By Tod J. Everage

The modern day contract is a direct result of trial and error. Generally speaking, transactional lawyers try to negotiate “bulletproof” contracts providing exactly what their client wants or needs. Despite their best efforts, litigators in later disputes try their level best to find the “errors” in those contracts that could benefit their client. Then the pattern repeats. Take Seismic Wells, LLC v. Sinclair Oil and Gas Co., 2018 WL 43377234 (5th Cir. 9/13/2018), for example. In that dispute, the parties had included a “prevailing party” fee provision in their Joint Operating Agreement (JOA): “In the event any party is required to bring legal proceedings to enforce any financial obligation of a party hereunder, the prevailing party in such action shall be entitled to recover … a reasonable attorneys’ fees.” At first blush, this provision appears fairly standard and innocuous. But, with over $1 million at stake in attorneys’ fees, the meaning of every word in that provision is fair game.

The facts leading up to the dispute aren’t relevant here, other than Seismic sued Sinclair under various agreements when it was concerned that Sinclair would not be holding up their end of the bargain. Seismic’s amended complaint included 17 counts, including claims of fraud, breach of contract, conspiracy, tortious interference, defamation/libel, and business disparagement. At the end of Seismic’s case at trial, the court granted Sinclair’s motion for judgment as a matter of law. Sinclair then moved for over $1 million in attorneys’ fees incurred in defending itself, citing specifically to the prevailing party provision in the JOA. The district court denied the motion for three reasons: (1) failure to properly plead under RFCP 9(g) (failure to plead special damages); (2) the provision did not apply because Seismic’s suit was not a legal proceeding brought to enforce a “financial obligation under the JOA”; and (3) Sinclair did not adequately segregate its fee to isolate the work performed defending fee-eligible claims. The Fifth Circuit only addressed the second issue.

The Fifth Circuit agreed that Sinclair was obviously the “prevailing party,” a decision the Court had previously affirmed. The operative question though was whether Sinclair was the prevailing party in a lawsuit “to enforce any financial obligation of a party” under the JOA. The first issue was one of context. How was the dispute brought? The prevailing party provision applies when a party brings a legal proceeding to enforce a financial obligation. The Court noted that many of the claims Seismic brought against Sinclair alleged fraud that induced Seismic to sign the contracts; those claims sought to void the contracts, not enforce them. In other words, those claims sought to render the contract unenforceable and therefore would not satisfy the fee provision.

Two other claims though asserted breach of contract allegations; however, only one of those claims was grounded in the JOA, so the Court focused in there. Count 12 provided that Sinclair breached the JOA by refusing to assign Seismic a leaky well or operate that well on its terms. So, it appeared that this provision did seek to enforce the JOA. But, that was not enough because the legal proceeding must be brought to enforce a financial obligation under the JOA. The Fifth Circuit noted that “financial obligation” is synonymous with “monetary obligation,” and was not persuaded that Seismic’s claim seeking monetary damages made this claim a financial one. Rather, this claim was to turn over a leaky well, which the Court held was not a financial obligation. As such, the prevailing party fee provision was not triggered.

Seismic filed this lawsuit, lost, then got away without having to pay for Sinclair’s attorneys’ fees under a provision that Seismic probably would have sought to enforce itself if it had won at trial. Without knowing anything about the negotiations, including the term “financial obligation” in the JOA’s prevailing party provision narrowed the remedies available to either party in this dispute. Using the term “enforce” arguably did as well given Seismic’s attempts to invalidate the contract. Whereas, had the parties used the more boilerplate language awarding attorneys’ fees to the prevailing party in any legal proceeding brought by “any party arising under this Agreement,” Sinclair may have recovered. Well, assuming that was their original intent.

This case presents a good example of the interplay between the words used in the contract, and the words used in the complaint filed to enforce/or invalidate that same contract. Both transactional lawyers and litigators should take note.

