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Indemnity in Deep Water: Indemnity Agreements
Offshore and the Deepwater Horizon
Indemnity in Deep Water:
Indemnity Agreements Offshore
1
and the Deepwater Horizon
Michael A. Golemi2
Liskow & Lewis
L. Etienne Balart3
Jones Walker
1
This paper incorporates materials produced by Liskow & Lewis in connection
with various other presentations. The authors would like to specifically thank
Josh Downer and J.T. Kittrell for their assistance in preparing these materials.
2
Shareholder, Houston Office of Liskow & Lewis. Member of firm’s Maritime,
Oilfield, and Insurance Practice Group.
3
Partner, Jones Walker, LLP. Member of the firm’s Admiralty & Maritime,
Construction, and Business & Commercial Litigation Practice Groups.
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I.
INTRODUCTION
On April 20, 2010, an explosion occurred on the Mobile Offshore Drilling Unit
(“MODU”) Deepwater Horizon, taking the lives of eleven people and causing a spill in
the Gulf of Mexico that lasted 87 days. In the years to follow, this event would trigger a
sweeping amount of litigation and raise a multitude of complex legal questions, not the
least of which concern the scope and enforceability of agreements to provide defense and
indemnity for personal injury and environmental damage. This paper examines some of
the fundamentals of contractual indemnity and insurance provisions in the offshore
production context, using the events of the Deepwater Horizon incident as a case study
where appropriate, and discusses how that event and recent decisions may shape future
oilfield contracts. At the end of each section the paper will also attempt to provide an
update by summarizing some notable recent cases under Louisiana, Texas, and maritime
law.
II.
WHY INDEMNITY?
With all the issues that typically arise when a party seeks to enforce an indemnity
agreement, a casual observer might wonder why companies go to such lengths to include
these agreements in their contracts in the first place. Indemnity agreements are typically
entered into between an owner or operator of an offshore facility and a contractor hired to
perform services on that facility. Often such entities will enter into a broad master
contract intended to govern all the anticipated transactions of the parties at the outset of
their relationship; then work will be performed pursuant to individual work orders subject
to that master agreement. These overarching master contracts usually take the form of a
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Master Service Agreement (“MSA”) or a Drilling Contract and contain the indemnity and
insurance provisions that seek to allocate risk on the front-end.
Since the master
agreement is intended to cover the future relationships of the parties, it is primarily
forward looking, and the indemnity agreement and related insurance provisions are part
of this process.
There are a multitude of different types of indemnity agreements. This paper,
however, focuses on the typical “broad form” agreement commonly encountered in the
offshore context.
These agreements usually require the principal to indemnify the
contractor for injury to the principal’s property or employees and vice-versa.
By
allocating risk on an ownership and employment basis, the parties seek to avoid any
ambiguity as to who will be responsible for potential damage in the future and to place
any possible liability in the hands of the party that is in the best position to handle the
situation.
The relationship between BP and Transocean in the Deepwater Horizon
context, for example, was governed by a 1998 Drilling Contract that contained several
indemnity provisions. In this agreement, BP agreed, among other things, to indemnify
Transocean for all claims based on pollution that occurred below the water line, while
Transocean agreed to do the same for pollution that originated above the water line. See
In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20,
2010, MDL 2179, 841 F. Supp.2d 988, 994 (E.D. La. 2012).
Thus the indemnity
agreement between an offshore operator and a contractor, at its core, is nothing more than
a risk allocation tool in an industry where costs can quickly accumulate and liabilities can
be astronomical.
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III.
DRAFTING IN A NUTSHELL
In order to effectively allocate risk on an ownership or employment basis, an
indemnity agreement must be enforceable, even where the indemnitor is negligent or
otherwise at fault. Whether an indemnity provision in a contract will be enforceable for
the indemnitee’s negligence is in large part determined at the time of its drafting. Some
of the core requirements of an effectively drafted indemnity agreement are discussed
below, and as the reader will see, anticipating what law will ultimately govern the
contract is immensely important.
A.
“Clear and Unequivocal” and Express Negligence
To indemnify a person against his or her own negligence, the parties must ensure
that the agreement states this intent expressly. Both maritime law and Louisiana law
employ a similar standard. Under maritime law, an agreement is enforceable when the
intent to indemnify against the indemnitee’s negligence is expressed in “clear and
unequivocal” terms. Seal Offshore, Inc. v. American Standard, Inc., 736 F.2d 1078, 1081
(5th Cir. 1984). Similarly, in Louisiana, the parties must use “unequivocal terms.”
Perkins v. Rubicon Inc., 563 So.2d 258, 259 (La. 1990).
Originally, Texas followed the “clear and unequivocal” test as well. In 1987,
however, the Texas Supreme Court rejected the clear and unequivocal test and adopted
the “express negligence doctrine,” stating that the intent to indemnify the indemnitee for
his own negligence must be stated in “specific terms” within the four corners of the
contract. Ethyl Corp. v. Daniel Const. Co., 725 S.W.2d 705, 708 (Tex. 1987). This rule
seems to require that the parties actually use the word “negligence” in their agreement.
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Although the analysis varies somewhat from state to state, it is advisable that any party
drafting an indemnity agreement include an express reference to the negligence of the
indemnitee as well as an express reference to other forms of fault such as the “sole or
concurrent” fault of the indemnitee, strict liability, unseaworthiness, and pre-existing
conditions. If the parties intend the agreement to cover the indemnitee’s contractual
liability to a third party, the parties will need to expressly provide for this in the
agreement as well.
The rule also requires that such indemnity or release be in
conspicuous language that calls the reader’s attention to the clause through such methods
as boldface type, capitalization, or contrasting font, as discussed below.
B.
Fair Notice and Consent Requirements
In addition to using sufficiently clear language, under Texas law the indemnity
provision must not be hidden within the contract; rather, it must be conspicuous. Courts
will not enforce a provision if the indemnitor did not have sufficient notice that the
indemnity obligations would extend to the indemnitee’s own negligence. For example, in
Dresser Industries, Inc. v. Page Petroleum, Inc., 853 S.W.2d 505 (Tex. 1993), the Texas
Supreme Court held that indemnity provisions and releases must be “conspicuous” and
adopted the standard provided in the Texas Uniform Commercial Code. Indemnity
agreements and releases located on the back of work orders in a series of uniformly
numbered paragraphs with no heading and without contrasting print type font are not
sufficiently conspicuous to provide fair notice to the indemnitor under Texas law. Id. at
511.
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Louisiana does not require that the agreement be conspicuous, but under
Louisiana law, a court may refuse to enforce an indemnity agreement contained in a
“contract of adhesion” if a party with superior bargaining power prepares the agreement.
Often the size of printed terms will be a factor in such a determination because the use of
small print “raises a question as to whether or not the weaker party actually consented to
the terms.” Golz v. Children's Bureau of New Orleans, Inc., 326 So. 2d 865, 869 (La.
1976). See also McGoldrick v. Lou Ana Foods, Inc., 94-400 (La. App. 3d Cir. 11/2/94);
649 So.2d 455, 460 (recognizing but refusing to apply contract of adhesion defense
where indemnity clause appeared in lettering that was the same size as the rest of the
contract and both parties were business entities).
Maritime law, like Louisiana law, does not require conspicuousness outside of the
requirement for a clear and express intention. But maritime law may also recognize the
adhesion doctrine. In Griffin v. OPI International, Inc., 878 F.Supp. 996 (S.D. Tex
1995), affirmed by, 79 F.3d 1144 (5th Cir. 1996), the court found the indemnity and
insurance provisions of a charter party to be a contract of adhesion because the person
who signed the contract alleged that he did not understand the agreement when he signed
it and was told that if he did not sign he would lose his contract with the indemnitee. Id.
at 1009.
The Griffin opinion is not particularly well reasoned, and many other
circumstances impacted the decision. Nevertheless, these kinds of decisions are why
MSAs and Drilling Contracts typically include the indemnity provisions in separate
sections and paragraphs within the agreement and highlight them in bold-faced print or in
all caps.
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C.
Recent Drafting Related Cases
1.
In re: Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of
Mexico on April 20, 2010, No. 2179 Section: J(1), 2011 U.S. Dist.
LEXIS 131693 (E.D. La. Nov. 15, 2011), rev’d by In re: Deepwater
Horizon, No. 12-30230, slip op. (5th Cir. March 1, 2013).
The Fifth Circuit recently reversed Judge Barbier’s November 2011 order in which Judge
Barbier determined that Transocean’s insurers did not owe BP additional insured
coverage for pollution liabilities resulting from the Deepwater Horizon incident. Judge
Barbier had concluded that the umbrella insurance policy language only required
Transocean’s insurers to include BP as an additional insured to the extent that Transocean
was obligated to indemnify BP in the Drilling Contract between those two entities.
The Drilling Contract required Transocean to maintain certain insurance policies
and to include BP as an additional insured on these policies. Transocean secured $50
million in general liability coverage and $700 million in excess coverage as part of this
agreement. The insurers sought a declaratory judgment that BP was not an additional
assured under the policy with respect to any pollution claims resulting from the incident,
and in late 2011 BP moved for a judgment on the pleadings. BP sought a final judgment
establishing (1) that BP is an additional insured and (2) that the scope of BP’s coverage
was not limited by the indemnity provisions of the Drilling Contract. In re: Oil Spill,
2011 U.S. Dist. LEXIS 131693, at *4-5.
The decision turned on the interpretation of several key provisions. First, the
insurance policies defined the term “Insured” as including the Named Insured, other
parties, and “any person or entity to whom the ‘Insured’ is obliged by any oral or written
‘Insured Contract.’” Id. at *10. The policies further defined an “Insured Contract” as
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“any written or oral contract or agreement entered into by the ‘Insured’…and pertaining
to business under which the ‘Insured’ assumes the tort liability of another party….” Id.
Section 20.1 of the Drilling Contract provided in turn:
20.1 INSURANCE
Without limiting the indemnity obligations or liabilities of
[Transocean] or its insurer, at all times during the term of
this CONTRACT, [Transocean] shall maintain insurance
covering the operations to be performed under this
CONTRACT as set forth in Exhibit C.
Finally, Exhibit C provided in relevant part:
[BP], its subsidiaries and affiliated companies, co-owners,
and joint venturers, if any, and their employees, officers
and agents shall be named as additional insureds in each
of
[Transocean’s]
policies,
except
Workers’
Compensation for liabilities assumed by [Transocean]
under the terms of this Contract.
