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Energy Law Exchange

May 9, 2016

Navigating OCSLA's Choppy Waters What Choice of Law Will Govern My Offshore Development Contract?

As a result of the Outer Continental Shelf Lands Act ( OCSLA ) 143 U.S.C. § 1331, et seq., North American offshore oil and gas projects can be subject to laws that are very different from those agreed upon in their related contracts. Developers of these projects should understand how OCSLA can impact their contractual choice of law provisions to avoid exposure to unforeseen liabilities, such as those that may arise from the invalidation of typical risk-shifting contractual provisions like indemnity clauses. This article presents a summary of the factors to consider when determining what choice of law will apply to offshore service contracts as well as the potential commercial impacts of OCLSA jurisdiction.

Prior to OCSLA, contracts related to offshore services were governed by either maritime law or the parties choice of law provisions. Maritime law generally upholds the parties choice of law, and thus parties enjoyed significant flexibility to select the controlling law for their offshore activities. 2Stoot v. Fluor Drilling Services, 851 F.2d 1514 (5th Cir. 1988) (holding that where the parties have included a choice of law clause, that state law shall govern unless the state law chosen has no substantial relationship to the parties or the transaction or the state’s law conflicts with the fundamental purpose of maritime law). This flexibility was significantly curtailed, however, by the passage of OCSLA in 1953. OCSLA provides a statutory framework for mineral exploration and development of the outer continental shelf ( OCS ) and has been construed fairly broadly as applying to facilities permanently or temporarily attached to the seabed that are used for exploring, developing, producing or transporting oil or gas resources. 3Rodrique v. Aetna Casualty and Surety Company, 395 U.S. 352 (1969); Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778, 783 (5th Cir. 2009); Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043 (5th Cir. 1990). Examples of these facilities include drilling rigs, offshore drilling platforms, and gas transportation lines that are, at some point, attached to the OCS. 4Id. When OCSLA applies, the parties contractual choice of law provisions are generally overridden in favor of the laws of the adjacent state to the extent that these state laws do not conflict with federal law. OCSLAs choice of law scheme cannot be circumvented or otherwise waived by the parties. 5Texaco Exploration and Production, Inc. v. AmClyde Engineering Products Company, Inc., 448 F.3d 760, 772 (5th Cir. 2006).

Federal courts have established the following three-part test to determine whether OCSLA and its choice of law provisions apply: (i) the controversy must arise on a covered situs; (ii) federal maritime law must not apply of its own force; and (iii) state law must not be inconsistent with federal law. 6Grand Isle Shipyard, 589 F.3d at 778.

First, the controversy must arise on a situs covered by OCSLA. For tort claims, the test is relatively simple if the tort occurs on an OCSLA situs, then the situs test is satisfied. 7Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009). Accordingly, torts occurring on offshore platforms generally satisfy the OCSLA situs test, 8Grand Isle Shipyard, 589 F.3d at 784. while torts occurring on navigable waters generally do not. 9Id.

For contract claims, federal courts apply a focus-of-the-contract test to evaluate whether a majority of the contract is performed at an OCSLA situs. 10Id. If so, the OCSLA situs element is satisfied, even if the underlying incident triggering the dispute occurs outside of the OCLSA situs. For instance, in Grand Isle Shipyard v. Seacor Marine, LLC, an injury to a seaman gave rise to a contractual indemnity claim after the seaman was injured on a vessel that was transporting him from his work platform to a residential platform. 11Grand Isle Shipyard, 589 F.3d at 781. The court held that, although the injury occurred on navigable waters and thus traditionally subject to maritime law, OCSLA nevertheless applied to the contractual indemnity claim since the contract pertained mainly to the performance of construction and maintenance services on an offshore drilling platform. 12 Grand Isle Shipyard, 589 F.3d at 787.

