Establish maritime/non maritime nature of contracts, Steamship advises

For US vessel owners operating in the Gulf of Mexico it is essential, before finalizing a contract, that liabilities under that contract are known, along with any limitations and defences which may be available, writes Steamship Mutual: Stuart Crozier  Syndicate Associate, on the Steamship web site.

He said that it was of particular importance to establish whether a contract with a service provider was considered a maritime contract because this has implications as to whether contractual indemnities would be enforceable or if, for example, the Louisiana Oilfield Indemnity Act (LOIA) would bar indemnification.

Crozier noted that the test to determine whether or not a contract was maritime in nature was discussed in the recent matter of Larry Doiron Inc v Specialty Rental Tools & Supply LLP et al (5th Circuit) No. 16 30217, January 8th 2018, heard before the entire bench (en banc). The Court  decided to review the case to consider modifying the criteria established in the 1990 case Davis & Sons v Gulf Oil Corp 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.

In the Doiron case, Apache Corp 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; 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.

Anticipating litigation from the crewmember, 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 thus hinged on whether the MSC was a maritime contract. If it was, general maritime law permitted enforcement of the indemnity provision. If it was 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, but 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:

  • 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.
  • A genuine dispute exists if a reasonable jury could find in favour of the non-moving party.
  • All facts and evidence are viewed in the light most favourable 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:

  • What does the specific work order in effect at the time of injury provide?
  • What work did the crew assigned under the work order actually do?
  • Was the crew assigned to work aboard a vessel in navigable waters?
  • To what extent did the work being done relate to the mission of that vessel?
  • What was the principal work of the injured worker?
  • What work was the injured worker actually doing at the time of injury?

This test however had previously been criticised 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 however noted that the Supreme Court’s opinion in Norfolk Southern Railway Co. v Kirby in 2004 set a far simpler and more straightforward method for determining whether a contract was 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 avoided the unnecessary question from Davis & Sons as to whether the particular service was inherently maritime in nature.
  2. If the answer to the above question was “yes,” did the contract provide or did the parties expect that a vessel would play a substantial role in the completion of the contract? If so, the contract was maritime in nature.

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

Crozier noted that this decision would likely “have significant impacts on future offshore oil and gas contracts in the Gulf of Mexico”.

In particular, if a contract was maritime in nature, acts (such as the LOIA) which bar the enforcement of indemnities would not apply. It was, 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”.

Steamship expected that the simpler test set out by the Court would provide clarity to vessel owners regarding their indemnity obligations in offshore oil and gas contracts.

stuart.crozier@simsl.com

https://www.steamshipmutual.com/publications/Articles/OffshoreServiceContract0318