Blog

Managing Oilfield Service Risk Through Contracts

MARITIME

06/06/2016

By: David B. Sharpe

Offshore service vessels and tugs operate in a valuable but risky business. On any given day, operators and owners face risks like collisions, slip-and-falls, and bad weather, just to name a few. Managing those risks is a crucial part of doing business in the oil patch.

Service contracts can’t eliminate risk, but they can help manage risk by reallocating it using indemnity and insurance provisions. This is typically accomplished through provisions in master service agreements, or MSAs, and master time charter agreements, or MTCAs.

Both instruments commonly include reallocation-of-risk clauses, and it’s common for each party to try and shift as much risk as possible to the other.

Towage contracts are unique

In the towage context, the Supreme Court has held that a tower cannot contract out of all liability for its own negligent damage to the tow. No matter how clearly or cleverly a tug owner, for example, words the reallocation-of-risk clause in its contract, the owner is not allowed to escape all risk that the tow will be damaged due to the tower’s own negligence. The rationale is that making wrongdoers pay damages discourages negligence. It also protects those in need of goods or services from being overreached by others who have power to drive hard bargains.

Can you reallocate risk in MSAs and MTCAs if you don’t provide towage services?

Beyond the towage context, maritime law generally allows parties to reallocate risks of personal injury and property damage. “Knock for knock” and “mutual hold harmless” clauses are commonly used to provide that each party will be responsible for its own personnel and property, regardless of fault.  But any reallocation-of-risk clause must be clear and unambiguous before a court will consider its validity.

The enforceability of a reallocation-of-risk clause in a non-towage contract depends on which legal system applies: state law; federal statutory law; or general maritime law. In the Gulf of Mexico offshore oilfield, vessel service contracts can be subject to each system. The need for knowledgeable legal counsel with experience in admiralty and maritime law can be critical.

For example, the federal Longshore & Harbor Workers’ Compensation Act (“LHWCA”) can apply in the offshore oilfield. In general, LHWCA 905(b) prevents a covered employer from contracting to accept all the risk of its employees being injured or killed in offshore accidents aboard vessels. But LHWCA 905(c) allows mutual indemnity agreements in limited circumstances.

The Louisiana Oilfield Anti-Indemnity Act (“LOAIA”) and its Texas equivalent place restrictions on indemnity provisions, as well. When applicable – for instance via the Outer Continental Shelf Lands Act – LOAIA can invalidate an otherwise valid knock-for-knock indemnity provision. 

Courts have recognized that some of the restrictions upon freedom of contract imposed by LHWCA and LOAIA can be mitigated through the use of benefit-of-insurance clauses, which require one party (usually the contractor) to name the other party (usually the customer) as an additional insured. While subject to policy terms and other requirements, an effective benefit-of-insurance clause can shift the financial risk from the customer to the contractor’s own insurance company. Benefit-of-insurance clauses can be valid even though a contractual indemnity agreement is not.

Since general maritime law could allow an indemnity clause that LOAIA or LHWCA would otherwise invalidate, the law governing your contract and its allocation-of-risk and benefit-of-insurance clauses matters. There are also key rulings from the Fifth Circuit that create an additional layer of issues such as the vessel’s location when an incident occurs.

What about vessels working on a construction project in Louisiana waters not related to a well?

Vessels involved in offshore construction projects unrelated to oil wells could also see state law invalidate an otherwise valid indemnity clause. Enacted in 2010, the Louisiana Construction Anti-Indemnity Act (“LCAIA”) generally voids reallocation-of-risk clauses in certain construction contracts. It prohibits indemnity provisions covering another party’s acts or omissions, as well as provisions requiring insurance for another’s liabilities.

In its original form, the LCAIA did not allow parties to contract around these prohibitions through benefit-of-insurance clauses. In 2012, the law was amended to permit limited risk reallocation using benefit-of-insurance clauses, though the language is rather confusing. And since only a few cases have interpreted the LCAIA so far, its effects remain murky.

Of course, these topics illustrate only a few of the potential pitfalls when managing the risks involved with owning and operating oilfield service vessels.

Lugenbuhl’s admiralty and maritime law team has extensive experience with indemnity- and insurance-related matters. Our attorneys have successfully litigated cases involving state and federal anti-indemnity acts, and we work closely with clients to draft and negotiate contracts that contain reallocation-of-risk provisions. 

For more information about this topic, or to retain legal representation in the field of admiralty and maritime matters, contact us. To learn more about our admiralty and maritime practice, or to contact one of our attorneys with expertise in this area, click here.

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David B. Sharpe focuses on marine insurance coverage and risk management. A towage and offshore services instructor at Tulane Law School, he has extensive experience negotiating and litigating contracts for both vessel owners and charterers. Additionally, Lugenbuhl shareholders Miles ThomasRodger Wheaton, and Stanley Cohn focus heavily on admiralty and maritime law and marine insurance coverage, providing a wide range of transaction and litigation services.

 

The content of this article is not intended to serve as an exhaustive review of the laws, statutes or issues related to the Longshore & Harborworkers Compensation Act, the Louisiana Oilfield Anti-Indemnity Act or other legislation mentioned, and it is not intended to provide legal advice. The opinions expressed through this article may not reflect the opinions of the firm, individual attorneys or clients.