Houston Exploration Co. v. Halliburton Energy Services, Inc.

                   UNITED STATES COURT OF APPEALS
                        FOR THE FIFTH CIRCUIT
               _____________________________________

                            No. 00-30724
               _____________________________________


                  THE HOUSTON EXPLORATION COMPANY,

                                              Plaintiff-Appellee,

                                  V.

                 HALLIBURTON ENERGY SERVICES, INC.,

                                              Defendant-Appellant,


         __________________________________________________

           Appeal from the United States District Court
               For the Eastern District of Louisiana

         __________________________________________________
                          October 22, 2001


Before DAVIS and JONES, Circuit Judges, and PRADO*, District
Judge.

W. EUGENE DAVIS, Circuit Judge:

     The Houston Exploration Company (“THEC”) sued Halliburton

Energy Services, Inc. (“Halliburton”) for damages incurred when

THEC’s gas well blew out after Halliburton conducted drill stem

testing on the well.   At trial, Halliburton argued that it was

shielded from liability under an indemnity agreement between

Halliburton and THEC, which required THEC to release and

indemnify Halliburton.   Finding that Halliburton’s conduct

     *
     District Judge of the Western District of Texas, sitting by
designation.
constituted gross negligence, the district court refused to

enforce the indemnity agreement and entered a judgment for THEC.

Halliburton now appeals, arguing that it was not grossly

negligent, and thus, that the indemnity agreement should be

enforced.   Because we conclude that the district court clearly

erred in finding that Halliburton’s conduct amounted to gross

negligence, we vacate the judgment of the district court and

remand the case for further proceedings consistent with this

opinion.

                                I.

     The facts giving rise to this action are largely undisputed.

THEC owned a natural gas well, known as Well C-1 (“the Well”),

located on the Outer Continental Shelf in the Gulf of Mexico

offshore of Louisiana, which blew out on May 31, 1997.   Pursuant

to a Work Order Agreement, THEC contracted with Halliburton to

perform drill stem testing operations on the Well.

Significantly, the Work Order Agreement required THEC “to defend,

indemnify and hold Halliburton . . . harmless from and against

any and all liability, claims, costs, expenses, attorney’s fees

and damages . . . resulting from . . . [l]oss of well control.”

The blowout that is the subject of this litigation occurred after

Halliburton completed the third of three drill stem tests.

      Drill stem testing entails perforating natural gas bearing

formations at different depths in the well to determine at what



                                -2-
depth or depths the well should be completed.   One tool necessary

for the test is a Halliburton tool known as an Internal Pressure

Operating (“IPO”) valve.   The IPO valve is a tubular tool fitted

with one or more pins, which will shear when the variance between

the internal pressure in the hollow core of the valve and the

external pressure surrounding it reaches a preset differential.

Each pin is designed to shear at a pressure differential of 610

psi; thus, the total pressure differential required to open the

ports is 610 psi multiplied by the number of pins.   When the

IPO’s pins shear, ports in the valve open, allowing the well

fluid to circulate inside and outside the drill stem.   In this

way, the IPO valve acts as a back-up circulating valve, which

circulates mud or fluid through the well in the course of the

well testing operations.   It is not designed to function as a

well control device.

     At the time of the blowout, Halliburton’s practice was to

ship IPO valves from its tool shop fitted with only one pin.     The

Halliburton tool operator would then calculate the number of pins

required for the job, open the valve, inspect it, and fit it with

the correct number of pins.   In this case, Halliburton shipped

three IPO valves to the rig: first, two valves with serial

numbers 374 and 154, and later, a valve numbered 351.

     The three well tests were conducted on May 21, 28, and 31,

aboard the mobile drilling vessel PHOENIX II.   Wayne Lemaire was



                                -3-
the Halliburton tool operator for the first two tests.   During

the first test, the pins in IPO valve number 374 sheared.     That

valve could not be reused and was returned to Halliburton’s on-

shore shop to be redressed.   As a result, Halliburton shipped

valve number 351 as a replacement.

     The second test was conducted on May 28, 1997.    According to

Halliburton’s policy, Lemaire inspected valve number 351 and

correctly fitted the valve with five pins.   Lemaire did not

record the serial number on the valve or mark it for

identification.   During a delay of several hours before the

second test, the dressed valve was moved around the rig.     When

Lemaire gathered the tools for the second test, he realized that

they had been moved.   Without reopening the valve to determine

whether it had been properly pinned, Lemaire picked up what he

believed was the readied IPO valve and inserted it into the test

string.   Unfortunately, Lemaire erroneously installed the

unprepared IPO valve number 154, which contained only one pin.

Nevertheless, the second test was successfully completed.