BP argued that under Texas law the scope of coverage is limited only by the terms
of the insurance policy itself. See Evanston v. ATOFINA Petrochemicals, Inc., 256
S.W.3d 660 (Tex. 2008); Aubris Resources LP v. St. Paul Fire and Marine Ins. Co., 566
F.3d 483 (5th Cir. 2009). Further, BP argued that in ATOFINA the Texas Supreme Court
had established that an indemnity provision in a contract does not limit the additional
insured provisions in the same contract when the additional insured provision is “separate
from and additional to the indemnity provision.” Id. at *14; ATOFINA, 256 S.W.3d at
664 n.5. Thus, BP argued that it was an additional assured for the pollution claims at
issue, despite the fact that the indemnity provisions in the contract assigned this risk to
BP.
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Judge Barbier began his decision by distinguishing ATOFINA and Aubris. Judge
Barbier found ATOFINA inapplicable because there was no language in the policy at
issue in ATOFINA basing coverage on the insurance provisions of an underlying contract.
Unlike Transocean’s policies, the policy in ATOFINA made no reference to an underlying
agreement.
Id. at *33-34.
Secondly, the court found the facts of Aubris made it
inapplicable to the case at hand. Id. at *41-43.
After distinguishing ATOFINA and Aubris, Judge Barbier went on to determine
that the policy language required the court to look to the insurance provisions of the
Drilling Contract to determine whether the Drilling Contract met the definition of an
‘Insured Contract.’ Id. at *51-52. Judge Barbier next read the insurance provisions of
the Drilling Contract to only require Transocean to name BP as an additional insured for
liabilities assumed by Transocean under the contract. Id. at *68. Since he interpreted the
insurance provisions as limiting the insurance obligation to liabilities assumed by
Transocean under the Drilling Contract, Judge Barbier found that the court had to look to
the terms of the Drilling Contract to determine the scope of coverage. Finding that the
only “reasonable interpretation is that the insurance provision refers to risks assumed
within the Drilling Contract indemnity provisions,” Judge Barbier ultimately determined
that BP was only an additional insured to the extent of Transocean’s indemnity
obligations. Id. at *70.
The Fifth Circuit rejected this approach, stating that the case was
indistinguishable from ATOFINA, Aubris, and other similar Texas cases.
The court
further found that Texas cases decided after Judge Barbier’s opinion made absolutely
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clear that “only the umbrella policy itself may establish limits upon the extent to which
an additional insured is covered…,” so long as the additional insured provision is
separate from the indemnity provisions in the underlying contract. In re: Deepwater
Horizon, No.12-30230, slip op. at 9 (5th Cir. March 1, 2013). Since there was no
relevant limitation to the scope of coverage in the policy language itself, it made no
difference how the court interpreted the insurance provisions in the Drilling Contract.
Finally, the court easily determined that the additional insured provision in the Drilling
Contract was “separate from and additional to” the indemnity provisions, stating that
under Texas law all that is required is that “the additional insured provision be a discrete
requirement.”
The additional insured provision “need not be an entirely separate
provision of the contract, and its independent status is not altered by the fact that the
contract also includes a provision requiring the relevant party to obtain insurance to cover
its liabilities under the contract.” Id. at 17. Again finding the case indistinguishable from
ATOFINA and other Texas cases, the court found BP entitled to coverage as an additional
insured under each of Transocean’s policies as a matter of law. Id. at 18.
2.
One Beacon Ins. Co. v. Crowley Marine Services, 648 F.3d 258
(5th Cir. 2011).
In One Beacon, the Fifth Circuit held that a reference in a vessel repair contract
incorporating the terms and conditions from a company’s website included the indemnity
and insurance terms in those conditions. The parties in that case signed a repair service
order that provided in material part:
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THIS RSO IS ISSUED IN ACCORDANCE WITH THE
PURCHASE ORDER TERMS 7 CONDITIONS ON
WWW.CROWLEY.COM/ DOCUMENTS&FORMS,
UNLESS OTHERWISE AGREED IN WRITING.
The court concluded that this language was sufficient notice, under maritime law, and
that the indemnitor was bound by the indemnity terms on the website because a contract
may incorporate another document by “clear reference to the document that describes it
in such terms that its identity may be ascertained beyond doubt.” Id. at 268.
3.
Tutle & Tutle Trucking, Inc. v. EOG Resources, Inc., No. 10-110062-CV, 2012 Tex. App. LEXIS 9543 (Tex. App.—Waco Nov. 15,
2012).
The Texas Tenth District Court of Appeals recently addressed whether the fair
notice requirements applied to a “pass through” provision in an indemnity agreement. In
Tutle, an employee of Tutle & Tutle Trucking, Inc. (“Tutle”) was injured during a
construction project. The employee sued his employer and another contractor, Frac
Source Services, Inc. (“Frac Source”). Subsequently, Frac Source made demand on EOG
Resources, Inc. (“EOG”) for defense and indemnity under a separate MSA. EOG, in
turn, demanded that Tutle defend both EOG and Frac Source pursuant to the terms of
EOG’s contract with Tutle. The contract between Tutle and EOG contained mutual
indemnity agreements covering injuries to each party’s employees, which were placed in
separate paragraphs in all caps. The contract also contained a “pass through provision”
which allowed for the indemnity agreement to extend to contractual indemnity claims by
third parties “where such contractual indemnities are related to or ancillary to the
performance of the work contemplated under the Agreement….” Id. at *5. Unlike the
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actual indemnity provisions, the pass-through provision was placed in regular print with
no other distinguishing characteristics.
Tutle argued that the pass through provision was not sufficiently conspicuous to
be enforceable under Texas law because the paragraph was not capitalized and it was
placed in the same font as the rest of the agreement. The court rejected this argument and
found that the pass through provision sufficiently conspicuous due to its connection and
relationship to the other indemnity paragraphs: “[w]e conclude that paragraph 6E is
sufficiently conspicuous to provide fair notice. The numbering for the ‘pass through’
provision is capitalized and is different from other provisions in the MSC. And, perhaps
more importantly, the location of paragraph 6E, being numerically linked to paragraphs
6A and 6B, is such that a reasonable person ought to have noticed it.” Id. at *12.
4.
Wilson v. M/V B911, No. 10-3320, 2012 U.S. Dist. LEXIS 19348
(E.D. La. Feb. 16, 2012).
In a recent case applying maritime law, the Eastern District of Louisiana
determined that a contract which made no reference to negligence or fault of any kind
satisfied the clear and unequivocal test because it contemplated litigation. In Wilson, the
plaintiff in the underlying tort suit was injured while working on a barge owned by his
employer Centaur LLC (“Centaur”) when a crane vibrator, owned by International
Construction Equipment, Inc. (“ICE”), malfunctioned and caused him to be thrown to the
deck of the barge.
ICE sought indemnity and insurance coverage pursuant to the
equipment rental agreement for the crane. The agreement in that case stated in relevant
part:
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8. Liability of Lessee- ICE shall not be responsible for, and
the Lessee shall indemnify ICE against, all loss, damage,
expense and penalty arising from any action on account of
death or personal injury or damage to property occasioned
by the operation, handling or transportation of equipment.
Id. at *9. After stating that an agreement’s inclusion of “‘any and all claims’ standing
alone is not sufficient to indemnify the indemnitee for its own negligence,” the court,
nevertheless, found the clear and unequivocal test satisfied. Id. at *8 (quoting East v.
Premier, Inc., 98 Fed. Appx. 317 (5th Cir. 2004)).
The court took note that the
agreement specified that it applied to certain causes of action, i.e., personal injury and
property damage claims caused by the operation, handling, or transportation of the
equipment.
By referencing causes of action, the court found that the agreement
contemplated the indemnitee’s negligence because the agreement would have “little
effect if it did not indemnify ICE for its own negligence….” Id. at *10.
IV.
EXCEPTIONS TO THE RIGHT OF INDEMNITY
Even if the indemnitee has done all he can do to protect himself and has skillfully
drafted and negotiated the indemnity provisions, the agreement may still be
unenforceable due to public policy or statute. Given the constantly shifting nature of the
law, as well as the multitude of ways in which these agreements are invoked, parties are
often faced with application of these clauses to scenarios that may or may not be what the
parties intended.
A.
Coverage for Gross Negligence or Punitive Damages
As an initial matter, a party seeking indemnity for gross negligence or punitive
damages must use absolute clarity in the contract. Even where the intent is sufficiently
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expressed, however, the law is not entirely settled as to whether public policy permits
indemnification or insurance coverage for gross negligence of the indemnitee or for
punitive damages assessed against the indemnitee. The answer, as is common in this
area, may depend upon which law applies to the agreement.
Texas has long recognized that public policy might prohibit indemnity for gross
negligence or punitive damages. In Atlantic Richfield Co. v. Petroleum Personnel, Inc.,
68 S.W. 2d 724, 726 n.2 (Tex. 1989), the Texas Supreme Court noted but did not resolve
the controversy: “We do not decide whether indemnity for one’s own gross negligence or
intentional injury may be contracted for or awarded by Texas courts. This issue is not
presented in this appeal…[and]…[p]ublic policy concerns are presented by such an issue
that have not been argued or briefed by the parties.” Subsequently, the Texas Supreme
Court allowed a post-injury release for gross negligence claims stating “there is no logic
in prohibiting people from settling existing claims.” Memorial Medical Center of East
Texas v. Keszler, 943 S.W.2d 433, 435 (Tex. 1997). The Court has also noted that at least
one appellate court permitted indemnity for gross negligence, but again expressed no
opinion. Fairfield v. Stephens Martin Paving, LP., 246 S.W.3d 653, 687-88 (Tex. 2008)
(citing Webb v. Lawson-Avila Constr., Inc., 911 S.W.2d 457 (Tex. App. – San Antonio
1995, writ dism’d w.o.j.)).
The Texas Supreme Court has provided more guidance on the insurability of
punitive damages. In Fairfield, the Fifth Circuit presented a certified question to the
Texas Supreme Court asking whether Texas public policy would prohibit a liability
insurance provider from indemnifying an award for punitive damages imposed on its
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assured because of gross negligence.
Four years later, the Texas Supreme Court
responded with a narrow answer; the court stated that within the worker’s compensation
context, an insurance agreement providing coverage for punitive damages was valid.
