Sep 27, 2018

The Fifth Circuit Charts New Course on Maritime Contracts

The U.S. Court of Appeals for the Fifth Circuit, in two key rulings this year, has tried to clarify a critical question for the oil and gas industry along the Gulf Coast: When does maritime law govern a contract?

First, in In re Larry Doiron, 879 F. 3d 568 (5th Cir. 2018), an en banc decision released in January, 2018, the court revealed a new, stripped-down test for deciding when a contract falls under maritime jurisdiction. Then, in July, the court put the new test to work in the matter of the complaint of Crescent Energy Services, LLC, et seq., v. Carrizo Oil & Gas, Inc., 896 F. 3d 350 (5th Cir. 2018), a case hinging on whether Louisiana or maritime law should apply in a contract dispute over indemnification in the wake of a workplace accident. 

In the oil-rich Fifth Circuit, the decisions are more than just a matter of jurisprudential housekeeping. Significant dollars are at stake for energy industry companies and insurers depending on which set of laws are used to interpret a contract. Federal maritime law allows for indemnity clauses aimed at limiting liability for issues like workplace accidents, pollution and property damage. In Texas and Louisiana, however, state anti-indemnity laws can negate those clauses.

Our firm, Deutsch Kerrigan, successfully represented Carrizo Oil & Gas, Inc., a Houston-based energy company, at both the trial and appellate levels. In this article, we examine the issues involved in our case, the circumstances that led to the revised maritime test in Doiron, and how, in its first post-Doiron opinion, the court used the new test to evaluate our client’s contract.

An Indemnity Fight

Carrizo had hired Crescent Energy Services, a company based in Belle Chasse, Louisiana, to plug and abandon three obsolete oil wells located on small, fixed platforms located in navigable waters along the coast of Lafourche Parish, Louisiana. The contract included provisions describing Crescent’s obligation to indemnify Carrizo for any claims for bodily injury or death of Crescent employees.

On Feb. 13, 2015, a Crescent employee was severely injured while bleeding pressures from one of the wells. In denying indemnity to Carrizo, Crescent relied on Louisiana’s Oilfield Indemnity Act, which would have voided Crescent’s obligation to indemnify Carrizo, if applicable.

Carrizo fought back. And in November 2016, Judge Milazzo of the U.S. District Court for the Eastern District of Louisiana granted Carrizo’s motion for summary judgment. The court held that indemnification was enforceable against Crescent because the parties had entered into a maritime contract, and “the plug and abandon operations defined in the contract were inextricably related to the mission of Crescent vessels…giving the contract the requisite salty flavor.”

To reach a decision, Judge Milazzo used a six-part test set forth by the Fifth Circuit in 1990’s Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313. In her opinion, she acknowledged that the “the discussions of past courts regarding whether contracts involving oil and gas operations on navigable waters are maritime or non-maritime is anything but clear. Indeed, some courts have referred to this area of law as a ‘marshland.’”

The Crescent interests appealed the case to the U.S. Fifth Circuit. (Crescent, through an agreement with Carrizo, had been dismissed from the case and was considered a nominal party).

Streamlining the Test

Like Judge Milazzo, the Fifth Circuit was grappling with how to interpret Davis. In a Feb. 23, 2017, concurrence, Fifth Circuit Judges W. Eugene Davis and Leslie Southwick urged the court to sit en banc to clear up confusion and simplify the six-part test. “One problem with the multi-factor test in Davis & Sons is the lack of guidance about what weight to give each factor,” the judges wrote.

They also cited the U.S. Supreme Court’s 2004 decision in Norfolk Southern Railway Co. v. Kirby, 543 U.S. 963, which argued for a contract-based approach to evaluating whether maritime jurisdiction applied. The Davis test relied on a tort-based approach. “[I]n determining whether a contract being sued upon is a maritime contract, we should use contract principles rather than tort principles,” the judges wrote.

Spurred by the judges’ arguments, the full Fifth Circuit agreed to meet to review the case, Doiron, and to revise the maritime test. On Jan. 8, 2018, the Court issued its opinion, which dramatically streamlined its former criteria for determining whether federal maritime law applies to a contract. “Our cases in this area have long been confusing and difficult to apply,” the court said in its opinion. “For a variety of reasons, most of the prongs of the Davis & Sons test are unnecessary and unduly complicate the determination of whether a contract is maritime.”

The new Doiron test” poses two questions for determining whether a contract falls under maritime law: 1) Does the contract provide services to facilitate the drilling or production of oil and gas on navigable waters? 2) If the answer to the first question is “yes,” does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?

As judges Davis and Southwick had suggested, the new test put an emphasis on a contract-based analysis. “This test also removes from the calculus those prongs of the Davis & Sons test that are irrelevant, such as whether the service work itself is inherently maritime and whether the injury occurred following a maritime tort,” the court wrote. “Courts need not determine whether this service work has a more or less salty flavor than other service work when neither type is inherently salty.”

