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The Wandering Rocks – Recent Fifth Circuit Jurisprudence On Offshore Indemnity

Once your comrades have rowed you beyond those creatures I cannot advise you of the best course to take. I will tell you the choice, but you must decide. One leads to sheer cliffs, against which green-eyed Amphitrite hurls her vast roaring breakers, the blessed gods call them the Wandering Rocks. Not even birds can pass between them unscathed, not even the timorous rock-doves that bring ambrosia to Father Zeus. The slippery rock always takes one, and Zeus must send another to complete their number. Crews that reach the rocks can never escape, instead ships’ timbers and human corpses are tossed by the waves or in gushers of cruel fire.

-Homer, Odyssey Book XII, trans. A.S. Kline

A pair of recent Fifth Circuit cases, In Re Larry Doiron, Inc., 849 F.3d 602 (5th Cir. Feb. 23, 2017, rev’d Mar. 7, 2017) and Richard v. Anadarko Petroleum Corp., No. 16-30216 — F.3d —-, 2017 WL 835187 (5th Cir. Mar. 2, 2017) provide two more “wandering rock” decisions in the Fifth Circuit’s fraught indemnity jurisprudence. In these cases, the Fifth Circuit has, once again, set course into the uncertain waters of its contractual indemnity jurisprudence, an area that commentators have routinely described as “bewildering,” “inconsistent” and “perplexing” (Kenneth G. Engerrand, Primer of Remedies on the Outer Continental Shelf, 4 LOY. MAR. L.J. 19, 20 (2005)), and one for which the court itself has “expressed…frustration with the inconsistency of our case law in this general area.” Hodgen v. Forest Oil Corp., 87 F.3d 1512, 1534 (5th Cir. 1996) overruled by Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009).

The majority of this problematic jurisprudence generally hinges on an incredibly commercially important issue – i.e. which of two (or more) parties to a lawsuit may be entitled to defense, indemnity and additional insurance from another party to the suit. Accordingly, these recent decisions are crucial in efforts to sort out – hopefully sooner rather than later – where the ultimate liabilities will lie in an offshore incident.

In Re Larry Doiron, Inc.

In the Larry Doiron, Inc. decision, the Fifth Circuit considered whether a contract to perform flow-back services on a natural-gas well on a fixed platform in state waters qualified as a maritime contract – in which case the indemnity provisions of the contract would be enforceable; or as a non-maritime contract – in which case the indemnity provisions would be prohibited under the Louisiana Oilfield Anti-Indemnity Act (LOAIA, La. Rev. Stat. §9:2780).

Generally speaking, flow-back operations (involving well intervention efforts to recommence flow from an older well that may have stopped or slowed production) are not inherently maritime in nature; they may be performed on offshore wells or on land-based wells. In Larry Doiron, Inc., Apache Corporation had entered into a general Master Service Contract (MSC) with Specialty Rental Tools & Supply (STS), further to which Apache later hired STS – via an oral work order issued pursuant to the MSC – to perform flow-back services on a non-vessel fixed production platform located in the territorial waters of Louisiana. STS in turn sent two technicians out to perform the work, but after the first day, these technicians informed Apache that they would require a crane barge (i.e. a vessel) in order to successfully perform the flow-back work. Accordingly, Apache ultimately chartered a crane barge (along with a crane operator) from Larry Doiron, Inc. (LDI). However, during end-of-the-day rigging down operations on the second day of the flow-back project, the crane operator boomed down the crane, struck one of the two STS technicians, and caused him to fall 8 feet onto the deck of the barge.

Eventually, LDI tendered its defense and indemnity to STS pursuant to the Apache-STS MSC, which required STS to defend and indemnity both Apache and Apache’s “Company Group,” defined to include other contractors of Apache (like LDI) besides STS. STS, in turn, denied the tender, asserting that the MSC was a non-maritime contract pertaining to an hydrocarbon well, and thus defense and indemnity were prohibited under the LOAIA. LDI, for its part, contended that the specific work order at issue – i.e. for flow-back operations with assistance from a crane barge – constituted a maritime contract such that the LOAIA did not apply.

The Fifth Circuit ultimately determined that the oral work order pursuant to the MSC (as opposed to the MSC as a whole), involving the necessary use of the crane barge, constituted a maritime contract and that the indemnity provisions were therefor valid and enforceable. Notably, the court recognized the “wandering rock” nature of its jurisprudence in this area: “Distinguishing between maritime and non-maritime contracts turns on a minute parsing of the facts, but we are bound by [precedent] – however inexact it may be.” 849 F.3d at 606. Likewise, the court specifically limited its hold to the unique facts of the case. Id. at 610.