Fairfield Ins. Co., 246 S.W.3d at 654. The court declined to answer the broader question,
stating that that the members of the court were “hesitant to opine on policy language and
facts not before us.” Id. at 660. The court in Fairfield did, however, lay down a list of
considerations and factors that it might consider if the issue appeared in another context.
Id. at 664-670.
In Griffin v. Tenneco Oil Co., 625 So.2d 1090, 1097 (La. App. 4th Cir. 1993), the
Louisiana Fourth Circuit Court of Appeals held that an indemnity agreement that
extended coverage for “sole negligence or gross negligence,” but that excluded injuries
“intentionally caused by willful misconduct of employers” covered a claim for exemplary
damages under former Louisiana Civil Code article 2315.3. Based on this decision alone,
one could conclude that Louisiana law would allow indemnification for exemplary
damages. However, as discussed below, the more modern trend of thought seems to be
that punitive damages or fines intended to punish or deter the wrongdoer are “personal”
in nature and cannot be passed off in contract. This was the rationale employed by Judge
Barbier in deciding the issue in the Deepwater Horizon litigation, as discussed below in
more detail.
As to gross negligence, Louisiana law is not completely settled. Paragraph one of
Louisiana Civil Code Article 2004 expressly provides “[a]ny 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.” Comment (e) to this article states that Art. 2004 “does
not govern ‘indemnity’ clauses, ‘hold harmless’ agreements, or other agreements where
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parties allocate between themselves, the risk of potential liability towards third persons.”
The vast majority of cases that cite this comment, however, do so in regard to paragraph
two of Art. 2004 and not paragraph one. Moreover, as some civilians are quick to point
out, the comments to code articles are not the law in Louisiana and do not justify
departure from the plain text chosen by the legislature. See Arabie v. CITGO Petroleum
Corp., 2011-2605 (La. 03/13/12); 89 So.3d 307, 312; La. Civ. Code Art. 9.
Whether maritime law allows indemnity for gross negligence is unsettled as well.
In a 1987 decision, the Eastern District of Louisiana held that maritime law would not
allow indemnification for punitive damages because indemnity would defeat the purpose
behind those damages. At the same time, the court hinted that insurance coverage for
such damages might be permissible. Daughdrill v. Ocean Drilling & Exploration Co.,
665 F. Supp. 477, 481 (E.D. La. 1987). Similarly, the Fifth Circuit allowed recovery of
costs and attorney’s fees expended in defending a claim for punitive damages under a
P&I insurance policy, basing its decision on Louisiana law due to lack of federal
precedent. Randall v. Chevron U.S.A., Inc., 13 F.3d 888 (5th Cir. 1994).
B.
In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of
Mexico on April 20, 2010, 841 F.Supp. 2d 988 (E.D. La. January 26,
2012).
This was the state of the law on this issue when Judge Barbier was asked to
decide whether public policy would allow Transocean to require BP to defend and
indemnify Transocean for its own gross negligence, and separately, whether public policy
would allow Transocean to be indemnified for punitive damages and Clean Water Act
(“CWA”) penalties. BP argued, based on contract interpretation and public policy, that
BP’s indemnity obligation was limited to claims based on Transocean’s fault or
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negligence and did not extend to claims based on strict liability, gross negligence, or
statutory penalties.
After determining that the terms of the contract required BP to indemnify
Transocean for Transocean’s own gross negligence, Judge Barbier had to determine
whether public policy would uphold such a contractual requirement. Judge Barbier
essentially held: (1) that “indemnities,” as opposed to “releases,” are not void as against
public policy under maritime law simply because they cover claims of gross negligence;
(2) the drilling contract could not require BP to indemnify Transocean for punitive
damages; and (3) the drilling contract could not require BP to indemnify Transocean for
CWA penalties.
Addressing indemnity for gross negligence, Judge Barbier began his analysis by
drawing a sharp distinction between “releases” and true indemnity agreements. Under a
release, a party releases another in advance for damage caused to the releasing party.
Under an indemnity agreement, one party agrees to protect another from the claims of
third parties. While acknowledging that prior Fifth Circuit cases have held that gross
negligence will invalidate a release, 4 Judge Barbier suggested that the public policy
considerations are widely different between a release and an indemnity agreement and
that there was no “controlling case” on the enforceability of an indemnity clause covering
gross negligence.
Judge Barbier found that public policy would not invalidate a true indemnity
agreement covering gross negligence for two reasons. First, the BP-Transocean contract
sufficiently discouraged Transocean from engaging in grossly negligent behavior, even
4
See e.g. Houston Exploration Co. v. Halliburton Energy Servs., Inc., 269 F.3d
528, 531 (5th Cir. 2001); Todd Shipyards Corp. v. Turbine Servs., Inc., 674 F.2d
401, 411 (5th Cir. 1982).
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with the indemnity provision, because reciprocal provisions in the contract assigned
Transocean responsibility for certain situations such as most personal injuries and
pollution originating above the water’s surface. Second, Judge Barbier expounded upon
the different equities between a release and an indemnity agreement when viewed from
the position of the injured party. With a release, the party suffering damage has no
recourse because he cannot pursue the wrongdoer.
With an indemnity agreement,
however, the injured party will recover his damages from one contracting party or the
other.
Thus, Judge Barbier concluded that a true indemnity agreement for gross
negligence was enforceable under maritime law.
The court found, however, that
indemnity could not extend to punitive damages because allowing indemnity for such
damages would subvert the purpose of punitive damages - deterring misconduct.
Likewise, the court found that the primary purpose of CWA penalties is to punish and
deter future misconduct such that indemnity for these penalties is also void as against
public policy.
The case-law concerning indemnity for gross negligence or punitive damages is
very scarce, and Judge Barbier’s thorough analysis of this subject could be one of the
most significant opinions to arise from the Deepwater Horizon incident.
C.
The Longshoremen and Harbor Workers’ Compensation Act
(“LHWCA”)
33 U.S.C. § 905(b) of the LHWCA prohibits certain indemnity agreements
between a “vessel” and the employer of a maritime employee. Specifically, § 905(b)
provides a cause of action for a maritime employee against a vessel for the vessel’s
“negligence” and provides that, in such an action, “the employer shall not be liable to the
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vessel for such damages directly or indirectly and any agreements or warranties to the
contrary shall be void.”
33 U.S.C. § 905(c) creates an exception to § 905(b), permitting reciprocal
indemnity agreements between the vessel and the employer when:
the employer of a person entitled to receive benefits under
this chapter by virtue of section 4 of the Outer Continental
Shelf Lands Act (43 U.S.C. § 1333) and the vessel agree to
defend and indemnify the other for cost of defense and loss
or liability for damages arising out of or resulting from
death or bodily injury to their employees.
33 U.S.C. § 905(c). In other words, a “knock-for-knock” indemnity provision for work
on the Outer Continental Shelf (“OCS”) is enforceable under § 905(c).
In Demette v. Falcon Drilling Co., 280 F.3d 492 (5th Cir. 2002), the Fifth Circuit
adopted a broad reading of the “by virtue of” language in § 905(c), rejecting the argument
that § 905(c) applies to workers entitled to LHWCA benefits exclusively by virtue of the
OCSLA. Under Demette, § 905(c) applies to all parties entitled to LHWCA benefits “by
virtue of” the OCSLA even if they would otherwise have been covered by the LHWCA.
In Pacific Operators Offshore, LLP v. Valladolid, 132 S. Ct. 680 (2012), the Supreme
Court recently resolved a three way split among the federal circuits and held that in order
to be entitled to benefits under section 1333(b) of the OCSLA, courts should employ a
“substantial nexus” test, requiring a significant causal link between the injury suffered
and the employer’s operations on the OCS. Id. at 691.
Section 905(b)’s definition of a vessel is also very broad; the term includes not
only an actual “vessel,” but the vessel’s owner or charterer. 33 U.S.C. § 902(21). A
movable drilling rig has traditionally been considered a vessel for the purposes of
§ 905(b), and other facilities might be included as well. When an operator acts in more
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than one capacity such as charterer of a crew boat and operator of a fixed platform, some
courts have found that § 905(b) only prohibits indemnity for “vessel” negligence such
that the indemnitee may claim indemnity for its liability in a non-vessel capacity. See,
e.g., Crutchfield v. Atlas Offshore Boat Service, Inc., 403 F.Supp. 920 (E.D. La. 1975)
(permitting oil company to seek indemnity from employer for non-vessel negligence).
D.
The Louisiana Oilfield Anti-Indemnity Act (“LOIA”)
La. R.S. § 9:2780, commonly known as the Louisiana Oilfield Indemnity Act,
prohibits certain types of indemnity and defense agreements in oil and gas contracts. The
statute itself details the public policy behind its enactment: “[t]he legislature finds that an
inequity is foisted on certain contractors and their employees by the defense or indemnity
provisions, either or both, contained in some agreements pertaining to wells….” La. R.S.
§ 9:2780(A). The primary purpose, therefore, is to invalidate all defense and indemnity
agreements in oil and gas contracts that purport to indemnify a party for its own
negligence or fault in causing death or bodily injury. The LOIA only applies, however,
when the agreement is: (1) the type of oil and gas contract governed by the act; (2)
pertaining to death or bodily injury (the LOIA does not prevent indemnity for property
damage or pollution); and (3) the agreement purports to indemnify for the indemnitee’s
negligence or fault.
1.
Covered Agreements
The LOIA only applies to indemnity provisions “contained in, collateral to, or
affecting an agreement pertaining to a well for oil, gas, or water, or drilling for minerals
which occur in a solid, liquid, gaseous, or other state….” La. R.S. § 9:2780(A). Both
Louisiana and federal courts use a two-step analysis developed by the Fifth Circuit in
Transcontinental Gas Pipeline Corp. v. Transportation Ins. Co., 953 F.2d 985 (5th Cir.
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1992), to determine which agreements are subject to the LOIA. First, there must be an
agreement pertaining to “a well;” if the contract does not pertain to a single identifiable
well then the LOIA does not apply. Id. at 991. This requirement is particularly important
in the transportation context, where a contract can cover multiple wells. In such a case,
the Transcontinental court held that a court should look for some “reasonably
determinable point” at which the product cannot be identified with a particular well. Id.
at 994. The court also stated in a footnote, however, that multiple wells serviced from
one platform constitute “a well” for the purposes of the statute. Id. at 995 n. 40. If the
contract has the requisite connection to a well, then the second step of the analysis
involves an examination by the court of the contract’s involvement with operations
related to the exploration, development, production, or transportation of oil, gas, or water.
