In May 2015 a U.S. District Court and U.S. Court of Appeals each issued opinions that address important legal issues concerning risk management in the offshore energy industry. In Marquette Transportation Co. Gulf-Inland, LLC v. Unknown Potential Claimants, the District Court for the Southern District of Texas examined whether an indemnity provision in a towing agreement encompassed claims for gross negligence claims and, if so, its validity in light of public policy considerations. 2015 WL 2151773 (S.D.Tex. 2015); Case 13-cv-00054. In Alexander v. Express Energy Svcs. Operating Co., L.P., the U.S. Court of Appeal for the Fifth Circuit addressed whether an injured platform worker qualified as a seaman under the Jones Act, who would be entitled to assert much more lucrative claims against his employer. 2015 WL 2074244 (5th Cir. 2015); No. 14-30488. Each case provides an important reminder of how offshore oil and gas operations implicate very different risks from onshore operations.
Indemnity for Gross Negligence Requires a Case by Case Analysis Under General Maritime Law
Indemnity provisions are now standard in almost every offshore service agreement. When the indemnity obligations are mutual, they are often referred to as a "knock for knock" obligation. In these instances each party typically assumes the risk of injury or loss to its own personnel or property, as well as pollution emanating from its own equipment or vessels. By assuming risk based on the number of one's own company personnel or equipment (as opposed to the fault of one party or the other), a risk manager is better able to quantify total risk and manage that risk. Courts, however, have historically struggled to require a party to indemnity another for the other's gross negligence both due to the perceived inequities and potential public policy concerns.
In Marquette Transp., a Marquette employee sustained personal injuries when he allegedly tripped over a broken wire on the deck of an American Commercial Lines ("ACL") barge and fell overboard. Marquette was towing the ACL barge pursuant to a towing agreement. The employee asserted claims against Marquette and ACL for personal injuries alleging, among other things, that ACL was grossly negligent. ACL sought to enforce the "knock for knock" indemnity provisions requiring Marquette to indemnify ACL for injuries to Marquette's employees regardless of fault. Marquette accepted the indemnity tender with respect to the negligence claims, but refused to indemnify ACL for its alleged gross negligence arguing that the terms of the indemnity provision did not encompass claims for gross negligence and that, even if so, such indemnities are against public policy.
The indemnity provision at issue did not expressly cover claims for gross negligence; however, it covered "all claims … regardless of how caused" even if caused by the "negligence or fault [of ACL]… howsoever caused." Under the general maritime law, an indemnity clause should be interpreted to cover "all losses which reasonably appear to have been within the parties' contemplation." Id. (citing Weathersby v. Conoco Oil Co., 752 F.2d 953, 956 (5th Cir. 1984)). Relying on prior case law interpreting similarly broad language, namelyEnergy XXI, GoM, LLC v. New Tech Eng'g, L.P., 787 F.Supp. 2d 5490, 609 (S.D. Tex. 2011), the court found this language sufficiently broad to include claims for gross negligence.
The Marquette Transp. court further addressed the extent to which the indemnity clause could be enforced for gross negligence. Citing Judge Barbier's opinion in the Deepwater Horizon matter, the court found the indemnity for gross negligence invalid and against public policy to the extent ACL sought indemnity forpunitive damages; but valid as to any claim for compensatory damages.
In finding the indemnity valid for compensatory damages, the court noted that the towing agreement's mutual,i.e. "knock-for-knock", indemnity obligations created an incentive for each party to avoid grossly negligent conduct and did not incentivize poor conduct. Moreover, both Marquette and ACL are large, sophisticated marine transportation entities with no evidence to suggest unequal bargaining power.
