Is your contract maritime? Perhaps not all the time! Clarifying a recent ruling

This case before the United States Court of Appeals for the Fifth Circuit considers whether a contract to inspect and repair lifeboats on an oil platform located on the Outer Continental Shelf is a maritime contract. The answer to this affects whether the contract would be subject to General Maritime Law (“GML”), in which case any indemnity provisions would be enforceable, or whether it would be subject to state law (in this case Louisiana law), in which case any indemnity provisions would be unenforceable under the Louisiana Oilfield Anti-Indemnification Act (“LOAIA”). In this case, the Appellate Court decided that the contract is a maritime contract and is therefore subject to GML. 

What is the LOAIA?

The oil and gas industry has for decades played a major role in driving Louisiana’s economy, given Louisiana’s proximity to the Gulf of Mexico. As a result they have contractual leverage. This has enabled the oil and gas companies to agree with service companies/contractors that the latter would indemnify the former for any personal injury or death claims brought, even if relating to their own negligence or fault.

The LOAIA was enacted 1981 to stop this practice as it was considered against public policy. It thereby rendered null and void any indemnity provisions in any agreement pertaining to a well for oil, gas or water (and certain mineral wells), requiring one corporate entity to indemnify another for “the death or bodily injury to persons, where there is negligence or fault (strict liability) on the part of the indemnitee, or an agent or employee of the indemnitee, or an independent contractor who is directly responsible to the indemnitee” (LA Rev Stat § 9:2780 (2015)).

Factual Background

This case arises from a tragic incident June 2019 where during a quarterly drill of several lifeboats by Shell Offshore, Inc., Shell Exploration & Production Company, and Shell Oil Company (“Shell”), the release cable for lifeboat 6 failed due to corrosion, causing the lifeboat to fall 80 feet into the water, unfortunately killing two Shell employees and injuring another.  

The incident occurred on the Auger Tension Leg Platform, which is owned and operated by Shell. In 2018, Shell and Palfinger entered into a purchase contract (akin to a master service contract), which in addition to outlining the services to be performed by Palfinger (I.e. annual inspection, maintenance and repair of the lifeboats on the platform), also laid out indemnity provisions whereby Shell agreed to indemnify Palfinger for liabilities resulting from death, injury, or disease of any Shell employee. Following settlement of the plaintiff’s claims, the issue to be considered by the courts was whether the purchase contract would be subject to GML or Louisiana law, which in turn would determine whether the indemnity provisions therein would be enforceable or not.

The District Court Decision

Palfinger’s purchase contract with Shell provided “services to facilitate the drilling or production of oil and gas on navigable waters” which required annual inspections and repairs on the Auger Platform’s lifeboats.

In deciding whether the purchase contract was a maritime contract and therefore whether federal or state law would apply under the Outer Continental Shelf Lands Act’s (“OCSLA”) choice of law provision, the District Court relied upon the Rodrigue/PLT test, which sets out three requirements for state law to apply:

• The controversy must arise on a situs covered by the OCSLA;
• Federal maritime law must not apply of its own force; and 
• The state law must not be inconsistent with Federal law

In general, the Outer Continental Shelf refers to all submerged lands lying seaward of United States coastal waters and of which the subsoil and seabed appertain to the United States and are subject to its jurisdiction and control (43 U.S. Code § 1331). The Auger Tension Leg Platform was situated around 130 miles off the Louisiana coast, which was within the exclusive economic zone of the United States (around 200 nautical miles from the baseline). Further, the Auger Platform was agreed between the parties to be a floating platform and the OCSLA extends federal law to all “artificial islands” and “installations and other devices … attached to the seabed” as well as other artificial structures in the Outer Continental Shelf (43 U.S.C. § 1333(a)(1)(A)). The District Court therefore found this first requirement to be satisfied.

It has already been held by the Federal Courts that the LOAIA is not inconsistent with federal law (87 F.3d 1512 (5th Cir. 1996)), which thereby satisfies the third requirement.

In determining whether the second requirement applies, The District Court relied upon Dorion’s two-factor test for determining whether a contract relating to offshore oil and gas exploration and production is maritime:

• Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? 
• 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?

The District Court reasoned that although “the Shell-Palfinger purchase and maintenance contract involved ‘services to facilitate the drilling or production of oil and gas on navigable waters,’ the record [did] not reflect that a vessel [would] play a substantial role in the completion of the contract”.

The District Court then concluded that Louisiana law applied, rendering the indemnity provisions within the purchase contract unenforceable under the LOAIA. This meant that Palfinger would be unable to recover its costs incurred in the settlement of the third party claims from Shell.

Palfinger therefore appealed and challenged the determination on the second requirement.

The Court of Appeal Decision

The Appellate Court found that the purchase contract is a maritime contract, and reversed the District Court’s decision, on three grounds:

First, The Appellate Court found that in the District Court’s consideration of whether the purchase contract is a maritime contract, they relied upon where the work was conducted (I.e. on the platform or the vessels / lifeboats), however this is a spatial approach which is inapplicable to maritime contracts, which instead require a conceptual approach which evaluates the actual substance of the contract. In this case, the substance of the contract was one which provides for the repair and maintenance of vessels which are necessary to support the operation of offshore drilling and production of oil/gas.

The second and third grounds were grouped together, as the Appellate Court’s answer to both was the same. The second ground concerned the District Court’s dismissal of the involvement of lifeboats as vessels as they were only incidental to the performance of the contract. The third ground concerned the District Court’s finding that as the lifeboats were not used to complete a substantial portion of the work, and were not themselves engaged in maritime commerce, the purchase contract was not maritime.

The Appellate Court argued that the District Court’s focus on the “use” of the vessel/s made them incidental to the contract, whereas the correct consideration should have been focused on whether the vessel/s will play a substantial role in the completion of the contract. In deciding this, the Appellate Court explained that the over-arching consideration to be contemplated is whether the “vessel would be necessary to perform the job” (879 F.3d 568 (5th Cir. 2018) at 570).

Having established that lifeboats are vessels in that they are “watercraft or other artificial contrivance used, or capable of being used, as a means of transportation on water” (1 U.S. Code § 3), and that lifeboats are required by the Coast Guard in order to evacuate all oil rig workers in case of an emergency (46 C.F.R. § 108.525), the Appellate Court decided that a vessel, I.e. in this case the life boats, need not itself be engaged in maritime commerce, but must be a necessary component in the completion of the commercial maritime activity. As such, a conceptual, as opposed to spatial, approach should be applied when considering maritime contracts. 

With this, the Appellate Court concluded that “drilling and production of oil and gas on navigable waters” (which satisfies Doiron’s first factor) is clearly a commercial maritime activity and the lifeboats on the platform are a necessary component of this activity and therefore play a substantial role in the completion of the contract (which satisfies Doiron’s second factor). Accordingly, the indemnity was enforceable.

Comments

The main emphasis of this decision is that when considering whether or not a contract is a maritime contract, one should avoid using spatial analysis and instead use a conceptual analysis. In other words, don’t simply consider where the performance of the contract took place or whether the vessel is physically used in order to complete the intended maritime activity. Instead, evaluate the substance of the contract and consider whether the vessel is necessary in order to bring about its completion.