Under this analysis, the scope of the LOIA can be quite broad. In Verdine v.
Ensco Offshore Co., 255 F.3d 246 (5th Cir. 2001), for example, the court considered the
application of the LOIA to an agreement between a drilling contractor and a company
hired to repair and refurbish a dismantled fixed platform that was to be used on
approximately six wells off the coast of Louisiana. All of the repair and refurbishment
work took place at a fabrication yard in Louisiana. The court held that, although it was
difficult to find a sufficient geographical and functional nexus between the platform rig
and a well or wells, the LOIA applied because the statute specifically encompasses
agreements for “services in connection with…any structure intended for use in the
exploration for or production of any mineral….” Id. at 253; La. R.S. § 9:2780(C). In
general, however, courts have stated that the LOIA should be limited to agreements that
pertain to wells and drilling, not transportation or refining of oil or other such services.
See, e.g., Hutchins v. Hill Petroleum Co., 609 So.2d 312 (La. App. 3d Cir. 1992),
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abrogated on other grounds by Kirkland v. Riverwood Intern. U.S.A., Inc., 681 So.2d 329
(La. 1996) (holding that agreements to perform services at petroleum refineries are not
governed by LOIA.); Labove v. Candy Fleet, LLC, No. 11-1405, 2012 U.S. Dist. LEXIS
103332 (E.D. La. July 20, 2012) (recent case determining that a contract to provide
services on a junction platform did not pertain to a well).
2.
Requirement of Fault and Availability of Defense Costs.
The LOIA only voids an agreement that attempts to indemnify a party for its own
negligence or fault. La. R.S. § 9:2780(A). The Louisiana Supreme Court has held, in
response to certified questions, that “[a]n agreement providing for cost of defense in the
event of a meritless suit against the indemnitee is outside the scope of the Act.” Meloy v.
Conoco, Inc., 504 So.2d 833, 839 (La. 1987). The “Meloy Exception” has spawned an
interesting subset of litigation concerning when a party may recover defense costs
pursuant to an agreement. The Louisiana Supreme Court held that “[i]f it is established at
trial that there is ‘no negligence or fault (strict liability) on the part of the indemnitee,’ the
Act does not prohibit indemnification for costs of defense.” Id. at 839. The court also
stated, however, that a provision in a contract providing for an upfront defense would be
void under the LOIA because “[p]rior to a judicial determination, it is not known whether
the indemnitee is or is not at fault….” Id. at 839 n.2.
In Melancon v. Amoco Production Co., 834 F.2d 1238, 1248 (5th Cir. 1988), the
Fifth Circuit, citing Meloy, stated that where a party’s status as an LHWCA employer
barred a finding of fault on the part of the employer, the LOIA never came into play and
did not prevent a party from seeking the costs of defense pursuant to its contract. The
Louisiana Third Circuit reached precisely the opposite conclusion, holding that the
existence of a valid legal defense is not enough to invalidate the LOIA when there has
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been no determination of negligence. The court held, however, that the parties would be
free to adjudicate the issue of fault in a subsequent proceeding. Phillips Petroleum Co. v.
Liberty Services, Inc., 95-124 (La. App. 3d Cir. 05/31/95); 657 So. 2d 405, 409.
Federal and state courts similarly disagree over the effect of settlement. Federal
courts hold that a party seeking to assert a subsequent Meloy claim cannot settle a
plaintiff’s claim and subsequently seek a judicial determination that it was free from
fault. The basic rationale being that the decision by the indemnitee to settle and “forego a
trial” precludes a court from finding fault on the part of the indemnitee. Tanksley v. Gulf
Oil Corp., 848 F.2d 515, 518 (5th Cir. 1988). Tanksley has been the subject of harsh
criticism, both for the fact that it discourages settlement and for its somewhat dubious
rationale. Fifth Circuit courts continue to adhere to the decision as valid precedent;
however, two Louisiana appellate courts and the Texas Supreme Court, applying
Louisiana law, expressly rejected the decision. State courts hold that nothing prevents a
party from settling a case and subsequently adjudicating the issue of fault. See Ridings v.
Danos & Curole Marine Contractors, Inc., 97-2710 (La. App. 4 Cir. 08/12/98); 723
So.2d 979, 983 n.2 (stating that it “respectfully disagreed” with the Tanksley decision);
Sonat Exploration Co. v. Cudd Pressure Control, Inc., 271 S.W.3d 228 (Tex. 2008).
The Louisiana Supreme Court acknowledged the discrepancy, stating that it could see the
logic behind both arguments, but declined to decide the matter. Fontenot v. Chevron
U.S.A., Inc., 95-1425 (La. 07/02/96); 676 So.2d 557, 563 n.7.
The Eastern District of Louisiana recognized an exception to the Tanksley rule
where the indemnitor and indemnitee enter into a joint settlement agreement with the
plaintiff that provides that the court will later adjudicate fault between the parties. Duet
v. Falgout Offshore, LLC, 757 F. Supp.2d 598, 601 (E.D. La. 2010). Further, the Fifth
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Circuit has recognized that the reverse of Tanksley does not apply, i.e., if the indemnitor
settles a case, assumed under a potentially invalid indemnity agreement, he must be given
an opportunity to adjudicate whether the indemnitee was at fault due to the public policy
concerns underlying the LOIA. American Home Assurance Co. v. Chevron USA, Inc.,
400 F.3d 265 (5th Cir. 2005).
3.
Insurance Protection Also Invalid
Subsection G of La. R.S. 9:2780 invalidates any contractual requirement that a
party be named as an additional insured or be granted a waiver of subrogation if there is
negligence on the part of the indemnitee.
There is a narrow exception to the rule
prohibiting insurance protection, however, if the indemnitee/additional insured is able to
prove that it has actually paid for the required insurance. Marcel v. Placid Oil Co., 11
F.3d 563, 569 (5th Cir. 1994); See also Patterson v. Conoco, Inc., 670 F.Supp. 182 (W.D.
La. 1987). The precise parameters of the “Marcel exception” are still the subject of
considerable dispute; however, it is clear that language in an agreement that a contractor
“may” be required to invoice insurance premiums allocable to work performed does not
satisfy the exception. Brumfield v. Conoco Inc., No. 93-1712, 1994 U.S. Dist. LEXIS
8945, at *7-8 (E.D. La. June 28, 1994).
Similarly, an unwritten "working policy"
whereby contractors could factor in the cost of procuring insurance when submitting bids
to work does not satisfy the exception. Hodgen v. Forest Oil Corp., 87 F.3d 1512, 1529
(5th Cir. 1996).
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4.
Recent LOIA Cases
(a)
ACE American Ins. Co. v. M-I, LLC, 699 F.3d 826 (5th Cir.
2012).
In ACE, the court affirmed a grant of summary judgment by the Southern District
of Texas in favor of an insurer, finding that the LOIA invalidated the insurance obligation
in a voluntary tender situation.
As is typical, ACE involved a blanket MSA that
contained indemnity provisions requiring the contractor to indemnify the operator for
personal injuries to the contractor’s employees. The agreement also contained insurance
provisions to support this indemnity obligation. The contractor procured the required
insurance from ACE American Ins. Co. (“ACE”). The underlying lawsuit involved an
injury to the contractor’s employee on a fixed OCS platform. Despite the fact that the
LOIA most likely applied to the agreement, the contractor voluntarily complied with its
indemnity obligations and was able to settle all of the worker’s claims on behalf of both
parties. Subsequently, ACE sought a declaratory judgment that the LOIA applied and
invalidated its insurance coverage obligations to the contractor. The Fifth Circuit found
that the insurance agreement was governed by OCSLA and invalid, leaving the contractor
holding the bag. The court found that the LOIA applied to agreement, despite the fact
that no formal work orders were ever issued by the operator under the MSA. The court
determined that the “creation of service tickets and time sheets” was sufficient “evidence
of the location where work was to be performed…as well as the scope of that particular
work order.” Id. at 831.
(b)
Teaver v. SEATRAX of Louisiana, No. 10-1523, 2012 U.S.
Dist. LEXIS 164870 (E.D. La. Nov. 19, 2012).
In Teaver, various indemnitees sought indemnity pursuant to a MSA from the
owner of a crane located on an offshore drilling rig. The plaintiff in the underlying tort
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claim was injured while dismantling the crane as part of plugging and abandoning
operations. The crane owner brought a motion for summary judgment, alleging that the
LOIA applied because the agreement contemplated that the crane would be used for
plugging and abandoning operations and, therefore, pertained to a well. The indemnitees
argued, on the other hand, that the court should look to the specific work orders in effect
on the day of the accident instead of the agreement as a whole. These daily work orders
encompassed only the dismantling of a crane. The court determined that the agreement
pertained to a well by applying the two part Transcontinental test to all of the service
orders issued over a five month period, rejecting the argument that it should look only at
the service orders issued on the day of the accident. The court found that such an
approach would violate the public policy of the LOIA: “making these findings would
mean that contractors are only covered under LOIA while they are actually performing
the contracted work, not while they perform on-site tasks necessary and incidental to the
contacted work....[T]his would draw an arbitrary line between actual performance of the
work and the final steps required for completion of the work.” Id. at *15. The court
concluded that “there was a strong functional and geographical nexus between [the
company’s] agreement to supply the crane for the plug and abandon work and the wells.”
Id. at *16.
E.
Newly Enacted La. R.S. § 9:2780.1
A relatively new Louisiana statute, tracking the language of the LOIA, invalidates
any clause contained in, collateral to, or affecting a “motor carrier transportation
contract” or a “construction contract” that purports to “indemnify, defend, or hold
harmless, or has the effect of indemnifying, defending, or holding harmless, the
indemnitee from or against any liability…resulting from the negligence or intentional
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acts or omissions of the indemnitee, an agent or employee of the indemnitee, or a third
party over which the indemnitor has no control….” La. R.S. § 9:2780.1(B). Likewise,
the statute invalidates an insurance provision covering the same circumstances.
Id.
§ 9:2780.1(C). Finally, for contracts involving work in Louisiana, the statute invalidates
a choice of law provision calling for application of anything other than Louisiana law.
