Streamlining the Maritime Contract Test

Facts of the Case

Apache Corp. entered into a blanket master services contract (MSC) with Specialty Rental Tools & Supply LLP (STS). This MSC contained an indemnity provision that favored Apache and its contractors. Apache and STS later entered into an oral work order for STS to provide flowback services on a gas well in the navigable waters of Louisiana. The well was only accessible through a stationary production platform. STS and Apache did not contemplate the use of a vessel for this work order.

Once on the platform, STS and Apache decided that another piece of equipment was needed to complete the job, and a vessel crane barge was ordered to help facilitate. Apache entered into a contract with Larry Doiron, Inc. (LDI), for the use of a crane barge. While using the crane, an employee for LDI injured an employee from STS.

In the course of the various injury and limitations lawsuits, LDI filed a third-party complaint against STS seeking indemnification from liability for the STS employee's injury, pursuant to the Apache-STS master services contract. LDI argued that the master services contract was a maritime contract and thus the indemnity provision was valid under maritime law; STS argued the contract was nonmaritime, was subject to Louisiana state law, and the indemnity provision was invalid under the Louisiana Oilfield Indemnity Act (LOIA).

The Rulings in the Case

The original opinion found in favor of LDI by applying the six-factor Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990), test that had been previously used in this circuit for determining whether services agreements qualified as maritime contracts. ² The en banc panel concluded that many of the prongs in the Davis test were unnecessary and "unduly complicate the determination of whether a contract is maritime." The court then scrapped the Davis factors in favor of a simplified test first articulated by the US Supreme Court in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14 (2004).

In Kirby, the US Supreme Court constructed a straightforward process for determining whether a bill of lading was a maritime contract. That case questioned whether the court had admiralty jurisdiction over a suit to recover for cargo damaged in a journey from Australia to Alabama, first by sea then by rail. The case fell within the court's admiralty jurisdiction because both bills of lading (one for the sea leg and one for the rail leg) were maritime contracts.

The court opined that determining the maritime nature of a contract should depend on whether the contract has reference to maritime services or maritime transactions. The court also stated that any inquiry into whether a contract is maritime should focus on whether the principal objective of a contract is maritime commerce. As the bills of lading, in this case, required a substantial carriage of goods by sea, the court ultimately found both bills of lading were maritime contracts.

Relying on the reasoning found in Kirby¸ the en banc Fifth Circuit created a new two-part test for use in deciding whether an energy services contract is a maritime contract and subject to maritime law. The first part of the new test asks: is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters? The court's precedent had viewed the drilling and production of oil and gas on navigable waters as a form of maritime commerce and would thus fit within Kirby's framework. If the answer to question one is "yes," one must then review whether the contract provided or did the parties expect that a vessel would play a substantial role in the completion of the contract.

In Chandris, Inc. v. Latsis, 515 U.S. 347 (1995), the US Supreme Court specified that a worker spends a "substantial" amount of time offshore for purposes of the Jones Act if that worker spends more or less than 30 percent of his or her time in the service of a vessel in navigation. The en banc panel stated in the footnotes that a similar 30 percent test could be developed by the lower courts for determining the substantiality of a vessel's use in a contract.

In deciding the LDS-STS dispute, the court concluded that the first part of the new test was met: the work order between Apache and STS was for the provision of oil and gas services in navigable waters. However, the second part of the test was not met as the work order did not contemplate the use of a vessel, and the crane barge's eventual use was an insubstantial part of the contracted-for flowback work. The court overturned the earlier three-judge opinion and found that Louisiana law and the LOIA controlled, thus negating the contractual indemnity provision. STS did not owe indemnity to LDI.

Conclusion

Replacing the six-part, fact-intensive Davis test with this two-part test should make offshore energy-related choice of law disputes more predictable. This new test will still require the parties to determine whether the use of a vessel will play/played a "substantial" (more than 30 percent) part in the execution of the contract. Going forward, it would appear that the type of offshore structure from which work is being performed will play a determinative role in what law will apply to services contracts. Contracts to be performed on "vessel" structures (floating production storage and offloading units and semisubmersibles, as examples) will be interpreted differently than contracts for performance on fixed-platform structures.

All parties should be aware of this new disparity and treat their contractual indemnity and insurance obligations with the care required by this new standard. It remains to be seen whether this new simplified test will, in fact, be easier to provide predictable results.