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Energy Law Exchange

February 7, 2018 - Source: King & Spalding Energy Newsletter

Court Issues New Test For Determining Whether An Offshore Oilfield Services Contract Constitutes A Maritime Contract


Maritime laws developed for the blue-water shipping industry have always been an imperfect fit for the offshore oil and gas industry. While both industries face the perils of the sea, what constitutes a vessel and who does a seaman’s work are constant questions for the offshore oil and gas industry. Similarly, for the past twenty-five years courts employed a fact intensive six-factor test to determine if an offshore oilfield services contract was a “maritime contract.” In January 2018, the U.S. Court of Appeals for the Fifth Circuit en banc took a significant step towards simplifying this analysis by applying a new two-part test that focuses on the parties’ expectations at the time of contracting. See In re Larry Doiron, Inc., 879 F.3d 568 (5th Cir. 2018).

This is an important issue to those who draft offshore oilfield services contracts and those who litigate claims arising out of their performance. If a contract is a maritime contract, the courts will enforce the parties’ choice of the general maritime law. But if the contract does not qualify as a maritime contract, courts will reject the parties’ choice of general maritime law and apply the applicable state law—most often Texas or Louisiana. Why is this important? Both states have anti-indemnity statutes that will void certain of the parties’ indemnity obligations if state law applies. Put another way, this issue could determine who bears the risk of loss during an offshore casualty.

In 1990, the U.S. Fifth Circuit began applying the six-factor Davis & Sons analysis to determine when an offshore oilfield services contract constitutes a maritime contract. See Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313 (5th Cir. 1990). This test was often criticized for its complicated, fact intensive analysis. In its place, the Court has developed a simpler two-part test intended to provide the parties greater certainty at the time of contracting as to the nature of their contract. First, the Court will determine whether the contract is “one to provide services to facilitate the drilling or production oil and gas on navigable waters.” In re Larry Doiron, Inc., 879 F.3d at 576. If no, the contract is non-maritime and there is no need to consider the second part. But if the answer is yes, the court will then determine whether “the contract provide[s] or do the parties expect that a vessel will play a substantialrole in the completion of the contract.” Id. (emphasis added).

As the test suggests, it is limited to contracts involving the exploration, drilling, and production of oil and gas—but the court does indicate that it would expect this test to be helpful beyond this limitation. The important feature of this test is its focus on the parties’ expectations of a vessel’s substantial involvement potentially to the exclusion of how the contract was actually performed. In Larry Doiron, the Court ultimately held that a vessel whose involvement was limited to transporting and transferring equipment to the platform for use by the crew was “insignificant.” But the Court also noted that the parties’ never anticipated the use of the vessel in performing the work when the contract was signed. This leaves open the question of whether the vessel’s involvement would have been more significant if the parties had always expected its involvement.

The emphasis on the parties’ expectations raises interesting drafting questions. Should parties begin including language in their contracts affirmatively declaring their expectation that the contract will or will not substantially involve a vessel? The legal effect of such an expression is uncertain. Arguably, a hollow representation that the parties expect a vessel to be significantly involved in the performance of the contract to support the parties’ choice of maritime law would be void as an attempt to circumvent Louisiana or Texas’ public policy. But where reasonably supported, it likely would be relevant to the parties’ intent at the time of contracting. While steering a contract more towards or away from a maritime contract may favor some parties and disadvantage others, it does provide greater certainty. And with this greater certainty, parties are better able to manage risk through revised indemnities, insurance, or adjustments to the contract price.

Most disputes in applying this test likely will involve whether the expected involvement of the vessel is significant enough. The Court has already indicated that anticipating a vessel for “transportation” to and from a platform is not significant. Left undeveloped is whether transportation is limited to crew travel or also involves transportation of specialty equipment, which the Court also found to be “insignificant” under the facts of the case.

The test, however, does suggests broad categories of offshore services that would be performed under maritime contracts because of the inherent, singificant involvement of a vessel. This includes nearly all exploration and drilling activities which are ordinarily performed aboard a jack-up drill barge, drillship, or mobile offshore drilling unit—all of which are vessels. This may also include well completions or workovers performed from a lift-boat. But it would not include work performed on a production platform, where a vessel is not involved. The uncertainty lies in those contracts where work is performed aboard a platform or other fixed structure, but where a vessel is involved in the operations to varying degrees. This vessel involvement could be to assist in the well operations or even serve as a floatel for crew when not working. The possibilities are endless for the offshore oil and gas industry.

The Larry Doiron test likely should be welcomed by most practitioners as a simpler, more intuitive test for determining when an offshore oilfield services contract is a maritime contract. Like most tests, however, its true utility will be demonstrated in how the district courts apply it to the varying disputes.