La. R.S. § 9:2780.1(D). As this statute is relatively new, its impact upon the oilfield
remains to be seen, as well as whether courts will adopt a Marcel-type exception.
“Construction contracts” include agreements to design, construct, repair or
maintain oil or gas lines but do not include contracts relating to the construction of dirt or
gravel roads used to access oil and gas wells and associated facilities or contracts relating
to the construction of oil flow lines or gas wells from the point that oil and gas becomes
co-mingled for transportation to oil storage facilities or gas transmission lines. In a 2012
amendment, the legislature created an exception to this statute for indemnity agreements
backed by insurance. The amendment removed from the statute’s scope agreements
where the indemnitor is required to (1) obtain insurance to “insure the obligation to
indemnify, defend, or hold harmless” and (2) “there is evidence that the indemnitor
recovered the cost of the required insurance in the contract price.”
La. R.S. §
9:2780.1(I)(1). The amendment further permits additional assured provisions if they
support such an authorized agreement, provided that the indemnitor is partially at fault as
well as the indemnitee (i.e., not the sole fault of the indemnitee). Id. § 9:2780.1(I)(2).
1.
Louisiana Chemical Association v. State of Louisiana, No. 2012CA-0230, (La. App. 1 Cir. 01/09/13); 2013 La. App. Unpub. LEXIS
9.
The Louisiana Chemical Association (“LCA”) is currently challenging La. R.S.
§ 9:2780.1 on constitutional grounds. The LCA asserts that that statute violates the equal
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protection clause of the Louisiana and United States Constitutions by impermissibly
distinguishing between certain types of motor carrier and construction contracts.
Recently, the Louisiana First Circuit Court of Appeals reversed a grant of peremptory
exception of no cause of action, and the case remains pending.
F.
The Texas Oilfield Anti-Indemnity Act (“TOAIA”)
Sections 127.001 through 127.007 of the Texas Civil Practice and Remedies Code
contain what has come to be known as the Texas Oilfield Anti-Indemnity Act
(“TOAIA”). Like the LOIA, the TOAIA invalidates indemnity and insurance provisions
contained in agreements pertaining to a well that indemnify a person for his or her own
negligence. Unlike the LOIA, however, the TOAIA specifically includes indemnity
agreements for property injury and “any other loss, damage, or expense that arises from
personal injury, death, or property injury.” TEX. CIV. PRAC. & REM. CODE § 127.003(C).
Under the TOAIA, an agreement pertains to a well if it requires the contractor to render
“well or mine services” or “to perform a part of those services or an act collateral to those
services….” Id. § 127.001(1)(A)(i)-(ii). In John E. Graham & Sons v. Brewer, 210 F.3d
333, 341 (5th Cir. 2000), the Fifth Circuit held that, in addition to the specific types of
contract activities outlined in the TOAIA, the TOAIA applies to agreements that call for
services that (1) bear a close nexus to a well and (2) are directed toward the goal of
obtaining or maintaining production from a well. Applying this standard, the Brewer
court found that that an agreement to tie-in wells from a satellite platform in order to
obtain production from a well bore a close enough nexus to a well that the TOAIA
invalidated the indemnity provision in the agreement.
The TOAIA contains numerous statutory exclusions. The most important for the
drafter or litigator to be aware of is that the TOAIA expressly “does not apply to an
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agreement that provides for indemnity if the parties agree in writing that the indemnity
obligation will be supported by liability insurance….” Id. § 127.005(a). Under this
provision, if the parties have entered into a mutual indemnity obligation, then the
indemnity agreement is fully enforceable up to the amount of insurance or self-insurance
that each party has agreed to obtain for the benefit of the other party as indemnitee.
With respect to a unilateral indemnity obligation, the amount of insurance required may
not exceed $500,000. Id. § 127.005(b)-(c).
The TOAIA also expressly does not apply to “purchasing, selling, gathering,
storing, or transporting gas liquids by pipeline or fixed associated facilities” or
“construction, maintenance or repair of oil, natural gas liquids or gas pipelines or fixed
associated facilities.” Id. § 127.001(4)(B)(i)-(ii). Other exceptions of note include that
the TOAIA does not apply to Joint Operating Agreements and property damage resulting
from pollution. Id. §§ 127.002(4); 127.004(2).
G.
Recently Enacted TEX. INS. CODE §§ 151.001-151.105.
Like Louisiana, Texas recently adopted an anti-indemnity statute that applies to
construction contracts. Effective January 1, 2012, the statute, at its core, purports to
invalidate provisions in construction contracts or an agreement collateral to or affecting a
construction contract to the extent that it requires one party to indemnify another for
claims arising out of the negligence or fault of the indemnitee or any third party under the
control or supervision of the indemnitee.
The statute broadly defines a “construction contract” as:
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A contract….or agreement…entered into by an
owner,…contractor,…subcontractor, supplier or material or
equipment lessor for the design, construction,
alteration,…repair, or maintenance of, or…furnishing of
material or equipment for, a building, structure,
appurtenance, or other improvement to or on public or
private real property.
TEX INS. CODE § 151.001(5).
The statute applies to both personal injury and property damage, but contains
several key exceptions. Most significantly, the statute expressly allows indemnity for an
employer for bodily injury or death to its employees or any employees of its
subcontractors. The statute also only prohibits additional assured provisions for claims
for which indemnity is prohibited. Because the statute allows indemnity for certain
personal injury claims, additional assured protection should still be available for these
claims as well. The statute also contains eleven express statutory exceptions; most
notably, contracts that use OCIP or CCIP insurance programs and agreements covered by
the TOAIA. Id. § 151.105. Therefore, it appears the primary effect of the statute will be
to prohibit indemnity for property damage claims and indemnity for personal injury or
death claims by true third parties.
V.
APPLICABLE LAW
As the reader has most likely gleaned from the previous discussion, the question
of what law applies to the contract is immensely important to the ultimate issue of
whether an indemnity agreement will be enforceable. Often the very same agreement
that would be enforceable under maritime law will be invalid under state anti-indemnity
statutes. Likewise, provisions of an agreement that would be enforceable under the
TOAIA might not be unenforceable if the LOIA is triggered and vice-versa. Many
parties include choice of law clauses in their MSA or Drilling Contract to avoid some of
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this uncertainty. OCSLA, however, does not permit parties to contract away from the
statute’s choice of law provisions. Thus, where OCSLA applies, the adjacent state’s law
will determine whether the agreement is enforceable, unless maritime law is deemed to
apply. See, e.g., Hollier v. Union Texas Petroleum Corp., 972 F.2d 662 (5th Cir. 1992).5
Many times, therefore, the battle in a litigation context, is won or lost on the court’s
determination of what law governs the contract.
A.
OCSLA Jurisdiction
43 U.S.C. § 1349(b) provides that federal district courts have jurisdiction over
“cases and controversies arising out of, or in connection with…any operation conducted
on the outer Continental Shelf which involves exploration, development, or production of
the minerals, of the subsoil and seabed of the outer Continental Shelf….” The Fifth
Circuit recently stated in the casualty context that a claim is subject to OCSLA
jurisdiction if “(1) the facts underlying the complaint occurred on the proper situs; (2) the
plaintiff’s employment furthered mineral development on the OCS; and (2) the plaintiff’s
injury would not have occurred but for his employment.” Barker v. Hercules Offshore,
Inc., 2013 U.S. App. LEXIS 2387, at *8 (5th Cir. Feb. 1, 2013). Although parties
sometimes continue to confuse the issue, the choice of law provisions of OCSLA and
OCSLA’s grant of jurisdiction involve two separate inquiries. See Barker, 2013 U.S.
App. LEXIS 2387, at *27 (“[C]hoice of law and the evaluation of subject-matter
jurisdiction under OCSLA involves two distinct inquires.”); Dominion Exploration &
Production, Inc. v. Delmar Systems, Inc., No. 07-9492, 2012 U.S. Dist. LEXIS 171137,
at *10-11 (E.D. La. December 3, 2012) (“coverage by OCSLA does not perforce entail
5
In addition, La. R.S. § 9:2779 invalidates forum selection and choice of law
clauses contained in certain construction contracts.
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application of state law.”). Generally, OCSLA jurisdiction is broader than OCSLA’s
choice of law provisions.
B.
Choice of Law Under OCSLA
OCSLA’s choice of law provision is contained in 43 U.S.C. § 1333. The Fifth
Circuit uses a three part test, sometimes referred to as the “PLT test,” to determine when
state law applies as surrogate federal law under section 1333: (1) the controversy must
arise on an OCLSA situs; (2) federal maritime law must not apply of its own force; and
(3) the adjacent state’s law must not be inconsistent with federal law. 6 Union Texas
Petroleum v. PLT Engineering, 895 F.2d 1043, 1047 (5th Cir. 1990).
1.
Situs
The Fifth Circuit held in Demette that the following three locations satisfy the
“situs” requirement of OCSLA’s choice of law provision:
(1)
The subsoil and seabed of the OCS;
(2)
Any artificial island, installation, or other device if
(a)
the device is permanently or temporarily attached to the
seabed of the OCS, and
(b)
the device has been erected on the seabed of the OCS, and
(c)
its presence on the OCS is to explore for, develop, or
produce resources from the OCS;
(3)
any artificial island, installation, or other device if
(a)
the device is permanently or temporarily attached to the
seabed of the OCS, and
(b)
the device is not a ship or a vessel, and
(c)
its presence on the OCS is to transport resources from the
OCS.
Demette, 280 F.3d at 497.
6
In the interest of space, the relevant case law dealing with this element of the PLT
test is not discussed in this paper. Suffice it to say that most laws pertaining to
indemnity agreements are not inconsistent with federal law.
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2.
Situs for Tort Claims
Despite a multitude of decisions on the issue and the passage of sixty years since
the statute’s enactment, the situs requirement continues to be a headache for courts to
apply, particularly outside of the personal injury context. On the whole, the Fifth Circuit
has interpreted the situs requirement broadly. In Hodgen v. Forest Oil Corp., 87 F.3d
1512 (5th Cir. 1996), for example, an offshore worker suffered injury while attempting to
swing on a rope from the platform to a vessel. A swell lifted the boat sharply, and the
worker landed awkwardly on the deck injuring his back. The court held that the situs
requirement was met because the worker was in contact with the rope, which was in turn
connected to the platform.