     Before the third test was run, Phillip Costlow, another

Halliburton employee, replaced Lemaire as tool operator.     Lemaire

informed Costlow that the IPO valve already installed in the Well

was properly pinned and ready for the third test.   Relying on

Lemaire’s statements, Costlow did not disassemble the test string

to reinspect the IPO valve and verify that it had been properly



                                -4-
pinned.

     After the third test was completed and as the IPO valve was

being removed from the test string, pressure in the Well created

a kick.   The drill crew brought the Well under control by

tightening the connections on the IPO valve, thereby shutting in

the Well.   During this time, the IPO valve acted as a blowout

preventer, a purpose for which it was not intended.    Over the

next one and a half hours, completion fluid was pumped into the

well, causing the pressure to rise.   As a result, the single pin

in the IPO sheared unexpectedly, causing its ports to open and

allowing a blowout of natural gas into the atmosphere.      All

personnel were safely evacuated from the rig.

     It is undisputed that if the IPO had been pinned as

intended, the blowout would not have occurred.    After 19 days,

the blowout was brought under control and the Well was placed

into production.

                                II.

     THEC filed this suit against Halliburton, alleging that

Halliburton was responsible for the blowout.    At trial,

Halliburton argued that the indemnity provisions of the Work

Order Agreement protected Halliburton from liability.    THEC

maintained, however, that the indemnity agreement was

unenforceable because Halliburton’s conduct amounted to gross

negligence.   The district court agreed and entered a judgment in



                                -5-
favor of THEC.

     Neither party disputes that a party’s gross negligence

defeats its right to enforce an indemnity contract of this kind.1

The key issue Halliburton raises on appeal is simply whether the

district court erred in finding that Halliburton’s conduct

amounted to gross negligence, thereby defeating its right to

enforce the indemnity agreement.

                               III.

     In an admiralty case, as in other cases, we review a

district court’s findings of fact for clear error and its

findings of law de novo.2   A finding that a party is negligent or

grossly negligent is a finding of fact and must stand unless

clearly erroneous.3   A finding of fact is “‘clearly erroneous’

when although there is evidence to support it, the reviewing

court on the entire evidence is left with the definite and firm

conviction that a mistake has been committed.”4

     Under Louisiana law, contracts limiting liability are


     1
          See La. Civ. Code Ann. art. 2004 (West 1987) (“Any clause
is null that, in advance, excludes or limits the liability of one
party for intentional or gross fault that causes damage to the
other party.”).
     2
          Fed. R. Civ. P. 52(a).
     3
          Smyth v. Huff, 207 F.3d 758, 762 (5th Cir. 2000); Kratzer
v. Capital Marine Supply, Inc., 645 F.2d 477, 480 (5th Cir. 1981);
Tittle v. Aldacosta, 544 F.2d 752, 754 (5th Cir. 1977).
     4
          United States v. United States Gypsum Co., 333 U.S. 364,
395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948).

                                -6-
generally valid and enforceable.5     Any waiver of liability for

intentional misconduct or gross negligence, however, is void.6

     Under Louisiana law, gross negligence is willful, wanton and

reckless conduct that falls between intent to do wrong and

ordinary negligence.7   We stated in Orthopedic & Sports Injury

Clinic v. Wang Laboratories, Inc., that “[g]ross negligence is

substantially and appreciable higher in magnitude than ordinary

negligence.”8   Other courts have defined gross negligence as the

“entire absence of care,”9 the “want of even slight care and

diligence,”10 and the “utter disregard of the dictates of

prudence, amounting to complete neglect of the rights of


     5
          See, e.g., Nicor Supply Ships Assocs. v. General Motors
Corp., 876 F.2d 501, 504 (5th Cir. 1989); Coastal Iron Works, Inc.
v. Petty Ray Geophysical, 783 F.2d 577, 580-83 (5th Cir. 1986). The
district court found that Louisiana law governs this case pursuant
to the Outer Continental Shelf Lands Act, 43 U.S.C. § 1333(a)
(2001). Because neither party challenges that finding on appeal
and because we find that the same outcome obtains whether Louisiana
or maritime law applies, we adhere to the district court’s finding
and apply Louisiana law.
     6
          La. Civ. Code Ann. art. 2004; Sevarg Co. v. Energy
Drilling Co., 591 So. 2d 1278 (La. Ct. App. 1991).
     7
          Orthopedic & Sports Injury Clinic v. Wang Laboratories,
Inc., 922 F.2d 220, 224 n.3 (5th Cir. 1991).
     8
          Id.
     9
          Hendry Corp. v. Aircraft Rescue Vessels, 113 F. Supp.
198, 201 (E.D. La. 1953); see also Ambrose v. New Orleans Police
Department Ambulance Service, 639 So. 2d 216, 219 (La. 1994).
     10
          State v. Vinzant, 200 La. 301, 315, 7 So. 2d 917, 922
(1942), quoting 18 Words & Phrases 723 (Perm. ed.); see also
Ambrose, 639 So. 2d at 219.

