Decommissioning an Oil Rig? Will your indemnity contract also abandon you?

May 2016

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On 24 February 2016, in the case of Tetra Technologies, Maritech Resources v Continental Insurance Company, the United States Court of Appeals for the Fifth Circuit issued a decision in the continuing debate regarding the availability of contractual defence and indemnity for operations in federal waters on the Outer Continental Shelf (OCS).

Tetra Technologies (Tetra) entered into an agreement with Maritect (Platform Owners) to salvage a decommissioned oil production platform in the Gulf of Mexico. Tetra retained Vertex to perform some aspects of the salvage operation. During this operation the bridge upon which the claimant, a Vertex employee, was working separated from the platform causing all of the workers who were on it to fall 80 feet into the Gulf of Mexico, suffering serious injuries.

Tetra and Vertex had entered into a Master Service Agreement (MSA) under which Vertex employees would perform work for Tetra. The MSA required Vertex to indemnify Tetra for injuries sustained by Vertex’s employees and to list them as an additional insured under their general liability insurance policy with Continental. Vertex disputed that there was any indemnity obligation on them under the MSA due to the application of the Louisiana Oilfield Indemnity Act (LOIA); which prevents a party from contracting out of their own negligence.

On 27 March 2015 the Court for the Eastern District of Louisiana agreed with Tetra and found that Continental and Vertex were required to indemnify Tetra because the LOIA did not apply in these circumstances.

Continental appealed to the Court of Appeals for the Fifth Circuit and asserted that:

1. The Outer Continental Shelf Lands Act (OCSLA) made Louisiana law applicable as surrogate federal law.

2. The indemnity agreement was void under the LOIA.

The OCSLA extends the benefits of the Longshore and Harbour Workers' Compensation Act (LHWCA) to workers injured or killed upon fixed structures (e.g., oil well platforms) that are permanently attached to the outer continental shelf for the purpose of natural resource exploration or development.

Under the LOIA, legislation states that any contractual language which would indemnify a negligent party for any claims resulting from death or bodily injury would be void, as being against public policy.

Tetra countered and argued that neither the LOIA nor the policy precluded recovery against Continental or Vertex.

The Court of Appeals for the Fifth Circuit had to address the arguments asserted by Continental.

 

The Outer Continental Shelf Lands Act (OCSLA) made Louisiana law applicable as surrogate federal law.

The court sought guidance from the case of Texas Petroleum Corp v PLT Engineering Inc (PLT test) (Fifth Circuit 2006) where it established that three requirements must be met for state law to apply as surrogate federal law under the OCSLA:-

1. The controversy must arise on a situs covered by the OCSLA i.e. the seabed or artificial structures permanently or temporarily attached

2. Federal maritime law must not apply of its own force

3. State law must not be inconsistent with federal law.

On review of the first requirement of the PLT test the court applied a “focus of the contract” test to determine whether the controversy arose on an OCSLA situs. This requirement is met if the majority of the performance under the contract is to be performed on stationary platforms.

Continental argued that the MSA and Salvage Plan establish that the controversy arose on an OCSLA situs, asserting the goal of the work was the destruction and decommissioning of a platform on the OCS. Tetra countered that there was no evidence as to where the majority of Vertex’s work for Tetra was to be performed but contended that most of the work was to be performed on lift barges and not on an OCS platform.

The court considered where the majority of Vertex’s performance was to occur under the contract however the evidence was not definitive and, therefore, concluded that neither party was entitled to judgement under the first prong of the PLT test.

On review of the second requirement of the PLT test, The court analysed the historical treatment of contracts and applied a six-factor “fact specific” test into the nature of the contract:-

1. What does the specific work order at the time of injury provide?

2. What work did the crew actually do?

3. Was the crew assigned to work aboard a vessel in navigable waters?

4. What extent did the work being done relate to the mission of that vessel?

5. What was the principle work of the injured worker?

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

In respect of the first two factors, the Court found the evidence was inconclusive as to whether the contract was non-maritime. Continental referred to the Salvage Plan and the injured workers testimony but these sources did not describe the nature of the entire work order. The Court also found similar problems with the third, fourth and fifth factors. Continental noted that the injured worker worked on a vessel but contended that his actual work was not related to a vessel in navigation.

The court, therefore, concluded that the evidence was insufficient to determine whether federal maritime law applied of its own force and so neither party was entitled to summary judgement on PLT’s second prong.

Finally, the court reviewed the third prong and noted there was nothing within the LOIA that was inconsistent with federal law. Because Tetra did not argue otherwise the court concluded that PLT’s third prong was satisfied however, as the evidence was insufficient to determine the first two PLT tests, neither party was entitled to summary judgement as to whether the LOIA must be adopted as surrogate federal law under OCSLA.

However, it was decided that this was not an issue under the District Court’s analysis because it concluded that if Louisiana law did apply the LOIA would not void the indemnity agreement under these circumstances and if Louisiana Law did not apply, the policy would not exclude coverage.

As the result would be the same either way, under the District court’s interpretation, the Fifth Circuit did not see the need to resolve the OCSLA question. The issue was therefore remanded back to the District Court to determine whether Louisiana law must be adopted as surrogate federal law.


The indemnity agreement was void under the Louisiana Oilfield Indemnity Act (LOIA)

The Court then looked at what would happen if OCSLA requires the adoption of Louisiana law as surrogate federal law making the next question whether LOIA applies to this litigation, and if it did, would this void Vertex’s indemnity obligation along with any obligations Continental may have had to Tetra under the insurance policy.

There is an adopted two part test to determine if LOIA applies:-

1. There must be an agreement that pertains to an oil, gas or water well

2. If point one is met, the court will examine the contracts involvement with operations related to the exploration, development, production or transportation of oil, gas or water.

This enquiry requires a fact intensive case specific analysis, looking at the work being done and the intended goal of the operation.

In considering the facts, the District Court concluded that the salvage of a fully decommissioned production platform does not have the required nexus to a well, because it is not in use, however the question is whether this operation had sufficient nexus to a well for the LOIA to apply and void the indemnity agreement.

Continental argued that a platform salvaging operation had the required nexus to a well.

Tetra argued that salvaging a decommissioned platform is not collateral to plugging or decommissioning the well but is effectively one step removed.

The Fifth Circuit considered previous cases on this issue but concluded that a contract for salvaging a platform from a decommissioned oil well has a sufficient nexus to a well under LOIA. Therefore, LOIA would void Vertex’s indemnity obligation as well as Continental’s obligation to indemnify Tetra as an additional insured.

The Court did however remand the case back to the District Court because there was insufficient evidence to determine whether OCSLA requires the adoption of Louisiana law as surrogate federal law. Further, commenting that if the District Court concludes that Louisiana law applies to this dispute, LOIA will void the indemnity agreement. If, however, the District Court concludes that Louisiana law does not apply, then Tetra and Maritech will be entitled to judgment against Continental and Vertex because the Policy does not exclude coverage.

This case highlights the risk that contractual defence and indemnity provisions in contracts dealing with operation on the OCS may not always work, their application are likely to be very detail and fact specific and, therefore, at a minimum the potential application of state anti-indemnity statutes need to be considered in the context of contractual risk allocation.

  

Article by:

Stuart Crozier, Syndicate Executive.
stuart.crozier@simsl.com