The precedent referred to by the court is Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990), which provides a two-step analysis that has guided (or misguided, as some would argue) the Fifth Circuit with regard to whether certain contracts in the offshore oilfield are maritime or not. This analysis considers (1) the historical treatment (maritime or non-maritime) of the type of contract at issue; and (2) if the historical treatment is unclear, a non-exclusive six-factor test:

  1. what does the specific work order in effect at the time of the casualty entail?
  2. what work did the crew assigned under the work order perform?
  3. was the crew assigned to work on a vessel in navigable waters?
  4. to what extent did the work relate to the mission of that vessel?
  5. what was the principal work of the injured worker (in a personal injury case)?
  6. what work was proceeding at the time of the casualty?

As to the historical-treatment prong, the court concluded there were no specific prior decisions on whether flow-back contracts were maritime or not. Accordingly, seeking analogies in the jurisprudence that might assist the analysis for flow-back operations, the court noted that contracts for wireline work (i.e. to provide maintenance for and gather geophysical data on offshore wells) have been determined to be non-maritime, whereas contracts for casing work (i.e. driving the initial pipe into the ground for an offshore well) have been held to be maritime contract – mostly because the latter require use of a vessel, whereas the former do not. Neither of these analogous operations, however, was sufficiently similar to flow-back operations – which may, or may not, require a vessel, depending on the circumstances.Accordingly, the court moved on to apply the second six-factor test of Davis, and found that factors 1, 2, 4 and 6 supported that the MSC was maritime, while factors 3 and 5 did not, as follows:

1. Because there was no specific written work order to consider, the court looked to the MSC as a whole, and held that the reference in the MSC to insurance for vessel operations sufficiently indicated the parties contemplation that operations under the MSC might involve vessels, such that there would be no “unfair surprise” in applying maritime law.

2. While the STS technicians’ primary work for the flow-back operation was on a non-vessel fixed platform, they nonetheless required a vessel to perform the work, and the injury occurred during use of that vessel. Thus, the flow-back work, in this context, was maritime in nature.

4. The mission of the barge was to assist in the flow-back operations, thus rendering those operations in these circumstances inherently maritime.

6. The injured technician was on the barge, by barge-mounted equipment at the time of the injury. Thus maritime vessel work was being performed for purposes of the Davis inquiry.

As for factors 3 and 5, the court acknowledged that the STS technicians were neither assigned to the barge, nor were they principally working on maritime/vessel related operations. Nonetheless, because the work at the time of the incident necessarily involved vessel operations, these factors were not dispositive.

Finally, the court distinguished precedent cited in support of STS’s argument that the mere involvement of a barge could not convert the otherwise non-maritime flow-back operations contract into a maritime contract. The court noted that these other cases involved (1) contracts that did not at all contemplate use of vessels, unlike the MSC; (2) did not involve injuries on a vessel and via vessel-mounted equipment; (3) or concerned barges moored and used solely as work platforms, unlike the LDI crane barge which was mobile during the relevant flow-back work.

Notwithstanding this result, and echoing the “wandering rock” laments of many prior panels, Judges Davis and Southwick concurred to again note the fraught state of the jurisprudence in this area, and to call for en banc rehearing to simplify the test for determining whether offshore oilfield contracts are maritime or not given the incredibly important commercial consequences of this dichotomy: “[The Davis test] is too flexible to allow parties or their attorneys to predict whether a court will decide if a contract is maritime or non-maritime . . . [and to] allow all parties to the contract to … accurately allocate risks and [reliably] determine their insurance needs.” Their solution would be a test that merely considers whether the “primary purpose” of a contract is provision of services for oil/gas drilling on navigable waters and aboard a vessel, regardless of whether non-maritime aspects are tangentially involved – i.e. an approach more akin to the Supreme Court’s “primary objective of maritime services” test for maritime contract analysis in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14 (2004) and the Fifth Circuit’s own “focus of the contract” test for OCSLA contract analysis in Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009) (en banc). Under this approach on the facts of In Re Larry Doiron, Inc., the MSC would not qualify as a maritime contract, because the work under the MSC was for non-maritime flow-back operations on a non-vessel fixed platform, that only incidentally and tangentially required involvement of a crane barge due to specific circumstances of the work.