It should be noted that a court applying another state's law may have reached the opposite conclusion. Texas, for example, requires that an indemnity provision expressly state in specific terms that indemnity is owed for losses caused by the indemnitees own negligence or gross negligence. This express negligence rule combined with requirements that any indemnity provision be conspicuous and apparent on its face comprise the Texas fair notice requirements, which have led courts to strictly construe some indemnity provisions. Additionally, the Texas Supreme Court has recognized that the parties' freedom to contract has limitations casting doubt whether any indemnity for gross negligence could be enforceable. See Zachry Construction Corp. v. Port of Houston Authority of Harris County, 449 S.W. 3d 98 (Tex. 2014).
The Marquette Transp. case illustrates that even under the general maritime law, indemnity for gross negligence is not absolute. Circumstances may arise where because of the nature of the parties and obligations assumed by each, an otherwise valid gross negligence indemnity obligation may be voided for public policy concerns.
Seaman Status Turns on Time Spent Working on a Vessel—Not Time Spent Performing Work that Required the Use of a Vessel.
Whether an employee qualifies as a seaman under the Jones Act, 46 U.S.C. §30104 et seq., can have significant implications to a risk management program. An injured seaman has significantly broader rights against an allegedly negligent employer than non-seaman, who is generally restricted to state worker's compensation or Longshore and Harbor Workers' Compensation Act (LHWCA) benefits.
A Jones Act seaman has the right to bring a negligence based suit against his or her employer in the forum of their choosing, with no liability cap on claims for pain and suffering, medical expenses, and lost past/future wages. A seaman is also entitled to maintenance (living stipend) and cure (medical care), which an employer owes regardless of who is at fault in causing the alleged injury. The failure to timely provide maintenance and cure benefits exposes an employer to claims for punitive damages and attorneys' fees.
Because of the very different risks involved with employing seamen, an employer must often turn to specialty marine policies and insurers, e.g., Maritime Employers Liability (MEL) policy or Protection & Indemnity Clubs, to insure against these risks. Thus, the potential that oil and gas workers may qualify as Jones Act seamen both significantly impacts a company's risks and requires additional risk management tools.
To qualify as a seaman, a worker must prove that he contributed to the function of a vessel or to the accomplishment of its mission and that he was assigned permanently to the vessel or spent a substantial part of his total work time—30%--aboard the vessel or identifiable fleet of vessels. Chandris, Inc. v. Latsis¸ 515 U.S. 347 (1995). Some offshore workers, such as roustabouts and floorhands aboard a drillship or Mobile Offshore Drilling Unit, clearly qualify as seaman because the installations from which they work are vessels. Other offshore workers, such as those working on fixed production facilities, are not seaman because they have no connection a vessel. Still others because of the nature of their work fall somewhere in the middle and the issue of seaman status can be hotly contested.
The Alexander case provides a common example of a worker whose assignments require him to spend time aboard both a vessel and fixed platform. The plaintiff was a lead operator for the defendant for an offshore plug and abandonment and platform decommissioning contractor. He was injured while performing work aboard a small platform that required the assistance of a lift boat positioned adjacent to the platform.
The Alexander plaintiff argued that since 35% of his assignments involved the use of a lift boat to assist in performing his work—a percentage not in dispute—he satisfied the temporal requirement to qualify as a Jones Act seaman. The plaintiff argued that only the participation of a vessel in a particular job was needed for that work to count towards his 30% temporal threshold. The defendant argued that a worker's connection to a vessel must be more substantive and that the proper inquiry was whether this plaintiff actually spent 30% of his total work time on the adjacent lift boat. The Fifth Circuit agreed with the defendant finding that proximity to a vessel during platform based assignments was insufficient. A plaintiff must prove that he spent at least 30% of his time working on a vessel to qualify as a seaman.
Determining whether an oilfield worker qualifies as a seaman can be complicated—especially where a worker is not permanently assigned to a particular installation but is dispatched on an as needed or per job basis. The inability to clearly classify some workers adds one more variable to the already complicated task of managing risk in the offshore energy industry.
The Marquette and Alexander decisions illustrate the different legal risks involved with offshore oil and gas operations. Understanding these differences is an important first step in successfully allocating these risks as part of larger risk management scheme.