Second, federal courts determine whether federal maritime law applies on its own force. In a contractual dispute, the courts apply the following six-part test in analyzing whether maritime law traditionally applies: i) what does the specific work order in effect at the time of the injury provide? ii) what work did the crew assigned under the work order actually do? iii) was the crew assigned to work aboard a vessel in navigable waters? iv) to what extent did the work being done relate to the mission of that vessel? v) what was the principal work of the injured worker? and vi) what work was the injured worker actually doing at the time of injury? 13Davis & Sons, Inc. v. Gulf Oil Corp., 919 F.2d 313, 316 (5th Cir. 1990). In applying this test, courts have held that agreements to develop oil platforms and oil rigs are generally not considered maritime contracts, while agreements to transport people and supplies in a vessel to and from a well site generally are maritime contracts. 14Texaco Exploration and Production, Inc. v. AmClyde Engineering Products Company, Inc., 448 F.3d 760, 772 (5th Cir. 2006); Laredo Offshore Constructors, Inc. v. Hunt Oil Company, 754 F.2d 1223 (5th Cir. 1985). Based on Grand Isle Shipyard, this second prong likely has less significance in a contractual dispute, as the focus-of-the-contract test appears to minimize the importance of the type of work the crew or injured member was performing or where the injury occurred, though it may be employed if the contract provides for multiple work orders.

For tort claims, courts utilize a two-prong test to determine whether claims fall under maritime law: (1) the location of where the tort occurred, and (2) the connection to maritime activity. 15Hufnagel v. Omega Service Industries, Inc., 182 F.3d 340 (5th Cir. 1999). Torts that occur on offshore platforms or involve the repair or construction of offshore platforms generally fall under OCSLA jurisdiction. Conversely, torts that occur on vessels that are primarily engaged in traditional maritime activity (such as the transportation of goods and personnel, or other activities that require the significant use of a vessel) are generally subject to maritime law.

Finally, courts consider whether the particular state law sought to be applied is inconsistent with federal law. Importantly, Federal courts hold that Texas and Louisiana anti-indemnity statutes do not conflict with federal law and thus apply under OCSLA. 16Grand Isle Shipyard, 589 F.3d at 789. Accordingly, parties may find that their negotiated knock-for-knock and other similar indemnity clauses requiring a party to indemnify the other when the latter is at fault are invalid under Texas and Louisiana anti-indemnification statutes. 17Louisiana Oilfield Indemnity Act (LSA-R.S. 9:2780); Texas Oilfield Anti-Indemnity Statute (Tex. Civ. Prac. & Rem. Code §§127.001 – 127.007); Texas Construction Anti-Indemnity Act (Texas Statutes and Codes Annotated, Insurance Code §§ 151.001, et seq.). OCLSA may also impose state-specific lien and perfection requirements that could result in the waiver of important rights if the parties fail to satisfy these requirements.

Similarly, developers of Louisiana offshore projects could be compelled by OCSLA to conduct all project-related litigation within Louisiana if (1) one of the parties is domiciled in Louisiana, and (2) work is performed or equipment and materials are supplied to a construction project within the state. 18La. Rev. Stat. 9:2779. If multiple parties are involved in a dispute, the application of this statute could force developers to litigate in multiple different forums if all project contracts do not uniformly require litigation in Louisiana. Moreover, a developer may desire to avoid litigation in Louisiana altogether. A proper understanding of OCSLA will allow developers to achieve the desired level of uniformity between different contracts by, for example, requiring all parties to arbitrate disputes in a common forum. 19The Fifth Circuit has held that the Federal Arbitration Act (“FAA”) preempts this Louisiana statute’s requirement to arbitrate in Louisiana because state law cannot contravene federal law. See OPE Int’l LP v. Chet Morrison Contractors, Inc., 258 F.3d 443 (5th Cir. 2001). In light of OPE, developers may consider utilizing arbitration clauses if they wish to avoid litigating disputes in Louisiana courts.

As set forth above, the application of OCLSA can override the parties best efforts to carefully negotiate the allocation of risk. Developers of offshore projects should carefully consider the impact of OCSLA on their contractual choice of law provisions to avoid unintended liability gaps, allow for the proper allocation of risk, provide for a uniform dispute resolution forum and to ensure compliance with any and all other state-specific lien and perfection requirements.