A federal judge ruled yesterday on the key issue of to what extent indemnification agreements between BP PLC and Transocean Ltd. limit the latter's exposure in the litigation surrounding the Deepwater Horizon disaster.

U.S. District Judge Carl Barbier of the Eastern District of Louisiana held that Transocean is indemnified over compensatory damages related to the April 20, 2010, explosion and resulting spill at the Macondo well, including the cleanup costs.

But Transocean, the owner of the Deepwater Horizon rig, will not be protected from potential punitive damages or civil penalties under the Clean Water Act, which could be in the billions.

The Clean Water Act penalties alone could range from $5.4 billion, based on a minimum $1,100-per-barrel fine, to as much as $21.1 billion, or $4,300 per barrel, if the spill is deemed to be the result of "gross negligence."

In November, Switzerland-based Transocean filed a motion for summary judgment in which it said BP, which was the well operator, must meet its contractual obligations (Greenwire, Nov. 1, 2011).

The 1998 contract, which was extended at various times, stated that BP would "defend, release, protect, indemnify and hold harmless" Transocean for "any and all fines, penalties and damages associated with environmental pollution," according to Transocean.

In his ruling, Barbier decided what was covered by that contract. Importantly for Transocean, he held that the agreement did protect the company from claims relating to pollution originating below the surface of the ocean, which includes compensation to fishermen and other businesses in addition to the cleanup costs.

BP set up a $20 billion compensation fund to pay affected parties and is also facing numerous private lawsuits as part of the multidistrict litigation that Barbier is presiding over.

Barbier also ruled, however, that Transocean could be exposed to punitive damages if found to have been grossly negligent, and he rejected the company's argument that Clean Water Act penalties could be covered by the contact.

Transocean said in a statement that the ruling "confirms that BP is responsible for all economic damages caused by the oil that leaked from its Macondo well, and discredits BP's ongoing attempts to evade both its contractual and financial obligations."

BP responded in its own statement that Transocean "is, at a minimum, financially responsible for any punitive damages, fines and penalties flowing from its own conduct."

The company "cannot avoid its responsibility for this accident," BP said.

Click here to read the ruling.