations to the district
court. In regard to categorizing the various aspects of cleanup,
restoration, and landowner damage as either contamination or non-
contamination, and to determining which of Dominion’s expenditures
on these items were necessary and reasonable, we leave to the
30
discretion of the district court whether the record is adequate or
in need of supplementation. The same applies to the court’s
determination of the reasonableness of the concededly necessary
costs of controlling and killing the Well and drilling a
replacement.
III. Conclusion
For the foregoing reasons, we affirm that part of the district
court’s judgment that holds that the Contract never converted from
a footage to a daywork basis. We also affirm the part that rejects
Cleere’s claims for (1) pre-blowout drilling services (because
Cleere never reached “contract footage depth”), (2) daywork
services (because the Contract never converted to a daywork basis),
and (3) the loss of its own property in the hole (because, under
subparagraph 18.2, Cleere remains responsible for any loss of its
in-hole equipment while performing on a footage basis). And we
affirm the part of the court's judgment that holds Cleere
responsible for all necessary and reasonable costs incurred by
Dominion in controlling and killing the Well and for the
differential between the contract cost of drilling the Well and the
reasonable cost of drilling the replacement well; but we vacate the
quantum of the court’s awards to Dominion for these items and
remand for the district court to determine how much of Dominion’s
expenditures on these necessary items was reasonable, and thus
reimbursable by Cleere.
31
Furthermore, we reverse the part of the district court’s
judgment that holds the Contract’s indemnity and release provisions
inapplicable for lack of “fair notice”; and we hold that doctrine
irrelevant because Dominion had actual knowledge of the indemnity
and release provisions of the Contract. We also reverse that part
of the judgment that holds the salt water, sand, and drilling mud
that the blowout spread on the surface of the land did not
constitute contamination of the drill site and the surrounding area
within the meaning of the Contract; we hold that the presence of
the materials in question did constitute contamination within the
meaning of the Contract.
Next, we vacate the quantum of the district court’s awards to
Dominion for costs incurred in the cleanup and restoration of the
surface, and remand for the court to determine (1) whether,
consistent with this opinion, any portion of Dominion’s
expenditures for cleanup or restoration of the drill site and
surrounding areas is not attributable to contamination and is
therefore Cleere’s responsibility under the Contract; and, (2) if
so, how much of each such non-contamination expenditure is
necessary and reasonable, and therefore reimbursable by Cleere. We
likewise vacate the quantum of the district court's award to
Dominion in reimbursement of payments to Kenaf for landowner
damages, and remand for the court to determine (1) whether,
consistent with this opinion, any portion of such landowner damages
to Kenaf is not attributable to contamination and is therefore
32
Cleere’s responsibility under the Contract; and (2) if so, how much
of such non-contamination landowner damages is necessary and
reasonable, and therefore reimbursable by Cleere.
AFFIRMED in part; REVERSED in part; VACATED in part; and REMANDED
with instructions.
33