Clearing the Muddy Waters of Offshore Contractual Indemnity Disputes: Implications
of Grand Isle v. Seacor
March 2010
Recently, the Fifth Circuit Court of Appeals,
sitting en banc, held that in determining
the situs of an offshore contractual dispute, for choice-of-law purposes, the
site of the majority of contracted work will be determinative.
by Michael
A. Orlando
Meyer Orlando
LLC
In Grand Isle Shipyard, Inc. v. Seacor Marine, LLC,
589 F.3d 778 (5th Cir. 2009) (en banc), the court established a "focus-of-the-contract"
test, representing a major shift in the analysis of contractual indemnity claims
in an offshore setting.
Background Facts
Grand Isle and Seacor were both contractors hired by BP for the maintenance
and repair of BP's offshore platforms. A Grand Isle employee was injured aboard
a Seacor vessel while it was traveling in open water between the rig platform
and the residential platform. The employee filed suit against Seacor, and Seacor
claimed defense and indemnity from Grand Isle based on an indemnity provision
in the contract between Grand Isle and BP. Grand Isle filed a separate suit
seeking a declaratory judgment that it did not owe Seacor defense and indemnity.
The dispute between Seacor and Grand Isle hinged on determining which law
would apply. If the Outer Continental Shelf Lands Act (OCSLA) applied, then
the substantive law of Louisiana would govern their contract, and the indemnity
provision would be invalidated by the Louisiana Oilfield Indemnity Act (LOIA).
If the OCSLA did not apply, then the indemnity provision was valid, and Grand
Isle would owe Seacor defense and indemnity for the underlying tort action.
The panel began its analysis by outlining what the OCSLA is and when it applies.
The OCSLA is a Congressional act that declares that the seabed, and structures
attached to the seabed, along the Outer Continental Shelf, will be considered
the lands of the adjacent state for situs purposes. Because of this determination,
substantive state law (as opposed to federal maritime law) will govern the seabed
and objects/platforms attached to it.
The Fifth Circuit had previously established a three-part test to determine
when the OCSLA, and adjacent state law, applied to a particular dispute in
Union Texas Petroleum Corp. v. PLT Eng'g, Inc.,
895 F.2d 1043, 1047 (5th Cir. 1990), adopting
Rodrigue v. Aetna Cas. & Sur. Co., 395 U.S. 352
(1969). The three conditions for determining whether OCSLA applied were:
- The controversy must arise on a situs covered by OCSLA (i.e., the subsoil
seabed, or artificial structures permanently or temporarily attached thereto).
- Federal maritime law must not apply of its own force.
- The state law must not be inconsistent with federal law.
This court focused primarily on the first prong of this test. To determine
the correct "situs" a court must first determine what the cause of action being
alleged is. If a tort is being plead, the "situs" for OCSLA purposes is determined
where the actual tort occurred. OCSLA will be enforced if the tort occurred
on a platform or other object attached to the seabed. If a tort occurs on navigable
waters, the opposite is true, and the OCSLA situs requirement will not be met.
Grand Isle at 784-85.
Situs History in the Supreme Court
The Supreme Court has a history of determining the situs of a tort claim
for OCSLA purposes. In Offshore Logistics, Inc. v. Tallentire,
477 U.S. 207 (1986), the Supreme Court determined that an incident occurred
on navigable waters where a helicopter crashed en route from platform to platform.
Because this incident occurred away from an OCSLA site, i.e., either of the
two platforms, the tort suit was subject to federal maritime law. In
Rodrigue, the Court determined that the situs
for a wrongful death claim was on an OCSLA-covered platform, so state law would
be applied instead of the federal Death on the High Seas Act.
Rodrigue, 395 U.S. at 361-66.
The Supreme Court has never decided what situs test will be used to determine
a contract dispute that had its origin in a tort action. Previously, the vast
majority of the Fifth Circuit cases had used the site of the tort as the situs
for the contractual indemnity choice-of-law analysis. The
Grand Isle court discussed the
PLT case in support of the notion that situs
for contract and situs for torts are two separate analyses.
Grand Isle at 785–86. While analyzing a purely
contractual issue, the PLT court looked to where
work was to be performed under the contract, not the location of the incident
that gave rise to the contract claim, to determine OCSLA situs.
PLT, 895 F.2d at 1047–50.
Fifth Circuit Analysis
The Grand Isle court discussed many of the
cases in the years following PLT in which both
the Fifth Circuit and the lower district courts ignored the focus-of-the-contract
test, instead opting for the site-of-the-tort test. In clearing
up the past 20 years of caselaw, Grand Isle holds
that the focus-of-the-contract test will be employed to determine the "situs"
requirement for contract disputes on the Outer Continental Shelf. The situs
will be determined where the majority of the contracted work is to be performed.
This court recognized that a claim for indemnity is a claim based in contract,
not tort, thus there is no reason to use tort analysis to determine the situs
for a purely contractual action. If the majority of the contracted work is to
be performed on a site recognized by the OCSLA, the Act will apply as will the
substantive law of the adjacent state. Grand Isle
at 787–788.
In determining whether OCSLA applies to a controversy, the first prong of
the PLT test is met if a majority of the performance
called for under the contract is to be performed on a situs enumerated in the
OCSLA, now called the focus-of-the-contract test. The court mentions in a footnote
that the first piece of the analysis in determining whether OCSLA applies likely
should be the second prong of the PLT test: is
the contract maritime? If the answer is "yes," any situs analysis would be moot.
It is immaterial, in contract disputes, whether or not the underlying incident
triggering an indemnity provision occurred on an OCSLA site. Site-of-the-tort
is no longer the controlling test in analyzing offshore contractual indemnities.
So strong is the court's holding that focus-of-the-contract is the new test,
it expressly overrules the portions of prior cases using the tort-situs test.
The court goes on to note that the Grand Isle contract with BP called for maintenance
work on a stationary platform on the OCS and was not a maritime contract. As
a result, maritime law did not apply of its own force, thus satisfying the second
prong of the PLT test. Finally, the court noted
that nothing in LOIA is inconsistent with federal law, and thus the third prong
of the PLT test is also satisfied. Having determined
that all three prongs of the PLT test were met,
it followed that the adjacent state's law (Louisiana) applied as surrogate federal
law, and LOIA made the indemnity provisions in the contract unenforceable.
Going Forward
This decision should clear the muddy Gulf waters of disagreement concerning
where an incident occurred and what law should be applied to that location.
The Grand Isle court has given a bright line
rule for determining where a contract cause of action occurred for purposes
of determining the application of OCSLA.
Easing a lot of the confusion and unpredictability about what law applies
to offshore contractual indemnity claims will likely be this decision's biggest
impact. Contracting parties will now know what law will apply when they assign
the majority of their work to a particular location. This allows for companies
to properly assess a risk before an incident occurs. By being certain what law
will apply, companies can adequately prepare for even the most unpredictable
scenarios. In real world context, this decision allows contracting parties to
know with more certainty whether the indemnity provision in their contract will
be valid. Companies will also know if they are assigning work to an area that
does not allow indemnity, they can attempt to contract around this eventuality
or change the consideration for the contract.
By endorsing the focus-of-the-contract test, the Fifth Circuit clears up
a former question mark in an already complicated area of maritime and state
jurisprudence.
Note: The author gratefully
acknowledges the assistance of his son/associate, Mike A. Orlando, Jr.
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