Some courts have found the situs test satisfied even where there is no physical
contact with an OCSLA situs. For example, in Texaco Exploration and Production Inc.
v. AmClyde Engineered Products Company Inc., 448 F.3d 760 (5th Cir. 2006), the court
determined that OCSLA applied adjacent state law to a products liability and negligence
action resulting from the construction of a fixed platform when part of the platform was
accidentally dropped into the ocean. At the time of the accident, the part of the platform
at issue was fully suspended from a crane located on a vessel. Nevertheless, the court
held that the plaintiff’s claims had an OCSLA situs because “the claims are inextricably
linked to the construction of a platform permanently fixed to the Shelf for the purposes of
development and would not have arisen but for such development.” Id. at 774. AmClyde
stands for the not quite so obvious proposition that a case involving a vessel dropping a
platform module into the ocean does not involve traditional maritime activity, i.e., lacks
maritime jurisdiction.
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3.
Situs of the Contract
The Fifth Circuit made clear that the situs of the tort does not dictate the law that
will apply to contractual indemnity agreements related to the incident. In Grand Isle
Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778, 781 (5th Cir. 2009), the Fifth
Circuit held that the situs element of the PLT test is satisfied for a contractual indemnity
claim when the “focus-of-the-contract” calls for work upon an OCSLA situs. This
requires a court to analyze where the contract contemplates a majority of the work will be
performed, not where the actual injury took place. Thus, in Grande Isle Shipyard,
adjacent state law applied to invalidate an indemnity provision, even when the underlying
tort occurred on a vessel. When dealing with a blanket agreement such as a MSA or
Drilling Contract, the court looks to the situs contemplated by the specific work order,
not the blanket agreement. ACE American Ins. Co., 699 F.3d at 831.
4.
Application of Maritime Law
As PLT recognized, if maritime law applies of its own force, then maritime law
will govern in the place of adjacent state law and other federal law that would otherwise
be applicable under OCSLA. Tenn. Gas Pipeline v. Houston Cas. Ins. Co., 87 F.3d 150,
154 (5th Cir. 1996) (“[W]here OCSLA and general maritime law both could apply, the
case is to be governed by maritime law.”); Barker, 2013 U.S. App. LEXIS 2387, at *2122 (“[W]hen maritime law applies under OCSLA, maritime law will displace the
application of federal law and any supplemental state law.”). Under maritime law, most
indemnity agreements are enforceable, and state anti-indemnity statutes will not
invalidate an indemnity agreement contained in a maritime contract. Angelina Casualty
Co. v. Exxon Corp., U.S.A., Inc., 876 F.2d 40, 49 (5th Cir. 1989). Moreover, if maritime
law applies, any choice of law clause contained in the agreement is generally enforceable.
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Determining whether a contract is maritime, however, can be very difficult, particularly
in the offshore production context.
In Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 23 (2004), the U.S.
Supreme Court held that the proper test for whether maritime law governs a contract is
whether the contract “has ‘reference to maritime service or maritime transactions.’” In
general, contracts that require the provision of a vessel will be considered a maritime
contract. The Fifth Circuit has repeatedly recognized that a contract with a drilling
company to drill a well and to provide general services from a jack-up rig is a maritime
contract. Lewis v. Glendel Drilling Co., 898 F.2d 1083 (5th Cir. 1990); Theriot v. Bay
Drilling Corp., 783 F.2d 527, 538-539 (5th Cir. 1986). Moreover, the fact that the
contractual services do not include the provision of a vessel does not defeat a finding that
the contract is maritime. For example, in Corbitt v. Diamond M Drilling Co., 654 F.2d
329, 332 (5th Cir. 1981), the court held that a contract to perform casing services on a
movable drilling rig provided by another party was maritime in nature.
The fact that a vessel is somehow involved will not, however, necessarily make
the agreement a maritime contract. In Thurmond v. Delta Well Surveyors, 836 F.2d 952
(5th Cir. 1988), a contractor utilized a wireline barge for the transportation of equipment
and workers in its performance of wireline services at various wells. Nevertheless, the
court held that the suit arose out of the performance of the contract’s principal nonmaritime obligation of performing wireline work on a fixed wellhead, and maritime law
did not apply.
When dealing with blanket contracts in the personal injury context, the Fifth
Circuit uses a two-part test adopted in Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d
313, 315-316 (5th Cir. 1990) to determine which contracts are maritime. The Davis &
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Sons test requires a court to first examine the type of contract’s “historical treatment in
the jurisprudence.” Then, the court must make a six factor inquiry:
1) what does the specific work order in effect at the time of
injury provide? 2) what work did the crew assigned under
the work order actually do? 3) was the crew assigned to
work aboard a vessel in navigable waters? 4) to what
extent did the work being done relate to the mission of that
vessel? 5) what was the principal work of the injured
worker? and 6) what work was the injured worker actually
doing at the time of injury?
Id. at 316. In Davis & Sons, the contractor/indemnitor attempted to argue that the
principal obligation of the contract was non-maritime and that the adjacent state’s law
should apply. The court found, however, that even if the blanket agreement was nonmaritime, the specific work order that called for maintenance activities to be conducted
from a special purpose vessel, dictated that maritime govern the agreement. If the “injury
occurs in the performance of a separable maritime obligation” the “complete contract
is…subject to maritime law” even where the blanket agreement is principally not
maritime. Id. at 315-316.
In Domingue v. Ocean Drilling & Exploration Co., 923 F.2d 393 (5th Cir. 1991),
the court distinguished Davis & Sons in a contract to perform wireline services on a jackup drilling rig. The district court had concluded that the contract was maritime because
the wireline services contributed to the mission and function of the vessel. The Fifth
Circuit found, however, that the wireline services were non-maritime in nature and were
insufficiently related to the mission of the vessel to take on a “salty flavor.” The court
distinguished Davis & Sons based on the more than incidental transportation function of
the special purpose mobile maintenance unit in Davis & Sons as compared with the jackup drilling rig in Domingue, which served more as a work platform.
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Shortly after this decision, the Fifth Circuit held that a contractual claim for
indemnity was governed by maritime law when a traditional maritime employee was
injured while standing on a fixed platform performing workover operations. Smith v.
Penrod Drilling Corp., 960 F.2d 456 (5th Cir. 1992). Smith is important because it
demonstrates that the location of the plaintiff at the time of his accident is not dispositive
to the characterization of the contract. See also Delahoussaye v. Pisces Energy LLC, No.
10-2624, 2012 U.S. Dist. LEXIS 44605 (E.D. La. March 30, 2012) (recent case finding
that a contract to perform workover recompletion and coiled tubing work on a fixed
platform was non-maritime despite the fact that the plaintiff was sometimes required to
unload vessels and was injured while working aboard a vessel).
The most notable Fifth Circuit case in recent years to address this issue is
Campbell v. Sonat Offshore Drilling, Inc., 979 F.2d 1115 (5th Cir. 1992). In Campbell,
the court was asked to characterize the nature of a contract to provide drive pipe, hammer
work, and casing services aboard a jack-up drilling rig provided by another party. The
court applied Davis & Sons and pointed to the fact that the contractor’s employees
traveled on the drilling rig, performed their work from the vessel, and used the vessel’s
equipment to accomplish the mission of the vessel to determine that the contract was
maritime.
C.
Special Purpose Vessels and Structures
The Fifth Circuit has clearly stated that a facility may simultaneously be an
OCSLA situs and a vessel. Demette, 280 F.3d at 498. However, as demonstrated above,
whether a facility is a vessel in addition to being an OCSLA situs is immensely important
to the question of whether maritime law applies of its own force. As technology offshore
continues to evolve, non-traditional structures and facilities such as SPAR platforms,
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semi-submersible drilling rigs, and Floating Production, Storage and Offloading Systems
continue to provide challenges in a choice of law analysis.
Both tension leg platforms and SPAR platforms have been found not to be vessels
because of their relative permanence. See Fields v. Pool Offshore, Inc., 182 F.3d 353
(5th Cir. 1999); Jordan v. Shell Oil Co., NO. G-06-265, 2007 U.S. Dist. LEXIS 56337
(S.D. Tex. Aug. 2, 2007). In contrast, jack-up rigs and semi-submersible drilling rigs are
considered vessels, even when attached to the seabed. See Dominion Exploration &
Production, Inc. v. Delmar Systems, Inc., 2012 U.S. Dist. LEXIS 171137, at *15
(“undisputed is the ‘legal fact’ that…a semi-submersible drilling rig…is a vessel under
the law of this circuit.”); Barker, 2013 U.S. App. LEXIS 2387, at *13 (“In this circuit,
jack-up drilling platforms (like the one at issue in this suit) are considered vessels under
maritime law.”). Whether future decisions will continue to consider these types of
stationary platforms to be vessels while drilling is an interesting question.
D.
Recent Cases Affecting Choice of Law Analysis
1.
Barker v. Hercules Offshore, Inc., No. 12-20150, 2013 U.S. App.
LEXIS 2387 (5th Cir. 2013).
The Fifth Circuit recently concluded that a party may remove a case from state
court based on the jurisdictional provisions of OCSLA, even where maritime law
precludes application of adjacent state law. Id. at *25.
In Barker, the plaintiff was the employee of a contractor, performing welding
services on a jack-up drilling rig in preparation for running casing over the well. At the
time of the plaintiff’s accident the rig was “jacked up” with its legs extended into the
seabed and the majority of the facility lifted out of the water. The plaintiff alleged that he
suffered severe emotional distress when a pollution pan gave way, causing his co-worker
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and long time friend to fall to his death. The plaintiff filed suit in Texas state court, and
the defendants removed to the Southern District of Texas based on OCSLA. The plaintiff
moved to remand the case, arguing that maritime law would supply the rule of decision
and therefore removal was improper. Id. at *6. The Fifth Circuit had previously declined
to address whether removal pursuant to OCSLA was improper where maritime law also
applied, and district courts had reached conflicting results. Compare Gautier v. Plains
Pipeline, LP, No. 12-1064, 2012 U.S. Dist. LEXIS 103331 (E.D. La. July 25, 2012)
(denying motion to remand) with Bulen v. Hall-Houston Oil Co., 953 F. Supp. 141 (E.D.
