Judge Barbier, presiding over the Deepwater Horizon Multi-District Litigation (MDL) in the Eastern District of Louisiana, recently issued a series of important opinions regarding the interplay between federal admiralty jurisdiction, the Outer Continental Shelf Lands Act (OCSLA), and state law as well as the application of offshore indemnification clauses. See In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 808 F. Supp. 2d 943 (E.D. La. 2011); In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 841 F.Supp.2d 988 (E.D. La. 2012); In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, Case No. 10-2771, 2012 WL 2737726 (E.D. La. Jan. 31, 2012).
The court first took up the issue of the application of admiralty jurisdiction in considering motions to dismiss filed by the defendants in the first pleading bundle for private "non-governmental economic loss and property damages." In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, 808 F. Supp. 2d 943, 947 (E.D. La. 2011). Cameron, the designer and manufacturer of the blowout preventer, was the sole party to argue the Deepwater Horizon was a fixed platform and not a vessel in navigation. Cameron aruged that the blowout preventer (BOP) was phsically attached to the wellhead, located on the seabed, Deepwater Horizon was not a vessel in navigation. Id. at 950. The court rejected this argument, citing the complaint's allegation that the BOP was part of the vessel's gear or appurtenances, and that maritime law "ordinarily treats an appurtenance attached to a vessel in navigable waters as part of the vessel itself." Id. at 950. The Court found Cameron's argument to run counter to long-standing Fifth Circuit Court of Appeals precedent. Id. at 949.
The court also found that federal admiralty jurisdiction applied because the tort claims satisfied both the location and connection with maritime activity test promulgated by the U.S. Supreme Court in Grubart, Inc. v. Great Lakes Dredge & Dock Co., 513 U.S. 527, 534 (1995). Id. at 951. This ruling supplanted the application of the OCSLA. Id. at 951. Finally, the Court held that because OSCLA was supplanted and state law would be inconsistent with federal law, plaintiff's state law claims were preempted. Id. at 925-958.
The court next issued two rulings regarding the application of offshore indemnification clauses arising out of two member MDL cases. The first, In re Triton Asset Leasing GmbH, et al., No. 10-2771, is a limitation action filed pursuant to the Limitation of Shipowners’ Liability Act, 46 U.S.C. § 30501, et seq., wherein Transocean, owner of the oil rig, Deepwater Horizon, is seeking limitation of its liability to a multitude of claims for personal injury, wrongful death, economic loss, and property damage. Transocean impled BP pursuant to FED. R. CIV. P. 14(c) and an indemnification clause in a 1998 contract between Transocean and BP’s predecessors. The second case, United States v. BP Exploration & Prod. Inc., et al., No. 10-4536, is a claim asserted by the United States for civil penalties arising under the Clean Water Act and the Oil Pollution Act of 1990. BP and Transocean were named as defendants and each cross-claimed against each other seeking indemnification.
After deciding that the language in the contract could be read to mean BP would have to indemnify Transocean for gross negligence, the court considered whether it would be contrary to public policy to allow indemnification for gross negligence and punitive damages. With respect to gross negligence, the court found that BP would, in fact, have to indemnify Transocean pursuant to the indemnification language. In doing so, Judge Barbier freed himself of the Fifth Circuit’s decisions in Becker v. Tidewater, Inc., 586 F.3d 358 (5th Cir. 2009), Houston Exploration Co. v. Halliburton Energy Servs., Inc., 269 F.3d 528 (5th Cir. 2001), and Todd Shipyards Corp. v. Turbine Service, Inc., 674 F.2d 401 (5th Cir. 1982). The court reasoned Becker did not present public policy as an issue and Houston Exploration and Todd Shipyards did not involve indemnification clauses.
Judge Barbier opined that it would not be against public policy to allow such indemnification due to the fact the parties’ drilling contract allocated risk to both Transocean and BP, not just BP. “In other words, the reciprocal nature of these indemnity clauses arguable created an incentive for Transocean to avoid grossly negligent conduct, or at least did not encourage Transocean to act in a grossly negligent manner.” In re Oil Spill, 841 F.Supp.2d at 1000-01. Next, the court found each party was a sophisticated entity with roughly equal bargaining power and recognized the parties’ “freedom of contract” weighing in favor of upholding the clause. Id. at 1001. The court also recognized that the indemnity clause would not leave the injured party without recourse, as would occur in a release. Id. at 1001.
Judge Barbier was not as generous with the punitive damages and Clean Water Act indemnification issues. The court refused to allow the indemnification clause to shift risk from BP to Transocean given the public policy purpose behind punitive damages which “is to punish the defendant for egregious conduct, teaching him not to do it again, and to deter others from engaging in similar behavior.” Id. at 1003. The Court also invalidated the indemnification clause to the extent it included risk-shifting provisions for civil penalties arising under the Clean Water Act.
The court also addressed the argument that a breach of contract should serve to invalidate the indemnification provisions between BP and Transocean. Id. at 1007. The court recognized that, in some instances, breach of contract can invalidate an indemnity clause. Id. at 1006. For example, where an indemnitee materially increases the risk or prejudices the rights of the indemnitor to the extent the indemnitor has been damaged, courts will invalidate the indemnification provision. Id. On the other hand, there are circumstances where the indemnitee breaches a term of the contract, but the indemnity obligation was not discharged because the indemnitor waived the breach. Id. at 1007. The court noted that BP’s arguments as to invalidating the indemnity clause seemed doubtful, but could not resolve the issues at the summary judgment stage due to the uncertainty and factual questions over whether duties under the contract exist, whether they have been breached, and whether they should have an effect on the duty to indemnify. Id. at 1007.
Finally, the court considered a novel indemnity argument wherein BP argued that Halliburton’s breach of contract, fraud, and material increase of risk to BP as an indemnitor invalidate BP’s indemnity obligations. In re Oil Spill by the Oil Rig “Deepwater Horizon” in the Gulf of Mexico on April 20, 2010, Case No. 10-2771, 2012 WL 2737726 (E.D. La. Jan. 31, 2012). Specifically, BP asserted Halliburton made fraudulent statements and concealed material information concerning cement tests it conducted. Id. at *2. BP asserts that the language of the indemnity does not extend to fraud nor would public policy allow such indemnity due to Halliburton’s alleged willful misconduct. Id. The Court found that fraud could void an indemnity clause on public policy grounds, but declined to do so at the dispositive motion stage given the unresolved factual issues as to BP’s allegations. Id. at *3.