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Court News Ohio
Court News Ohio

Contract Requires Oil Driller to Pay Penalty Well Owner Accepted

Image of an oil drill rig used in the practice of fracking.

The Court ruled an oil well owner that paid a fine for pollution violations caused by a drilling company could recoup the fine from the driller.

Image of an oil drill rig used in the practice of fracking.

The Court ruled an oil well owner that paid a fine for pollution violations caused by a drilling company could recoup the fine from the driller.

An eastern Ohio oil well owner paid a $50,000 fine to state regulators to settle pollution violations caused by a drilling company the owner hired. The well owner is allowed to recoup the fine from the driller, even though it did not notify the driller that it was negotiating a settlement, the Supreme Court of Ohio ruled today.

In a 4-3 decision, the Supreme Court found that the contract between well owner Discovery Oil and Gas  and driller Wildcat Drilling had a written provision requiring Wildcat to indemnify, or reimburse, Discovery for any fines. The provision did not have any requirement that Wildcat be notified in advance. The Court majority rejected Wildcat’s claim that under Ohio court precedent, a person obligated to indemnify another for a judgment must provide notice about the dispute before any payment is made.

This is the second time the dispute between Wildcat and Discovery has been before the Supreme Court. Today's decision vacates all prior decisions except an original 2017 Mahoning County trial court ruling that Wildcat had to pay Discovery’s $50,000 fine issued by the Ohio Department of Natural Resources (ODNR).

Writing for the Court majority, Justice Patrick F. Fischer explained the contract between the companies had an express indemnification provision, which stated the driller had to pay for any judgment or fine for pollution damages. When a contract has specific language that does not include a notice provision, then common law requirements that notice is required do not apply, he stated.

“Nowhere in the contract do the parties agree that either party must provide the other with notice of a claim before entering into a voluntary settlement of that claim in order to exercise its indemnification rights,” Justice Fischer wrote.

Chief Justice Sharon L. Kennedy and Justices R. Patrick DeWine and Joseph T. Deters joined Justice Fischer’s opinion.

In a dissenting opinion, Justice Michael P. Donnelly wrote that for decades Ohioans have relied on the 1944 Supreme Court decision (Globe Indemn. Co. v. Schmitt), which required a party seeking reimbursement after entering into a voluntary settlement to provide notice to the party it expects to pay the settlement.

“Today’s majority opinion needlessly eviscerates this aspect of common law,” he wrote.

In a separate dissenting opinion, Justice Melody Stewart noted that the Supreme Court sent the case back to the trial court in 2020 to interpret the contract provision more closely. The trial court and the Seventh District Court of Appeals ruled that Wildcat did not have to pay because it was not notified of the settlement. She wrote the Court majority  substituted its judgment for the lower courts and improperly engaged in “error correction.”

Justice Jennifer Brunner joined Justice Stewart’s opinion.

Fine Leads to Contract Dispute
In 2014, Discovery contracted with Wildcat to drill an oil and gas well. The contract required Wildcat to indemnify Discovery for any payments of fines or penalties imposed due to pollution or contamination caused by drilling. In 2015, ODNR notified Discovery that Wildcat’s drilling violated state law. Wildcat was aware of the accusation. Without consulting Wildcat, Discovery negotiated a $50,000 fine with ODNR.

When Discovery paid the fine, it demanded that Wildcat reimburse Discovery under the contract's indemnification clause. Wildcat refused. The parties sued each other for breach of contract in Mahoning County Common Pleas Court. Wildcat maintained that because Discovery did not notify Wildcat of ODNR’s proposed fine, it did not have to pay. Wildcat cited the Globe Indemn. Co. v. Schmitt decision, maintaining the Court established a common law rule in Ohio that a party needed to be notified of an indemnity claim before being obligated to pay it.

The trial court sided with Discovery, noting that Wildcat knew about the compliance issue and had an opportunity to challenge it before Discovery negotiated a settlement. Wildcat appealed to the Seventh District, which found the Globe Indemn. Co. decision did apply, and Discovery did have to give Wildcat notice if it wanted reimbursement.

Discovery appealed to the Supreme Court, which considered the case in 2020. In its 2020 decision, a divided Supreme Court did not side with either party. It remanded the case to the trial court to determine if the contract between the two companies contained a “clear intent” not to follow the  Globe Indemn. Co. requirements about when notice is required.

When the case was returned, the trial court ruled the contract was not clear and Wildcat was not obligated to pay because it did not receive notice. The Seventh District affirmed the decision. Discovery appealed to the Supreme Court, which again agreed to hear the case.

Supreme Court Analyzed Contract’s Provisions
Justice Fischer explained that parties to a contract can include terms that do not follow common law, but the intent to do so must be clearly indicated in the contract. The opinion observed that there are two types of indemnity, express and implied indemnity.  In cases of implied indemnity, otherwise known as common law indemnity, the principle is that everyone is responsible for their own negligence. If another person has been compelled to pay for damages, then that person has the right to be reimbursed by the actual wrongdoer.

The majority opinion explained that express indemnity alters the common law rule of implied indemnity. Express indemnity is based on the written agreement or contract between two parties and specifies the circumstances in which reimbursement must be paid.

“Therefore, when parties have entered into an agreement or contract that includes an indemnification clause, unless that clause is ambiguous or otherwise unlawful, it will be applied as written because the agreement or contract governs the rights of the parties,” the opinion stated. “This straightforward rule ensures that the parties can fully understand and protect their rights under the agreement or contract.”

The contract between Wildcat and Discovery contained no notice requirement. Based on the contract language, Discovery did not have to notify Wildcat of the ODNR settlement, the opinion stated.

Justice Fischer wrote that the lack of notification in the contract language should settle the case. However, he maintained that even if the contract's language did not clearly demonstrate the intent to ignore the notice requirement, there is evidence that the parties intended to depart from the common law requirement.

The opinion noted the contract required Wildcat to indemnify Discovery from “any loss” or fine for pollution and contamination and that they agreed that Wildcat would pay “all indemnity obligations” and “without limit” regarding the cause.

The Court noted these provisions did not contain any conditions, such as prior notification to Wildcat. The opinion stated that the parties did include a notice requirement before any action could occur in four other areas of the contract. That supported the argument that the parties intended to omit the notice requirement for indemnification, the Court concluded.

Dissent Questioned Supreme Court’s Second Review of Case
In her dissent, Justice Stewart explained that today’s majority opinion is based on the reasoning of Justice Fischer’s dissenting opinion issued in the 2020 Supreme Court decision. She stated the majority “merely substitutes the reasoning of the prior dissenting opinion in place of the legal analyses conducted by the trial and appellate courts.”

The dissent noted the majority’s actions correct what it perceives as an error made by the lower courts, and unnecessarily overrules the Court’s 2020 decision. Justice Stewart wrote the lower courts followed the Supreme Court’s instructions and interpreted the contract. Rather than change their decisions, she stated the Court should have considered the case to be improvidently accepted and let the Seventh District decision in favor of Wildcat stand.

“There is no reason to disturb that rational result and replace it with a blanket rejection of the well-established common-law principles simply because a contract is involved — regardless of whether the language of the contract evidences a clear intent to do so,” the dissent stated.

2022-0596. Wildcat Drilling LLC v. Discovery Oil & Gas LLC, Slip Opinion No. 2023-Ohio-3398.

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