Is your offshore service contract "salty" enough to enforce an indemnification clause?

April 2018

PDF Version

OffshoreServiceContract

For US vessel owners’ operating in the Gulf of Mexico it is essential, before finalising a contract, that their liabilities under that contract are known, along with any limitations and defences which may be available. It is of particular importance to establish whether a contract with a service provider is considered a maritime contract because this will have implications as to whether contractual indemnities would be enforceable or if, for example, the Louisiana Oilfield Indemnity Act (“LOIA”) would bar indemnification.

The test to determine whether or not a contract is maritime in nature was discussed in the recent matter of Larry Doiron, Incorporated v Specialty Rental Tools & Supply LLP et al (5 Cir.) No. 16-30217, Jan. 8, 2018. On 8 January 2018 the United States Court of Appeals for the Fifth Circuit heard the case en banc. The Court  decided to review the case to consider modifying the criteria established in Davis & Sons, Inc v Gulf oil Corp. (“Davis & Sons”) 919 F.2d 313 (5th Cir. 1990)  for determining whether a contract for performance of speciality services to facilitate the drilling or production of oil or gas on navigable waters was a maritime contract.

By way of background, Apache Corporation (“Apache”) entered into a master services contract (“MSC”) with Specialty Rental Tools & Supply (“STS”). The MSC included an indemnity provision in favour of Apache and its contractors. Apache issued a work order directing STS to perform “flow-back” services on a gas well in Louisiana waters in order to remove obstructions hampering the well’s flow. A stationary production platform provided the only access to the gas well. The work order did not require a vessel, and neither Apache nor STS anticipated that a vessel would be necessary to perform the work.

STS dispatched a crew to perform the work order. The STS crew determined that some heavy equipment was needed to complete the job and a crane would be required to lift the equipment into place. Apache contracted with Larry Doiron, Inc. (“LDI”), to provide a crane barge.

During the work one of the STS crewmembers was struck by heavy equipment that was in the process of being moved by a LDI crane operator.

In anticipation of litigation from the crew member, LDI filed a third-party complaint followed by a motion for summary judgment, seeking to rely on an indemnity under the terms of the MSC. STS filed a cross-motion for summary judgement seeking a determination that it did not owe an indemnity as the LOIA applied.

The decision turned on whether the MSC was a maritime contract. If so, general maritime law permitted enforcement of the indemnity provision. If not, Louisiana law controlled and the LOIA precluded the indemnity.

The District Court concluded that maritime law applied and awarded LDI defence and indemnity from STS. The judgement was affirmed on appeal, however, a majority of the judges voted to review the case en banc.

The Court was tasked with reviewing whether the granting of LDI’s motion for summary judgement should be upheld. , The Court first reviewed the three factors for determining the summary judgement:-

  1. If the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.
  2. A genuine dispute exists if a reasonable jury could find in favor of the non-moving party.
  3. All facts and evidence are viewed in the light most favorable to the non-movant.

Thereafter, the issue was whether the Court should apply maritime law or the law of Louisiana to determine the validity of the indemnity provisions in the MSC. If Louisiana law applied the indemnity agreement would be void as against public policy. If, on the other hand, the contract was “maritime” this would mean that state law would not apply and the indemnity would be enforceable.

The Court reviewed the six factor test that had been established in Davis & Sons to assess whether a contract is maritime in nature:

  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?
  6. What work was the injured worker actually doing at the time of injury?

This test has, however, come under criticism for being confusing, fact intensive, and unnecessarily and unduly complicating the determination of whether a contract is maritime in nature.

Applying each of the six tests the Court held that the contract was maritime in nature primarily because a vessel was essential to the completion of the job.

The Court noted that the Supreme Court’s opinion in Norfolk Southern Railway Co. v Kirby (“Kirby”) 543 U.S. 14, 2004 AMC 2705 however sets a far simpler and more straightforward method for determining whether a contract is maritime in nature.

In Kirby, the Supreme Court considered a claim for cargo damaged in a train wreck, which had first been transported by ship under two bills of lading. The Supreme Court had to consider whether this two-part venture would fall within the court’s admiralty jurisdiction. The Supreme Court found that bills of lading were maritime contracts because the “primary objective” of these bills was to accomplish the transportation of goods by sea.

In its reasoning the Supreme Court had broadly defined what characterised a contract as “maritime” was whether its purpose was to bring about maritime commerce.  The characterisation as a maritime contract would not be defeated simply because the bill of lading also provided for some land carriage.

Following the principles set out in Kirby, the en banc panel created a two-pronged test:

  1. Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? The answer to this inquiry will avoid the unnecessary question from Davis & Sons as to whether the particular service is inherently maritime in nature.
  2. If the answer to the above question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract? If so, the contract is maritime in nature.

This simpler test places the focus on the contract and the expectations of the parties. The test also removes those prongs of the Davis & Sons test that are irrelevant. Following this decision the focus of the courts should be to determine whether the service work is of a maritime or non-maritime nature, looking at for example whether an actual vessel is involved.

Applying this new test, the work order called for STS to perform downhole work on a gas well that had access only from a platform.  Following a complication a crane barge was called upon to lift equipment, however this was considered to be an insubstantial part of the job and not work the parties expected to be performed. Therefore the contract was non-maritime and controlled by Louisiana law whereby the LOIA bars the enforcement of an indemnity provision. The Court reversed the previous decisions and granted summary judgement in favour of STS.

Comment

This decision will likely have significant impacts on future offshore oil and gas contracts in the Gulf of Mexico. In particular, if a contract is maritime in nature, acts (such as the LOIA) which bar the enforcement of indemnities would not apply. It is, therefore, of significant importance for vessel owners contracting with service providers to ensure that contracts are clear and allow both parties to fully understand their liabilities and particularly the indemnities being assumed. It is expected that the simpler test set out by the Court will provide clarity to vessel owners regarding their indemnity obligations in offshore oil and gas contracts.

 

  Article by Stuart Crozier
Syndicate Associate
stuart.crozier@simsl.com