                                -7-
others.”11    At least one Louisiana court stated that one is

grossly negligent when he “has intentionally done an act of

unreasonable character in reckless disregard of the risk known to

him, or so obvious that he must be taken to have been aware of

it, and so great as to make it highly probable that harm would

follow.”12    Mere inadvertence or honest mistake does not amount

to gross negligence.13

       In this case, the district court found that Halliburton’s

conduct constituted gross negligence in two respects: (1)

Lemaire’s failure to verify that the valve he installed had been

properly pinned; and (2) Costlow’s subsequent failure to

disassemble the test string and recheck Lemaire’s work.

       We turn first to the district court’s determination that

Lemaire was grossly negligent because he did not mark the IPO

valve after pinning it, record its serial number, or reinspect

the valve after it had been moved.      The record demonstrates that

Lemaire properly inspected and pinned IPO valve number 351.     He

then lost track of that tool after a member of the drill crew

moved it.    Lemaire then erroneously substituted another


       11
          Hendry Corp., 113 F. Supp. at 201; see also Ambrose, 639
So. 2d at 219-20; Vinzant, 200 La. at 315, 7 So. 2d at 922.
       12
          Cates v. Beauregard Elec. Coop., 316 So. 3d 907, 916 (La.
Ct. App. 1975), aff’d, 328 So. 3d 367 (La. 1976); see also
Orthopedic & Sports Injury Clinic, 922 F.2d at 224 n.3.
       13
             See Orthopedic & Sports Injury Clinic, 922 F.2d at 224
n.3.

                                  -8-
indistinguishable tool in the test string.      The record does not

support a finding that Lemaire had been instructed to mark or

record the serial number of tools that had been dressed.      The

district court was entitled to find that Lemaire’s conduct was

negligent in failing to devise a method of distinguishing between

the dressed and undressed tools.       However, we conclude that the

record does not support a finding that Lemaire’s conduct amounts

to a “want of even slight care and diligence,”14 the most relaxed

definition of gross negligence the courts provide.

     Moreover, the record does not support a finding that Lemaire

knew or should have known that a blowout might occur if the IPO

valve was not properly pinned.   As stated earlier, THEC personnel

tried to control the kick by using the IPO valve as a blowout

preventer.   The IPO valve is a back-up circulating valve designed

to circulate fluids in the well during drill stem testing if the

principal circulating valve, the OMNI valve, becomes inoperable.

It is not designed to function as a well control device.      In

addition, the record contains no evidence that a blowout has ever

resulted from a mispinned IPO valve.      A tool operator would

reasonably expect that an improperly pinned valve would result

only in a botched drill stem test, requiring the drill stem to be

removed from the well in order to replace the IPO valve.      The

record does not support a conclusion that an operator, such as


     14
          Vinzant, 200 La. at 315, 7 So. 2d at 922.

                                 -9-
Lemaire, would anticipate that an improperly pinned valve would

contribute to a well blow-out.    On these facts, we conclude that

the district court clearly erred in finding that Lemaire’s

conduct constituted gross negligence.

     The district court also found that Costlow’s failure to

disassemble the test string and reinspect Lemaire’s work amounted

to gross negligence.    Costlow’s conduct presents an even weaker

case for gross negligence than Lemaire’s behavior.    Costlow had

no reason to believe that the IPO valve was not properly dressed.

Costlow relied on Lemaire’s statements that the IPO valve had

already been pinned correctly.    When Costlow relieved Lemaire as

tool operator, the second test had already been successfully

completed with the same IPO valve that is at issue in this case.

Costlow had no reason to suspect that anything was wrong with the

valve.    Under these circumstances, the record clearly

demonstrates that Costlow’s conduct would at most support a

finding of negligence.    Thus, we hold that the district court

also clearly erred in finding that Costlow’s conduct amounted to

gross negligence.

     Our resolution of this appeal makes it unnecessary for us to

consider a number of additional issues Halliburton raises in this

appeal.

                                 IV.

     THEC argued in the district court that the indemnity



                                 -10-
agreement on which Halliburton relies was not executed by an

authorized representative of THEC, and therefore, that the

contract is unenforceable.   Because the district court did not

reach this issue, we must remand this case to the district court

for its resolution.   Accordingly, we VACATE the judgment of the

district court and REMAND the case to the district court for

further proceedings consistent with this opinion.

VACATED AND REMANDED.




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