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Marine & Energy News Alert: Fifth Circuit Applies New Test for Maritime Contract Determination

July 20, 2018

Earlier this year, the United States Court of Appeals for the Fifth Circuit established a new test for defining maritime contracts when it issued its unanimous en banc decision in In re Larry Doiron, Inc., 879 F.3d 568 (5th Cir. 2018). In doing so, the Fifth Circuit abandoned the multi-factor tort-based test articulated in Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990) in favor of a two-pronged contract-based test that turns on the answers to the following:

  1. Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?
  2. Does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?

On July 13, 2018, the Fifth Circuit considered, for the first time post-Doiron, whether an agreement executed between an operator and contractor for plugging and abandonment work (“P&A”) was a maritime contract. The agreement consisted of two documents: (i) a master service contract that provided general terms governing the parties’ working relationship and (ii) a bid letter that outlined the specifics of the P&A work to be performed. Notably, the master service contract contained several indemnity provisions that required the contractor to defend and indemnify the operator against “any claims for bodily injury, death, or damage to property.” The bid letter also contained a specific section that listed the equipment required to perform the P&A work, including three vessels.

On appeal, the Court was required to address whether the financial obligations for personal injuries outlined in the agreement’s indemnity provisions were enforceable or if those provisions were invalidated by application of the Louisiana Oilfield Indemnity Act, LA.REV.STAT. ANN. § 9:2780(A)(the “LOIA”). Ultimately, the Fifth Circut determined that the agreement was a maritime contract and that federal maritime law applied.

In reaching its decision, the Fifth Circuit employed a fact-specific approach in light of the two-prong test set forth in Doiron.

First, the Court considered whether the contract at issue was one to facilitate the drilling or production of oil and gas on navigable waters. Initially, the Court determined that the plugging and abandonment of well heads is considered part of the “drilling and production of oil and gas” because the decommissioning of a well is part of its lifecycle. The Court further determined that, regardless of whether the personal injury action for which a party seeks indemnification occurs on a vessel, the first prong of the Doiron test is satisfied if the contract itself calls for oil and gas production on navigable waters. Here, the Fifth Circuit determined that the contract contemplated work to be performed upon navigable waters despite the fact that the underlying tort claim arose out of an incident that occurred on a fixed platform. This marks a clear departure from the previous analysis set forth in Davis.

Next, the Fifth Circuit turned to the second prong of the test which asks whether the agreement provides or the parties expect that a vessel will play a substantial role in the completion of the contract. The Fifth Circuit first acknowledged, in Doiron, it determined work is likely “substantial” if it comprises over thirty percent of the performance under the agreement. Ultimately, the Court found that because over half of the P&A operations were comprised of wireline work, and because the wireline equipment was located on one of the three vessels indicated in the original bid offer, the parties must have contemplated that the vessel was to play a substantial role in the completion of the contract.

Having decided that the two prongs of the Doiron test were met, the Fifth Circuit concluded that the agreement between the parties was a maritime contract. Accordingly, federal maritime law applied, and the indemnity provisions in the contract were enforced.

Although some maritime and legal professionals seem to favor this new, streamlined approach in evaluating whether a contract is maritime in nature, others seem to take issue with the Fifth Circuit’s application of the seemingly nebulous “substantial” standard. That said, only time will tell if this new approach will benefit or obfuscate contracting parties and their insurers’ efforts in assessing risk.

Please note, the case referenced throughout is Crescent Energy Servs., L.L.C. v. Carrizo Oil & Gas, Inc. No. 16-31214, 2018 U.S. App. LEXIS 19284 (5th Cir. July 13, 2018). Click here to read the entire decision. Also, for a more in-depth analysis of the Doiron decision, click here.