Fifth Circuit Applies Its Simplified Maritime Contract Test
Michael Orlando | August 17, 2018
The US Fifth Circuit Court of Appeals was recently able to apply its newly formulated "maritime contract" test in determining whether a contract for plugging and abandoning three offshore wells was to be governed by maritime law or Louisiana law for purposes of applying an indemnity agreement. Using the two-part "Doiron" test, the court held that the indemnity agreement was enforceable because a maritime contract existed.
In Crescent Energy Servs., LLC v. Carrizo Oil & Gas, Inc., No. 16-3124, 2018 U.S. App. LEXIS 19284 (5th Cir. July 13, 2018), the court was tasked with interpreting an offshore services contract through the lens of its months' old "Doiron" test—Larry Doiron, Inc. v. Specialty Rental Tools & Supply, LLP, 879 F.3d. 568 (5th Cir. 2018)—to determine the law controlling the contract's indemnity provision.
Carrizo Oil & Gas entered into a master service agreement and then a bid for work (collectively the "contract") with Crescent Energy Services for Crescent to plug and abandon (P&A) three of Carrizo's offshore oil wells. The wells were located on fixed platforms in Louisiana state waters. The contract called for Crescent to provide equipment for the P&A work as well as three vessels and a five-person crew to assist in accomplishing that work. The contract also included a provision where Crescent agreed to indemnify Carrizo for any claims of bodily injury or property damage. During the work, a Crescent employee was injured while working on one of the fixed platforms.
Crescent filed a limitation of liability action in the US District Court for the Eastern District of Louisiana; it claimed that its vessels were seaworthy and disclaimed any negligence as to the cause of its employee's injury. Carrizo answered by claiming benefits from Crescent and Crescent's insurers under the indemnity agreement in the Carrizo-Crescent contract. Crescent and its insurers denied such liability by arguing that the Louisiana Oilfield Anti-Indemnity Act (LOAIA) applied, thus negating the enforceability of the contract's indemnity provision.
Eventually, two of Crescent's insurers (Liberty Mutual Insurance Co. and Starr Indemnity and Liability Co.) and Carrizo submitted summary judgment motions to the district court regarding whether the contract's indemnity provision was valid and whether Carrizo was owed indemnity from Crescent's insurers. These arguments could essentially be distilled to whether the contact was governed by Louisiana or federal maritime law: "The [district] court held that indemnification was enforceable against Crescent because the parties had entered a maritime contract. Such a contract made federal maritime law applicable and precluded application of the [LOAIA]." Crescent's insurers appealed.
The Doiron Two-Prong Test
On appeal, the Fifth Circuit's decision was to be directed by its newly adopted Doiron test for determining whether an agreement among parties is a maritime contract. 1 (Doiron was released after the district court made its rulings.) The test for determining whether an offshore services contract is subject to maritime law involves the following two parts.
- Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?
- Does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?
Prong 1
Regarding the Carrizo-Crescent contract, the court split the first question into two subquestions, did the contract to P&A three wells "facilitate the production of oil and gas," and were these wells located in navigable waters? The insurers argued that the contract mostly called for the decommissioning of oil wells as well as the fixed platforms—making this work more akin to the nonmaritime activity of platform construction. Carrizo countered that plugging and abandoning of wells is the end stage in the lifecycle of producing oil and gas. Thus it fits within the "production" requirement.
The Fifth Circuit agreed with Carrizo. In finding that plugging and abandoning a well is a part of the production lifecycle, the court cited Louisiana laws that require lease owners to give security when obtaining a permit to drill an oil well and only being able to get that security returned once the well is plugged and abandoned, and the well site is restored. The court was persuaded that Louisiana recognized plugging and abandoning a well as a part of the entire process of extracting and producing hydrocarbons. Since the Carizzo-Crescent contract facilitated the end cycle of a well's production, the court held that it met part 1a of the Doiron test.
The insurers next argued that the plugging and abandonment work did not occur on navigable waters. The work was performed on fixed platforms, and the plaintiff was actually injured while on one of the fixed platforms. The insurers argued that the Fifth Circuit does not consider such structures as vessels and thus this case did not concern navigable waters.
In rejecting these arguments, the court stated that, post-Doiron, the site of injury is no longer a concern in determining whether a contract is maritime in nature (it is only a concern if a claimant is attempting to argue a maritime tort). The court held that the wells to be plugged and abandoned were located in the territorial waters of Louisiana and that Crescent's vessels were able to navigate to them. So, part 1b of the Doiron test was met.
The court ended its discussion of question 1 by reinforcing its commitment to the Doiron test and distinguishing its goal of simplifying the inquiry into whether a contact is governed by maritime or adjacent-state law from other previously established Fifth Circuit tests involving events on the Outer Continental Shelf or from torts occurring on various fixed platforms or vessels.
Prong 2
Finally, the court answered part 2 of the Doiron test in the affirmative by finding that the Carrizo-Crescent contract provided vessels that would play a substantial role in the contract's completion.
Among the directions given by Doiron on what "substantial" means is that if work is performed in part on a vessel and in part on a platform or on land, we should consider not only time spent on the vessel but also the relative importance and value of the vessel-based work to completing the contract.
The insurers attempted to define "substantial" as requiring that a "majority" of the contract's work be performed on a vessel. The court repeated that it viewed a vessel's role as "substantial" if 30 percent or more of the time to complete a contract was spent on the vessel. This is congruous with its definition of "substantial" in Jones Act cases where a maritime worker can claim the benefits of the Jones Act if he spends more than 30 percent of his time on a vessel(s). 2 The court did note that it would only consider the vessel's work once at the site in making a "substantial" determination; transportation to and from the work site should not count toward the 30 percent mark.
Viewing the facts of this case, the court found that three vessels were needed to complete the P&A work: a crane barge, a tug, and a cargo barge. The crane barge housed the only crane on site and the crew quarters, as well as the wire line unit to be used in a significant amount of the P&A work. That same wire line unit and crane were controlled from this barge. The court viewed the vessel components in their entirety as essential to completing the contract. Without assigning an exact percentage, the court held that the vessels performed a substantial role in completing the contract.
Conclusion
The Carrizo-Crescent contract met all of the Doiron factors and was considered a maritime contract. Consequently, the indemnity provision was valid because maritime law allows such, and Crescent's insurers owed indemnity to Carrizo.
It appears this case was the Fifth Circuit's first opportunity to apply its simplified maritime contract test. One of the bigger takeaways from this decision is that the site of the injury no longer plays a role in determining which law to apply to the contract; future situations will likely exist where a service contract is governed by maritime law, but the claimant's tort is not. Also, the role the vessel plays in contributing to the end goal of the contract gains more importance.
In this case, the outcome could have been different if the wire line unit had been shifted over to the fixed platforms for the P&A work, as opposed to being solely used while it was on the crane barge. It is also notable that the court did not address choice of law clauses in service contracts such as the one at issue. Merging this case and Doiron with a fact pattern that concerns a contractual choice of law clause is a dispute likely not far away. Only time will tell if the new test really is a simplification.
Acknowledgments
The author would like to acknowledge and thank coauthor Michael A. Orlando Jr., an attorney with Meyer Orlando LLC in Houston.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
Footnotes