La. 1997) (granting motion to remand); In Re: Oil Spill by the Oil Rig “Deepwater
Horizon” in the Gulf of Mexico, on April 20, 2010, 747 F. Supp.2d 704, 709 (stating that
maritime claims cannot be removed even under OCSLA).
All members of the panel in Barker agreed that removal was proper, even if
maritime law supplied the rule of decision. When maritime law applies under OCSLA, it
only displaces the substantive law provisions of the OCSLA; it does not affect OCSLA’s
jurisdictional grant. Id. at *25.
In a part of the opinion subscribed to only by Judge Clement, however, the court
examined whether drilling from a jack-up rig is a traditional maritime activity for the
purpose of maritime tort law. See Jerome G. Grubart, Inc. v. Great Lakes Dredge &
Dock Co., 513 U.S. 527 (1995).
Although Judge Clement never decided whether
maritime law applied to the matter, she affirmatively stated that “we conclude today that
drilling from a jack-up rig is not maritime in nature….” Id. at *16 (emphasis original).
Judge Clement reached this conclusion by first examining the purposes of the OCSLA
and noting the tension between Fifth Circuit precedent and the Congressional intent to
apply OCSLA’s choice of law provisions to all controversies that arise on an OCSLA
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situs. Id. at *11 (“Although the application of maritime law under OCSLA may be
contrary to the intention of Congress, we are bound by our precedent to apply maritime
law…where it applies “‘of its own force.’”) (quoting PLT Engineering, 895 F.2d at
1047).
Judge Clement thus determined that the application of maritime law in an
OCSLA situation should be applied with Congressional intent in mind. Id. at *15.
Therefore, Judge Clement concluded that “drilling” from a jack-up rig was not a maritime
activity, but that other accidents could implicate maritime law “when they arise out of or
implicate the rig’s movement across water.” Id. at *16. Judge Clement stated the test as
follows:
when determining whether maritime law applies to a tort
suit, this court must look to whether the act which gave rise
to the incident in question—in this case, replacing casing
over a well—was in furtherance of the non-maritime
activity of offshore oil exploration and drilling, or whether
it was related to repair and maintenance of a jack-up
drilling rig for the purpose of enabling the rig to move
across water.
Id. at *18. Since the plaintiff made no allegations that the defendant’s failures or the
activity giving rise to the incident “affected the jack-up rig’s movement across water or
implicated the movement of other ships…,” Judge Clement stated that the general
character of the incident “appeared” to be non-maritime. Id. at *19-20.
Judge Clement’s statements are interesting in light of the fact that contracts to
perform similar services have previously been held to reference a maritime activity. See,
e.g., Corbitt v. Diamond M. Drilling Co., 654 F.2d 329 (5th Cir. 1989) (holding that a
contract to perform casings services on a movable drilling rig was a maritime contract).
Judge Clement noted, however, that contract cases were not controlling: “[d]espite
Barker’s allegation to the contrary, contract cases with similar fact patterns are not
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binding on whether this tort action is maritime in nature, since tort and contract cases
apply different tests….” Id. at *20 n.4.
In his dissent, Judge Higginbotham stated that the plaintiff sufficiently alleged a
maritime tort, finding that the relevant “incident” was the fall of a pollution pan from a
vessel (the jack-up rig) and that the relevant “activity” was failing to provide a safe work
place aboard that vessel. Id. at *45-48. The dissent criticized Judge Clement’s choice of
law opinion for the “uncertainty its approach brings to settled law.” Id. at *42. Further,
Judge Haynes declined to join the section of the Judge Clement’s opinion addressing the
lack of maritime activity.
2.
Lozman v. City of Riviera Beach, 133 S.Ct. 735 (2013)
The Supreme Court, in Lozman, recently expounded upon the test for vessel status
adopted by Stewart v. Dutra Constr. Co., 543 U.S. 481 (2005). In Stewart, the Supreme
Court determined a large dredge to be a “vessel” within the terms of the LHWCA,
holding that a vessel is any “watercraft” that is “practically capable of being used for
maritime transportation, regardless of its primary purpose or state of transit at a particular
moment.” Id. at 497. Citing Stewart, the Eleventh Circuit determined that a large
houseboat was a vessel because it floated and could be moved under tow.
Due to a conflict among circuit courts, the Supreme Court in Lozman sought to
clarify the word “capable,” emphasizing that courts “must apply this definition in a
‘practical,’ not a ‘theoretical,’ way.” Id. at 609. To accomplish this task, the Lozman
Court adopted a “reasonable observer” test: “in our view a structure does not fall within
the scope of this statutory phrase unless a reasonable observer, looking to the home’s
physical characteristics and activities, would consider it designed to a practical degree for
carrying people or things over water.”
Id. at 611.
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propulsion would be a major factor in the determination: “although lack of selfpropulsion is not dispositive…it may be a relevant physical characteristic.” Id. Finally,
the Supreme Court held that satisfaction of this objective reasonable observer test may
not be necessary if the owner actually uses a floating structure as a vessel, even if “not
designed to any practical degree for transportation.” Id. at 617.
The “reasonable observer” test is arguably less inclusive than the Fifth Circuit’s
application of Stewart previously, and it is unclear whether offshore facilities that have
traditionally been held to be vessels will continue to meet this test. After all, would a
reasonable observer consider a jack-up rig, floating with its legs hundreds of feet up in
the air, unstable, and moving under tow “designed to a practical degree for
transportation?”
The possible interplay between Lozman and Barker is also interesting. Drilling
for mineral resources has never been considered a “traditional maritime activity,” but the
maritime connection requirement of the Grubart test has traditionally been satisfied
strictly due to the vessel status of the jack-up rig or drilling unit. While the Fifth Circuit
in Barker did not decide what substantive law applied to the plaintiff’s claims, Judge
Clement observed that the jack-up rig was a vessel but reiterated that “under Supreme
Court precedent, offshore drilling is not maritime activity.” Thus, the plaintiff’s work in
Barker was more closely related to the furtherance of offshore oil exploration and drilling
and therefore “non-maritime in nature.” This dicta stands for the proposition that a
plaintiff’s injury on a vessel may not be maritime in nature if the plaintiff was engaged in
activity related to offshore drilling as opposed to vessel repair and maintenance.
Only time will tell whether the traditional assumption of maritime jurisdiction
based solely on vessel status as opposed to an examination of the activity in question
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remains, or what role Lozman may play in redefining what were once classified as
“vessels.” Judge Clement’s opinion in Barker indicates a willingness by at least one
federal Judge to reconsider the Robinson 7 line of cases. Barker might be one to watch for
possible en banc reconsideration by the Fifth Circuit.
Another important feature of the Lozman decision is the Court’s emphasis that the
owner’s intent should not be considered in the determination of vessel status: “we have
sought to avoid subjective elements, such as owner’s intent, by permitting consideration
only of objective evidence of a waterborne transportation purpose….”
Id. at 616.
Previously, the Fifth Circuit has acknowledged that the owner’s intent might be relevant
to a determination of whether the structure has been permanently moored. See, e.g., De
La Rosa v. St. Charles Gaming Co., 474 F.3d 185 (5th Cir. 2006). The Supreme Court
did not expressly reject this approach, but its language lends considerable support to the
argument that the owner’s intent should not be considered for any purpose. Lozman has
already caused the reversal of a Louisiana state case that found a riverboat casino to be a
non-vessel due to its connection to land. Lemelle v. St. Charles Gaming Co., No. 12-130,
2012 La. App. LEXIS 4 (La. App. 3 Cir. 1/4/12), writ denied, 86 So.3d 627 (La. 4/27/12),
reversed by 2013 U.S. LEXIS 1048 (January 22, 2013). It should be noted that the
riverboat casino in Lemelle is the very same riverboat that the Fifth Circuit found to be a
non-vessel in De La Rosa, and the Louisiana court based its decision in large part off of
the Fifth Circuit’s finding.
7
Offshore Co. v. Robinson, 266 F.2d 769 (5th Cir. 1959).
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3.
Mendez v. Anadarko Petroleum Corp., 466 Fed. Appx. 316 (5th
Cir. 2012) (not designated for publication), cert denied, Mendez v.
Anadarko Petroleum Corp., 2013 U.S. LEXIS 1045 (January 22,
2013).
In a recent unpublished decision, the Fifth Circuit revisited the vessel status of a
SPAR and determined that the RED HAWK SPAR owned by Anadarko Petroleum Corp
(“Anadarko”) was not a Jones Act vessel. Notably, the Supreme Court denied certiorari,
despite the issues raised in its decision in Lozman. The RED HAWK, like all SPARs,
floats on the surface of the water with a long cylindrical body under the Ocean’s surface.
The SPAR is connected to an extensive subsea infrastructure of mooring lines, flow lines,
umbilicals, and export pipelines. When examining whether the RED HAWK could be
considered a vessel, the Fifth Circuit placed considerable emphasis on the time and
expense that would be required to move it to another location. Anadarko had conducted a
feasibility study and found that moving RED HAWK would require abandoning the
entire subsea system, take approximately 50 days (approximately 46 days just to
disconnect and modify the structure), and cost over $42 million dollars. Id. at 317. The
court determined that the RED HAWK was thus theoretically capable of maritime
transportation but not practically so. Id at 319. In so doing, the court analogized to its
previous ruling in Pavone v. Miss. Riverboat Amusement Corp., 52 F.3d 560 (5th Cir.
1995) in which the court determined that a casino boat was no longer a vessel because it
was permanently moored to the shore. The court stated that “[d]isconnecting the RED
HAWK from the sea floor would make disconnecting a casino boat from the shore look
as easy as unplugging a toaster.” Id. at 319.
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4.
Washington v. BP America, Inc., No. 6:10-1486, 2012 U.S. Dist.
LEXIS 164371 (W.D. La. Nov. 16, 2012)
In Washington, the Western District of Louisiana held that the THUNDER
HORSE platform owned by BP was not a vessel. The court characterized the THUNDER
HORSE as a “production drilling quarters.” The THUNDER HORSE floats on four large
columns, which are partially submerged. It is held in place by 16 wire and chain mooring
lines. The THUNDER HORSE can move under its own power, within a small radius, by
tightening and slacking its mooring lines so that it may service multiple wells. In
determining that the THUNDER HORSE was not a vessel, the Washington court
compared the THUNDER HORSE to the RED HAWK discussed in the unreported case
of Mendez. The court noted that while the RED HAWK would cost $42 million to sever
and remove (a factor weighing against vessel status), moving the THUNDER HORSE
would cost up to $400 million to move. Id. at *11. As the Washington court noted, other
district courts have also held that the THUNDER HORSE is not a vessel. See, e.g.,
Moore v. Bis Salamis, Inc., 748 F. Supp. 2d 598 (E.D. Tex. 2010); Rushing v. Pride
Intern., Inc., No. H-11-0294, 2011 U.S. Dist. LEXIS 80149 (S.D. Tex. July 22, 2011);
Scroggs v. Bis Salamis, Inc., No. 1:09-CV-1007, 2010 U.S. Dist. LEXIS 109916 (E.D.