By Tod J. Everage

Contractual indemnities are important and valuable in the oil patch. When they are enforceable, they have the potential to end litigation completely or at least the financial burden for a particularly well-positioned indemnitee. But, with “anti-indemnity” statutes in play in several jurisdictions (including Louisiana), the enforceability of these indemnity provisions rely (barring exceptions) on the application of general maritime law.

It is a common practice to select general maritime law as the governing law in any oilfield MSA – at least within the Fifth Circuit – but simply saying it applies doesn’t actually make it so. As a result, jurisprudential tests have emerged to determine what law actually applies to torts depending on where the incident occurred, as well as to the contracts themselves. When the services provided under the contract are obviously maritime in nature, such as a contract for vessel support services, there is little to dispute. But, especially when there is a high-dollar potential exposure riding on the enforceability of an indemnity obligation, there have been persuasive arguments made on both sides of the maritime vs. state law debate governing contracts for other, less obvious, oilfield services.

Most recently, the US Fifth Circuit addressed this dispute over plugging and abandoning services (“P&A work”) on three wells in coastal Louisiana waters in In re: Crescent Energy Services, No. 16-31214 (5th Cir. July 13, 2018). Crescent agreed, amongst other things, to provide three vessels to perform the work and to indemnify Carrizo against any claims for bodily injury, death, or damage to property. One of Crescent’s employees was injured on one of Carrizo’s fixed platforms during the P&A work, and unsurprisingly, Carrizo’s indemnity demand from the resulting claim was denied by Crescent under the Louisiana Oilfield Indemnity Act. The district court, applying the former Davis & Sons test, found the contract between Carrizo and Crescent to be a maritime contract and granted summary judgment in favor of Carrizo on its indemnity claim.

In January, the US Fifth Circuit pared down its maritime contract test (from Davis & Sons) to focus on only two factors: (1) “is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?” and (2) “does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?” In re Larry Doiron, Inc., 879 F.3d 568, 576 (5th Cir. 2018). Both factors must be affirmed before maritime law may be applied to the contract.

On the first factor, Carrizo asserted a creative and ultimately successful argument that P&A work is “part of the total life cycle of oil and gas drilling.” Because plugging and abandoning a drilled well is part of the agreement with the State of Louisiana to get an initial permit to drill, the US Fifth Circuit was persuaded that the contract for P&A work involved “the drilling and production of oil and gas.” The Court then re-iterated its departure from Davis & Sons and its concern about where the incident occurred. In Doiron, the US Fifth Circuit stated: “The facts surrounding the accident are relevant to whether the worker was injured in a maritime tort, but they are immaterial in determining whether the workers’ employer entered into a maritime contract.” Doiron, 879 F.3d at 573-74. The US Fifth Circuit is “no longer concerned about whether the worker was on a platform or vessel.” Rather, the question is whether the contract concerned the drilling and production of oil and gas on navigable waters.

On this point, Crescent’s insurers argued that Doiron’s analysis on the P&A work resulted in inconsistencies with other Fifth Circuit precedents finding that torts occurring on and during the construction of fixed, offshore production platforms on the OCS are generally not governed by maritime law. Also, wireline work – which comprises much of the P&A work – had also traditionally been found to not be a maritime activity. The Court declined the invitation to review those OCSLA cases: “We are not concerned here with those OCSLA issues of whether to borrow state law as surrogate federal law, which leads to analyzing whether maritime law applies of its own force, which requires determining the historical treatment of certain contracts. We do need to analyze, though, whether this is a maritime contract. Doiron now controls that endeavor.” But these statements do not make clear whether the rejection of the OCSLA cases was because Crescent Energy Services is not an OCSLA case itself, or whether that distinction no longer has a difference in oil and gas contract review.

The Fifth Circuit then quoted commentary from Professor David W. Robertson discussing contract disputes on the OCS: “If the contract is a maritime contract, federal maritime law applies of its own force, and state law does not apply. If the contract calling for indemnity is not a maritime contract, the governing law will be adjacent-state law made surrogate federal law by OCSLA § 1333(a)(2)(A).” Why bring this up if the Court is ignoring OCSLA cases on the grounds of distinction? The Court doesn’t directly clarify. Instead, it said the reference was “to show that Davis previously and Doiron now are performing the task of determining how to classify contracts.” It further stated that Davis (a Louisiana waters case) did not offend OCSLA cases, so neither does Doiron.

