The Offshore Master Service Agreement

by King & Spalding
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The offshore MSA is a fundamental contract for any operator or service company. It is the framework by which all work is performed offshore and, importantly, establishes which party assumes the risk of loss for people, property, and pollution. The domestic offshore MSA invariably uses independent contractor clauses and knock-for-knock indemnity provisions to allocate risk. The former distances and insulates the operator from the conduct of its contractor, and the latter allocates risk of injury or loss by class irrespective of fault. Over the years contracting parties have been able to rely on these provisions' consistent application and generally uniform interpretation by the Courts. Now, recent regulatory changes enacted by the Bureau of Safety and Environmental Enforcement (BSEE) have caused some to question whether these clauses still provide the same level of certainty that they once did.

Much has been discussed about BSEE's efforts to hold the entire offshore energy industry accountable by imposing Safety and Environmental Management System (SEMS) requirements on operators and its sudden jurisdictional expansion to include offshore contractors; however, there has been little discussion of how these changes might impact the agreements that operators and contractors rely on to allocate risk. Complying with SEMS may no longer allow an operator to keep its contractor at arm's length; and contractors who now receive Incidents of Non Compliance (INCs) from BSEE might now fall outside the scope of their indemnity clauses.

At its core, the independent contractor clause insulates the operator from liability for the negligence or misconduct of its contractor. The clause generally contains some variation of the following:

Contractor, as an independent contractor, shall have complete control over the manner and performance of its operations, Company being interested only in the results to be obtained from the Work.

This language evolved from caselaw that generally held an operator was not liable for the negligence of a contractor in performing its work so long as an operator did not have substantial control over the manner and performance of the contractor's work. This stated intent of the parties, when combined with an operator's traditional "hands off" approach to contractors, would insulate the operator from a contractor's negligent operations.

The SEMS regulations require significantly more contractor oversight by the operator, calling into question whether the independent contractor defense is still viable. Specifically, the operator must make "certain that contractors have the skills and knowledge to perform their assigned duties and are conducting these activities in accordance with the requirements in your SEMS program." The operator must also verify that "contractor personnel understand and can perform their assigned duties … ." Is it possible for an operator to be only interested in "the results to be obtained," if it must ensure the contractor have knowledge to perform a specific task and is actually conducting those activities in compliance with the operator's SEMS program? These requirements may well expose operators to a new class of liabilities that they previously could avoid, especially where any damages are sustained by a third party who may not fall within the parties' indemnity scheme.

It is not just new regulations, but the new manner in which BSEE enforces the regulations that may impact MSAs. In 2011 BSEE announced it would begin holding contractors directly responsible for complying with its regulations. Prior to this announcement, only operators were obligated to comply with the offshore regulations. Operators were also jointly and severally liable for any regulatory violation committed by a contractor. This amounted to a "top down" regulatory scheme where BSEE regulated the operator who, in turn, regulated its contractors.

In an effort to calm the objections of contractors, BSEE issued Interim Policy Document (IPD 12-07) explaining that it would only issue INCs to contractors for "serious violations." Specifically, BSEE will apply a four factor test to the facts giving rise to the violation to determine if a contractor "engaged in egregious conduct." BSEE does not define what constitutes egregious conduct; nor does the term carry a recognized legal meaning. The name itself suggests something more than negligent conduct. But is it synonymous with grossly negligent conduct? That term is well known and carries with it significant legal implications.

Indemnity obligations often contain exceptions where the indemnitee is grossly negligent. Even where an agreement expressly provides for indemnity for gross negligence, some jurisdictions still struggle to enforce the clause. General maritime law permits indemnity for gross negligence; however, it voids indemnity for punitive damages—which often are associated with gross negligence. While it is unclear if a court will equate a contractor's INC with gross negligence, BSEE's policy calls into question whether contracting parties can rely on their present allocation of risk.

BSEE's new regulations and broader enforcement policies have muddied the offshore waters, with additional regulations expected. While the cost of new regulations can often be quantified, the extent of their impact on traditional risk allocation may not be fully understood for some time.

Andrew M. Stakelum
Houston
+1 713 276 7341
astakelum@kslaw.com

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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