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Drafting tip from the BP oil-spill settlement agreement: Think about the burden of proof for conditional payment obligations

When drafting a conditional obligation for your client to pay money (or do anything else), give some thought to specifying in detail:

(1) who has the burden of proving that the conditions for payment have been met, and

(2) just what is required to carry that burden.

As a simple example, let’s assume that you want to tell your kid that you’ll pay her $100 for making straight-A grades.

  • If you felt the need to be explicit about it, you could say that the kid must show you her report card.
  • It’d be unwise for you to say that you’d pay her unless you showed that she got at least one grade that wasn’t an A.

Along those lines, the oil company BP probably wishes, with 20-20 hindsight, that it had been tougher and more explicit on point #2 above in its settlement agreement for certain class-action claims arising from the Deepwater Horizon oil spill:

  • The settlement agreement documents stated that people and businesses that met certain prerequisites would be compensated from a fund set up by BP, without any need to produce evidence that their injuries resulted from the spill; all they had to do was to certify, under penalty of perjury, that this was the case.
  • But then the independent claim administrator issued an interpretation that he would pay such claims without regard to whether the claimants’ injuries had been caused by factors other than the oil spill.
  • That reportedly caused a veritable land rush of claims; as a dissenting appeals court judge argued, “[c]laimants whose losses had absolutely nothing to do with Deepwater Horizon or BP’s conduct will recover [that is, receive compensation from BP] as a result of this ruling.” In re Deepwater Horizon, No. 13-30315, slip op. at 25 (5th Cir. Mar. 3, 2014) (Clement, J., dissenting).

The Houston Chronicle reported that, in BP’s certiorari petition seeking review by the (U.S.) Supreme Court, filed this past Friday (apparently not available online), BP argued that:

… it [BP] has made about $546 million in payments to claimants who “reside far from the Gulf Coast and are engaged in business activities that bear no logical connection to the spill.”

And, the company said, it has also made $76 million in payments to claimants whose losses had nothing to do with the spill, such as businesses with warehouses that had burned down before the spill.

Collin Eaton, BP appeals to Supreme Court on spill settlement (FuelFix.com 2014).

Lesson: Be careful about how you phrase the conditions in a conditional obligation. There can be a big difference between:

  • I will pay you if you show that X is true, on the one hand,
  • versus

  • I will pay you unless I show that X is not true.
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