The Fifth Circuit seemed concerned about this argument though and the perception of the Court’s abandonment of long-standing precedent. Surely, this will be the continued topic of attack from potential indemnitors. In addressing those criticisms, the Court stuck with its more back-to-basics theme: “We are here classifying a contract for a certain purpose, a juridical activity that has been done consistently with the 1969 Rodrigue decision at least since our 1990 Davis decision. We en banc eliminated most of the factors, narrowing our focus, but we did not fundamentally change the task. Doiron is the law we must apply.” On the one hand, the Court’s statements seem to firmly reiterate that Doiron is the law going forward when analyzing the maritime nature of a contract regardless of the location of the work. But, the Court’s avoidance of the OCSLA issues and the narrowed “certain purpose” of their decision begs for more direct guidance from the Fifth Circuit on Doiron’s geographic reach.

The Fifth Circuit could have unequivocally proclaimed that the breadth of Doiron extended to OCSLA cases, in whatever capacity, if that were its intent; but it did not. So then, what is the expected effect of Doiron on those contract cases involving a controversy on the OCS, where OCSLA statutorily provides its own choice-of-law provision? Does Doiron actually supplant Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009), since it called the case “un-useful” to its task? If the situs of the controversy is no longer appropriate, then it seems that Doiron may be the answer.

Grand Isle was a contractual application of test articulated in Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043 (5th Cir. 1990) which starts by finding that the dispute arises on the OCS; otherwise, now, Doiron surely is the test. The second PLT factor determines whether the OCSLA choice-of-law provision applies by looking to see if federal maritime law applies of its own force. This is where Crescent’s insurers’ historical argument would come into play. To determine whether federal maritime law applies of its own force, the US Fifth Circuit: (1) identified the historical treatment of contracts such as the one at issue, and (2) applied Davis & Sons. It seems obvious that this factor will likely at least be revised to substitute Doiron for Davis & Sons. The less obvious question is whether the historical treatment factor is relevant at all going forward.

In Doiron, the Fifth Circuit criticized those “historical” opinions that “improperly focus[ed] on whether the services were inherently maritime as opposed to whether a substantial amount of the work was to be performed from a vessel.” Thus, it is possible that the second PLT factor simply becomes the Doiron test. But, if so, then that would effectively eliminate the necessity of the PLT test for OCS contract law disputes, because the Courts have long since acknowledged that the relevant application of Louisiana law to the contract does not conflict with federal law. If this analysis is correct then Doiron should be the standing legal test for the determination of applicable law in an oilfield contract regardless of the location of the work (OCS vs. State waters).

A comment the Fifth Circuit made in its analysis of another earlier issue seems to bolster that conclusion: “If the contract here is maritime, the fact that it was to be performed in the territorial waters of Louisiana does not justify causing the outcome of this lawsuit to be different than if the contract was for work on the high seas. Consistency and predictability are hard enough to come by in maritime jurisprudence, but we at least should not intentionally create distortions.” After lauding the directness of its new test in Doiron (notwithstanding their use of the unpredictably applied term “substantial role”), the Fifth Circuit could have assisted practitioners with a bit more directness in Crescent Energy Services.

Despite the historically non-maritime nature of P&A work in the Fifth Circuit, the outcome of Crescent Energy Services is not surprising given the necessity of the vessels used for the work. In that respect, this decision is consistent with the Fifth Circuit’s continued primacy – now, by way of the Doiron test highlighting its importance – of the “substantial role” that a vessel will play in the work being done under the contract. While the Fifth Circuit may have left a gap in its recent holdings for the next OCSLA-based contract dispute, we see no reason why Doiron would not be at least a part of that new analysis.