An Opinion Worth Its Salt – Fifth Circuit En Banc Simplifies Rule For Identifying Maritime Contracts In The Oilfield

by Baker Donelson
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The Fifth Circuit en banc (In re Larry Doiron, Inc., 2018 WL 316862, at *7 (5th Cir. Jan. 8, 2018)) has handed down an historic re-working of the test for determining whether oilfield contracts are maritime or non-maritime in nature. Harkening back to the United States Supreme Court’s eminently practical, simple maritime contract test in Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 22 (2004) that considers whether “the situation presented … [has] a genuinely salty flavor,” the en banc decision in In Re Larry Doiron, Inc. simplifies decades’ worth of confusing and often inconsistent jurisprudence to give a more streamlined and hopefully predictable rule for determining whether oilfield contracts are maritime or not.

And this new rule will likely have immediate real-world implications. In the offshore/nearshore oil and gas exploration industry, the use of knock-for-knock indemnity agreements in service contracts has been a standard, critical commercial tool for virtually as long as the industry has existed. The parties negotiate these (typically) mutual back-and-forth indemnity provisions, nearly always coupled with concomitant belt-and-suspender agreements to procure insurance in favor of the indemnified party (in case the indemnitor cannot meet its obligations on its own), in order to give some predictability ahead of time as to what their potential liabilities for a project may be.

The courts, however, have for decades complicated these efforts at arms-length agreements to foster commercial predictability by applying a byzantine, “perplexing”[1] set of fact-intensive, seemingly ad hoc rules to determine whether contracts relating to offshore/nearshore drilling are “maritime contracts” governed by maritime law that validates such indemnity agreements; or “non-maritime contracts” governed by state law that – at least in Louisiana and Texas and/or on the outer continental shelves of those states – invalidates such indemnity agreements pursuant to so-called “anti-indemnity” statutes. The distillation of this jurisprudence (insofar as it could be distilled) was the two-step, six-factor Davis test, which was less a definitive test and more a very rough guidepost of cobbled together, fact-intensive inquiries that almost necessarily resulted in case-specific outcomes depending on which of the virtually innumerable oilfield activity(-ies) was at issue (wireline operations, decommissioning, well-stimulation, etc.).

Into this quagmire, a Fifth Circuit panel in In Re Larry Doiron, Inc., 849 F.3d 602 (5th Cir. Feb. 23, 2017, rev’d Mar. 7, 2017) slogged its way through the Davis test in a case involving flowback operations (essentially stimulating an older natural gas well) performed in state waters on a fixed platform. As this blog’s prior discussion of Doiron noted, the crux of the problem in determining the maritime/non-maritime nature of the contract stemmed from the fact that the overarching master service contract (MSC) for the flowback work did not call for or contemplate any vessel involvement; but mid-way through the job, the flowback contractor (STS) required a crane to manipulate some of the flowback equipment. In turn, the only way to get a crane to the platform was via tug and barge, which required the platform owner (Apache) to subcontract with LDI to charter in the necessary vessels to allow STS to do its work under the MSC.   During the ensuing operations, an STS technician was injured, and LDI sought indemnity from STS under the terms of the Apache-STS MSC (which provided for indemnity from STS to Apache and any of Apache’s subcontractors).

The Doiron panel went through the painful exercise of attempting to apply the Davis factors to this unique fact pattern, and ultimately determined that the Apache-STS MSC was a maritime contract (such that the indemnity to LDI was valid) – although the court did so only hesitatingly, specifically stating that its “holding [was] confined to the facts before [it]” and should not be used as precedent in later cases. In re Larry Doiron, Inc., 849 F.3d at 610.

Moreover, two of the three judges on the original Doiron panel took the opportunity in a special concurrence to call for en banc rehearing, echoing the long-running criticisms of the Davis test for “creat[ing] uncertainty, spawn[ing] litigation, and hinder[ing] the rational calculation of costs and risks by companies participating in [the offshore/nearshore oil and gas] industry.” Id. at 611. Taking heart in this directive, STS and its insurers filed a petition for en banc rehearing; and after the mandatory poll of all sitting Fifth Circuit judges resulted in a majority voting for rehearing, the case was taken up before for en banc reconsideration.

Nearly a year later, the Fifth Circuit en banc issued its opinion reversing the panel in Doiron, holding that the Apache-STS flowback MSC was a non-maritime contract (notwithstanding the unexpected use of vessels), and that the Louisiana Oilfield Anti-Indemnity Act (La. Rev. Stat. §9:2780) therefore invalidated any indemnity in favor of LDI.

However, more importantly than this result itself, the en banc court in Doiron announced a new, much simpler, more straightforward and intuitive two-factor test for determining if an oilfield contract is maritime or not – that is, whether it is sufficiently “salty” to trigger application of maritime law to the exclusion of state law:

First, is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? . . . Second, 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.

2018 WL 316862 at *7. Based on these two questions, the court determined that because the use of vessels in the Apache-STS-LDI scenario was unexpected in the scope of the original work, the MSC was necessarily non-maritime.

That said, the death knell of Davis cannot ring out just yet; the Doiron en banc court noted that there may be residual usefulness of the kaleidoscopic Davis test in the context of the new two-factor test:

The scope of the contract may be unclear; the extent to which the parties expect vessels to be involved in the work may also be unclear. In resolving these issues, courts may permit the parties to produce evidence of the work actually performed and the extent of vessel involvement in the job [i.e. the Davis factors].

Id. at *8. Nonetheless, it is absolutely clear that the Davis factors are secondary/supplemental only, and that the ultimate resolution of whether an oilfield contract is maritime or not will be determined under the practical two-factor Doiron test. This result – perhaps a rarity in the legal world – was driven by the Court’s concerns for the practical realities of the industry and the end-goal of creating a framework that would allow some sense of certainty when negotiating agreements:

This test places the focus on the contract and the expectations of the parties. This is the proper approach in a contract case and assists the parties in evaluating their risks, particularly their liability under indemnification clauses in the contract.

Id. Given the omnipresence of indemnity/additional insurance provisions in oilfield contracts, and the commercial importance of certainty (within reasonable parameters) of contractual risk allocation in the potentially high-risk/expense world of oil and gas exploration, the Doiron decision should prove to be a welcome solution to a perennially perplexing quandary. It remains to be seen how the new Doiron test may affect existing contracts that were drafted under the prior labyrinthine rule of Davis. But in the meantime, oilfield contractors and operators, and perhaps equally importantly their insurers, should carefully consider the scope and nature of work in their service contracts, and specifically draft with an eye towards the new two-factor test.

[1] Demette v. Falcon Drilling Co., 280 F.3d 492, 500 (5th Cir. 2002), overruled by Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009).

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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