Tex. Oct. 5, 2010).
5.
In Re: BP p.l.c. Securities Litigation, MDL No. 10-md-2185, 2012
U.S. Dist. LEXIS 143126, affirmed sub nome City of New Orleans
Emples. Ret. Sys. v. Hayward, 2013 U.S. App. LEXIS 1145 (5th
Cir. Tex. Jan. 16, 2013).
The Southern District of Texas recently addressed OCSLA jurisdiction over fraud
claims in relation to the Deepwater Horizon incident. Several Ohio state pension funds
brought suit in Ohio state court against BP entities alleging that the defendants violated
Ohio’s security law and committed fraud, misrepresentation, and fraudulent concealment.
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The crux of the plaintiffs’ claim was that the BP entities had made false statements about
BP’s safety procedures and ability to contain an oil spill and that these misrepresentations
induced the state funds to purchase BP shares at artificially high prices. The defendants
removed the case to the United States District Court for the Northern District of Ohio and
transferred the case to the Southern District of Texas alleging that the claims satisfied 43
U.S.C. § 1349(b)’s “arising out of, or in connection with” requirement. Id. at *29.
The plaintiffs asserted that removal was improper and that OCSLA did not govern
their state and common law securities claims, arguing that the OCSLA jurisdiction only
applies when the facts underlying the claim affect the “efficient exploitation of
resources,” citing cases from the Eastern District of Louisiana. In contrast, the BP
entities argued that the court should use the “but for” test to determine which cases are
subject to OCSLA jurisdiction.
The court rejected both theories and applied the pure language of the statute itself.
The court noted that many of the alleged misleading statements were made in filings
required by the Mineral Management Service (“MMS”) regulations and were made using
MMS formulas. Other statements related to the amount of oil being released from the
Macondo well. Thus, the court concluded, OCSLA applied because “if BP had not
conducted exploratory operations on the OCS, Defendants would have had no
opportunity or reason to make the allegedly misleading statements….” Id. at *35. In
making this ruling, the court also explicitly rejected the argument that OCSLA’s
jurisdictional provisions contain a situs requirement: “[t]he court rejects Plaintiffs’
invitation to recognize an implicit situs requirement in section 1349(b)(1).” Id. at *37. It
will be interesting to see how this situs issue develops in light of the Fifth Circuit’s recent
formulation of the jurisdictional test in Barker.
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6.
W&T Offshore, Inc. v. Apache Corp., No. 11-2931, 2013 U.S. Dist.
LEXIS 6060 (S.D. Tex. January 15, 2013).
The Southern District of Texas recently addressed a similar problem when
deciding what law applied to tort claims based on violations of a Production and
Handling Agreement (“PHA”).
In that case, W&T and Apache both owned fixed
platforms off the coast of Louisiana. The two entities entered into a PHA under which
Apache agreed to process oil from W&T’s platform and dispose of excess water for a fee.
The oil from W&T’s platform was commingled with the oil from Apache’s platform, and
the agreement required Apache to allocate the production between the two entities after
processing. W&T alleged, inter alia, that Apache consistently under-allocated W&T’s
share of production and over-allocated the amount of water that needed to be disposed on
W&T’s behalf.
In addition, W&T alleged that Apache committed fraud due to
misrepresentations made about its allocation process from its Houston office. Apache
filed a motion to dismiss arguing that, under Louisiana law, W&T’s claims were either
not recognized or were barred by Louisiana’s one year liberative prescriptive period.
W&T argued that Texas law should apply because all of the alleged misallocations and
misrepresentations relevant to the case took place at Apache’s Houston office and were
not directly related to development of minerals on the OCS.
The court found that Louisiana law applied to the dispute and invalidated most of
W&T’s claims. In making this determination, the court rejected the argument that
OCSLA’s choice of law provision should be applied as extensively as its jurisdictional
provision. The court found, however, that although most of the events underlying the
alleged torts took place on land, the “controversy” arose on the OCS. Id. at *32 (citing
PLT Engineering, 895 F.2d at 1047). The court concluded that “[d]isputes over the
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performance of offshore production contracts arise on the OCS,” and “disputes over the
allegedly fraudulent performance of such contracts also arise on the OCS.” Id. at *32.
7.
In Re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of
Mex., 808 F.Supp. 2d 943, 951 (E.D. La. 2011).
Judge Barbier’s August 26, 2011 order disposing of defendants’ Motion to
Dismiss as to private, “non-governmental” economic loss and property damage claims
serves as a good example of an OCSLA choice of law analysis within the tort context and
of how complex this analysis can be.
Like the parties in the cases cited above, Judge Barbier first addressed whether the
M/V DEEPWATER HORIZON, a MODU, was a vessel. The court easily found the
M/V DEEPWATER HORIZON to be a vessel under previous precedent such as Demette.
The court noted that in contrast to the jack-up rig in Demette, the M/V DEEPWATER
HORIZON did not have legs extended into the seabed, and its only attachment to the
seabed was its drilling pipe. More importantly, the court found the M/V DEEPWATER
HORIZON to satisfy the Stewart test because the facility could float, employed a global
positioning device, and employed a “complex thruster” system to stabilize itself. Id. at
950.
Judge Barbier next quickly summarized its previous holding finding OCSLA
jurisdiction.
Jurisdiction existed because “(1) the activities causing the injuries in
question could be classified as an operation on the OCS involving exploration or
production of minerals, and (2) because the case arises in connection with that
operation.” Id. at 951; See also In re Oil Spill by the Oil Rig Deepwater Horizon in the
Gulf of Mexico, On April 20, 2010, 747 F. Supp. 2d 704 (E.D. La. 2010).
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Next, the court examined whether it also had admiralty jurisdiction over the B-1
master complaint claims. The court concluded that the location requirement was satisfied
because the blow-out occurred from an appurtenance of the M/V DEEPWATER
HORIZON, i.e., the blowout preventer and the drill string.
The court found the
connection test satisfied also. First, the court noted that the incident had an actual
substantial impact on maritime commerce.
Second, the court concluded that the
operations on the M/V DEEPWATER HORIZON bore a substantial relationship to a
traditional maritime activity, citing the contract case of Theriot for the proposition that
“‘oil and gas drilling on navigable waters aboard a vessel is recognized to be maritime
commerce.’” Id. at *951 (quoting Theriot, 783 F.2d at 538-539). This portion of Judge
Barbier’s opinion may have to be reconciled with Judge Clement’s statements in Barker.
Judge Clement unequivocally opined that “drilling” from a vessel was not a traditionally
maritime activity and that contract cases were not relevant in the tort context. Barker,
2013 U.S. App. LEXIS 2387, at *16.
Judge Barbier next discussed whether substantive maritime law pre-empted the
plaintiffs’ state law claims. Plaintiffs argued that state law could “supplement” maritime
law where there was a gap or in the absence of a conflict between the two. Plaintiffs also
asserted that OPA contained a state law “savings” clause, which prevented such preemption.
The court first noted that state law could not function as surrogate federal law
under OSCLA because general maritime law applied to the claims of its own force. In
discussing the relationship between maritime law and state law, Judge Barbier
emphasized that the framework embodied by the Constitution envisioned that maritime
commerce was governed by a consistent, uniform body of law. While admiralty law does
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not preclude states from regulating conduct in territorial waters, Judge Barbier noted that
the incident occurred on the OCS, an area of exclusive federal jurisdiction. The court
also rejected plaintiffs’ argument that state law could “supplement” general maritime law
because there was no substantive gap to fill, as both OPA and general maritime law
provide adequate remedies for the claimants.
Next, the court rejected plaintiffs’
argument that the OPA savings clause was intended to preserve the States’ police powers
to govern pollution discharges within their territorial waters stating that the saving clause
was not intended to bestow the power upon individual states to regulate out-of-state
discharges that affect multiple jurisdictions.
Next, the court addressed whether OPA was the sole remedy (against the
Responsible Party) for private economic losses and property damage and thus displaced
the plaintiffs’ general maritime claims. After providing a brief history of the EXXON
VALDEZ and the creation of OPA, the court noted that OPA was designed, in part, to
broaden the class of claimants who could recover for economic losses as a result of an oil
spill beyond the Robins Dry Dock rule that limits claimants to those with physical
damages to their property.
Judge Barbier concluded that OPA pre-empted general
maritime law where the cause of action and remedy were not available to plaintiffs before
the passage of OPA. Thus, any purported maritime claims by non-commercial fisherman
who had not alleged physical injury to their property were pre-empted. However, for
plaintiffs whose cause of action existed under maritime law before the enactment of
OPA, the court held that their claims against non-Responsible Parties were not displaced
because:
(1) there was no evidence Congress intended to occupy the entire field
governing liability for oil spills; (2) OPA does not directly address the liability of nonResponsible Parties for covered losses; and (3) allowing a general maritime remedy
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Indemnity in Deep Water: Indemnity Agreements
Offshore and the Deepwater Horizon
against non-Responsible Parties would not frustrate Congress’ intent in enacting OPA. In
summary, all maritime claims that did not exist before the creation of OPA were preempted; maritime claims that were saved against the Responsible Party must follow the
OPA presentment procedure; and maritime claims against non-Responsible Parties were
unaffected by OPA.
VI.
CONCLUSION
Three years after the Deepwater Horizon incident, the ins and outs of oilfield
service contracts offshore continues to be a volatile and dynamic area of the law. The
Fifth Circuit and the United States Supreme Court have made dramatic decisions in the
last few years, as they continue to grapple with the complex contractual interpretation and
choice of law issues surrounding such agreements. Meanwhile, states continue to update
and amend statutory prohibitions. The drafter of such agreements or litigator who seeks
to oppose or enforce them must remain constantly vigilant, keeping an eye on both
legislatures and courts.
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