Although this decision has been limited to its facts, the Fifth Circuit’s re-emphasis on and application of the “minute parsing” approach is a useful, up-to-date guide for parties attempting to navigate the tricky waters of oilfield indemnity disputes.

In fact, the In Re Larry Doiron, Inc. decision has already been cited in a district court remand proceeding resulting from another Fifth Circuit indemnity decision (Tetra Techs., Inc. v. Cont’l Ins. Co., 814 F.3d 733 (5th Cir. 2016)), previously discussed here on Striding the Quarterdeck, involving the question of whether a contract for decommissioning a fixed offshore platform was a maritime contract or not for purposes of the LOAIA. The Fifth Circuit remanded the matter after determining that there was insufficient evidence before the district court to determine whether the decommissioning contract was maritime or not (although the court went on to hold in an arguably advisory opinion that if it were not, the LOAIA would apply). The parties in Tetra Techs. on remand filed renewed motions for summary judgment on the issue of the maritime/non-maritime nature of the decommissioning contract. Recently, the putative indemnitee filed a supplemental memorandum citing the In Re Larry Doiron, Inc. decision to argue that all six Davis factors favor maritime contract status for a decommissioning contract involving use of a heavy lift derrick barge to deconstruct a fixed offshore platform, in connection with which operations workers assigned to work on the barge in support of the decommissioning were injured (although the case settled shortly thereafter, without a decision from the court).

Richard v. Anadarko Petroleum Corp.

The other of the two recent “wandering rock” decisions involved an offshore incident in which a casing worker employed by Offshore Energy Services (OES) was injured on a drillship BELFORD DOLPHIN owned by Dolphin Drilling Ltd. (DDL) and chartered to Anadarko Petroleum Corp. (Anadarko), which was the operator of the well being serviced by the drillship. the worker sued Anadarko, DDL, and others of Anadarko’s contractors.

However, Anadarko and OES had entered an MSC requiring OES to defend, indemnify and provide additional insurance coverage (to cover OES’s defense and indemnity obligations) to both Anadarko as well as its “subcontractors and their employees.”

OES settled the worker’s claims against itself, as well the claims against Anadarko and Anadarko’s other contractors, pursuant to OES’s defense/indemnity obligations under the MSC; and then sought reimbursement from its insurer Liberty Mutual for the settlements. Liberty Mutual, however, denied coverage on the basis that DDL and the other contractors were not subcontractors” as contemplated by the MSC, but were rather “contractors” and thus did not fall within OES’s defense/indemnity provisions.

As a result, OES sued Liberty Mutual for coverage vis-à-vis the indemnity to Anadarko et al., and the district court initially granted summary judgment in favor of Liberty Mutual on the basis that DDL and Anadarko’s other contractors were not subcontractors” as provided by the MSC. However, the district court did not dismiss OES’s related claims for reformation of the MSC – i.e. the claim that the parties to the MSC intended to include both subcontractors and contractors in the defense/indemnity language and had mistakenly failed to do so. Eventually, after further evidence was developed during a one-day bench trial, the district court granted judgment in OES’s favor and held that the MSC should be reformed to include both subcontractors and contractors in the indemnity provision, such that DDL and Anadarko’s other contractors were included within OES’s defense and indemnity obligations; and thus Liberty Mutual’s policy covered the amounts paid by OES.

The Fifth Circuit affirmed, holding that based on the evidence, reformation of the MSC was required in light of OES and Anadarko’s mutual mistake in failing to include in the MSC language to evidence their intent that all Andarko’s subcontractors and other contractors (besides OES) should be included in the defense/indemnity provision. Notably, the Fifth Circuit allowed reformation despite the otherwise ironclad rule that parol evidence is not permitted to alter the terms of a written contract, as well as the related/equally hard-and-fast rule that indemnity provisions in particular are strictly construed (especially when they contemplate indemnity for a party’s own alleged negligence). Likewise, the court allowed reformation based on a mutual mistake as between OES and Andarko, notwithstanding that this mutual mistake affected Liberty Mutual’s interest as a third-party insurer by expanding coverage beyond the four corners of the MSC.

This “extraordinary remedy” of reformation (see Wilcox v. Welders, 969 F. Supp. 2d 668, 685 (E.D. La. 2013), however, was based on several key pieces of evidence proving that there had in fact been a mutual mistake in the wording of the MSC as between OES and Andarko, the contracting parties. Indeed, the Fifth Circuit confirmed that reformation requires the higher burden of “clear and convincing evidence” (as opposed to mere preponderance), but nonetheless held that OES had met that higher burden.