A 'Perfect Companion'

In the wake of the decision, the lawyers working on the already-noticed and briefed Carrizo case raced to draft supplemental briefs to address the new test ahead of oral arguments in March 2018.

During oral arguments in March, Deutsch Kerrigan noted that Crescent v. Carrizo was “a perfect companion with Doiron.” And indeed, the case provided the Fifth Circuit with a prime opportunity to apply the new test and provide further insight about how and when the test may be deployed.

Crescent’s counsel raised two primary arguments against maritime jurisdiction in the case: First, the contract failed to facilitate drilling and production because it covered decommissioning oil wells. This was closer to constructing offshore platforms, which, they said, was not a maritime activity. Second, the services did not occur on navigable waters, they said, because the decommissioning activities occurred from a fixed platform. (Maritime law generally does not extend to events confined to a fixed platform, because those structures are not vessels.) They also attempted to raise a third issue, one that hadn’t been presented at the district court. They argued that, under Kirby, the work performed could be deemed “inherently local” in nature, making it immune from maritime law.

Carrizo responded that the agreement with Crescent was a maritime contract, because the plugging and abandoning of oil wells is a part of the total life cycle of offshore oil and gas drilling. Louisiana even requires that a company make financial provisions for a well’s plugging and abandonment before obtaining a permit to drill.

Though a fixed platform was part of the project, the work required everyday use of vessels. As Deutsch Kerrigan noted during argument, the crane and other equipment used in the project was aboard a vessel, material was brought to the site and taken away on a vessel, the crew lived on a vessel, and the injured seaman spent 75 percent of his time working aboard a vessel.  

A Victory for Carrizo

In an opinion written by Judge Southwick and joined by judges Patrick Higginbotham and Gregg Costa, the court delivered a complete victory for our client, Carrizo Oil and Gas.

First, the court brushed aside the attempt by Crescent’s arguments regarding Kirby and the “inherently local” nature of the contract. “We see no excuse for the late introduction of this issue,” the court said. It added: “[I]t is doubtful this issue would alter the outcome of the case.

The court then applied Doiron. The recent en banc opinion, it noted, had removed “some clutter” from the circuit’s “mission of identifying [maritime] contracts” though “significant parts of our prior law were explicitly unchanged. For example, ‘[o]il and gas drilling on navigable waters aboard a vessel is recognized to be maritime commerce.’ ”

Noting Louisiana’s requirements for plugging and abandonment as part of the process, the court concluded Crescent’s work had facilitated the drilling or production of oil and gas as required by the new test. The contract also covered work in navigable waters, the court said.

While the test under Davis considered where a worker was when an injury occurred, the court is “no longer concerned about whether the worker was on a platform or vessel” under Doiron. Now, “the question is whether this contract concerned the drilling and production of oil and gas on navigable waters from a vessel,” the court wrote. “All parties acknowledge that the wells were located within the territorial inland waters of Louisiana and that the vessels involved in this contract were able to navigate to them.”

As for the use of a vessel, the court said that the contract anticipated the constant and substantial use of multiple vessels. It further noted that Doiron defined “substantial” not only as a measure of the time spent on the vessel, but “also the relative importance and value of the vessel-based work to completing the contract.”

A vessel was needed as a work platform, and essential equipment, including a crane had to remain on a vessel, the court said. Crucially, the wireline operation – a continuous cable used to perform various subsurface functions in a well — was substantially controlled from a barge. Though previous Fifth Circuit case law had, for 30 years, decreed that such work from a vessel was not a maritime activity, the en banc panel in Doiron had criticized that stance. In the Carrizo case, the court underlined the en banc panel’s point. “What is important in the present case is that use of the wireline unit on the vessel was central” to the entire plugging and abandonment contract.

A Strong Message  

As the first case to be decided applying the new Doiron criteria, Crescent v. Carrizo shows just how intent the Fifth Circuit was in making lasting, substantive changes to its method of defining maritime contracts. It challenged assumptions about activities, such as wireline operations, that had long been held as non-maritime in nature. And it stuck closely to Doiron’s contract-based analysis, emphasizing, for example, the expectations the parties had for the use of vessels on the project.

Notably, the court also was forceful in rejecting efforts to interject previous case law that might undermine the effects of Doiron. Though it had operated under Davis rules for more than a quarter century, the court essentially said that it had made a fresh start: “[R]egardless of what other Fifth Circuit case law there may be, nothing in such case law detracts from the clarity of our 2018 en banc decision in Doiron. … We en banc eliminated most of the factors [required by Davis], narrowing our focus, but we did not fundamentally change the task. Doiron is the law we must apply.”