Specifically, the court held that “the unreformed…indemnity provisions [were] strongly suggestive of OES and Anadarko’s mutual intention to provide for the ‘knock for knock’ indemnity arrangement common in their industry” as evidenced by the fact that only a year after signing the MSC, OES provided defense and indemnity to Andarko and Andarko’s other contractors in virtually identical circumstances, and successfully submitted a claim for coverage for those defense and indemnity obligations to its prior insurer:

In 2005, OES, which was then insured by Zurich Insurance Company began to shop its risk through an insurance broker. Liberty Mutual then competed for OES’s risk, ultimately winning the contract by quoting a lower premium rate than Zurich. Knock for knock indemnity schemes were common practice in the industry by that time. Furthermore, during these negotiations, OES’s broker informed Liberty Mutual that OES wished to have the same blanket additional insured endorsement it had with Zurich, which would extend insurance coverage to parties OES agreed in writing to indemnify. The broker also provided Liberty Mutual with a “Loss History” that included, inter alia, the claims paid out by Zurich on the Thibodeaux case per the same contract (the OES–Anadarko [MSC]). Consequently, Liberty Mutual was fairly on notice that OES intended to indemnify other oilfield contractors and bought an endorsement specifically to insure such contractual liability.

Richard v. Anadarko Petroleum Corp., 2015 WL 1357013, at *11 (W.D. La. Mar. 24, 2015), (district court opinion underlying the Fifth Circuit’s Richard decision). Moreover, Liberty Mutual did not dispute that it “did not study, review or rely on the language of the MSC prior to issuing its policy to OES.” Id. at *11.

Likewise, the Fifth Circuit rejected Liberty Mutual’s reliance on two prior cases that had reached an opposite result by rejecting reformation of indemnity provisions based on similarly imprecise language:

Liberty Mutual does not stand on equal footing with the third parties whose interests blocked reformation in [Am. Elec. Power Co. Inc. v. Affiliated FM Ins. Co., 556 F.3d 282 (5th Cir. 2009) and Wilcox v. Wild Well Control, Inc., 794 F.3d 531 (5th Cir. 2015)]. Those third parties faced springing “hidden meaning[s],” such as the notions that contracting parties meant for the unambiguous word “corporation” to also encompass unincorporated entities, see Am. Elec., 556 F.3d at 288, or meant for a specific reference to a single business entity to also encompass all of that entity’s affiliates, see Wilcox, 794 F.3d at 541–42.

2017 WL 835187 at *7. In other words, the use of “subcontractors” to also include “contractors” as intended by the parties and as evidenced by their prior conduct known to Liberty Mutual (viz. the prior “Loss History”) was not unfairly surprising to preclude reformation based on prejudice to a third party like Liberty Mutual.

The Richard decision is an extremely important development in the Fifth Circuit’s indemnity jurisprudence, insofar as it grants the “extraordinary” remedy of reformation in the context of an indemnity provision, which otherwise requires precise contract drafting to ensure “clear, unequivocal and express” language – particularly for “indemnification . . .purporting to exculpate one from one’s own negligence.” Barnes v. Sundowner Offshore Servs., Inc., 1995 WL 529867 (E.D. La. Sept. 7, 1995). Perhaps most importantly, it is a poignant reminder to insurers that they must carefully consider the entirety of their insured’s indemnity obligations – which, for offshore oilfield service companies might encompass review of many, many contracts with multiple related work orders – if they wish to truly know the scope of their potential exposures for coverage of indemnity obligations.

Moreover, while the indemnitor/indemnitee in Richard both agreed between themselves that the MSC’s indemnity language should be reformed vis-à-vis the interests of a third party insurer, it seems unlikely that a disagreement between the privy parties to an indemnity provision would see the same result. Specifically, a “unilateral mistake does not support reformation” Express Rent-A-Car LLC v. U-Save Fin. Servs., Inc., 2009 WL 1649583 (E.D. La. June 10, 2009). As a practical matter, in a dispute between an indemnitee and indemnitor in privity of contract regarding the scope of contractual indemnity language, the indemnitor will most likely seek to avoid its indemnity obligation, and thus would never agree (as OES and Anadarko did in Richard) that any “mistake” in drafting language was mutual, as is required to meet the clear-and-convincing burden for reformation. Thus, for putative indemnitees attempting to argue reformation of an indemnity provision, the evidentiary burden of showing mutual mistake for reformation will likely remain much more difficult.