Knock for Knock Defense and Indemnity Clauses
Another area where the issue regularly arises concerns contracts connected to oil and gas exploration and drilling activities in both inshore and offshore waters of the Gulf of Mexico. By way of background, oilfield services contracts in the Gulf of Mexico region routinely contain what are known as “knock for knock” defense and indemnity clauses. In a typical knock for knock scheme, each company on a job agrees to indemnify, defend, and provide additional insured coverage to the others so that each is liable for injury to its own employees, regardless of fault. The intent underlying this is to apportion the insurable risk each contracting party bears to their relative size and role in the venture. Theoretically, this allows smaller companies to compete for jobs without potentially cost-prohibitive insurance premiums, and costs are further reduced by a decreased need to litigate the issue of liability among multiple defendants, as liability is assumed irrespective of fault or negligence of any other party.
Under the U.S. general maritime law, such clauses are generally enforceable. However, several states, such as Texas and Louisiana, have enacted laws limiting the scope and validity of such provisions when the contract at issue concerns oil and gas exploration, drilling, and production activities. Such state laws, if applicable, will control the question of the enforceability of a contract’s defense and indemnity provisions to the exclusion of any other law that might have otherwise have deemed them enforceable.
Thus, answering the question of whether state versus federal law applies to a particular contract can have major implications for contracting parties, their subcontractors and other related service providers, and their insurers. In the wake of a casualty event, once defense and indemnity demands begin to be exchanged, if there is any credible possibility that state law could negate or limit the contract provisions under which the demands are made, the issue often is not resolved without resorting to litigation.
The Fifth Circuit’s Tests
Beginning with its decision in Davis & Sons, Inc. v. Gulf Oil Corporation, 919 F.2d 313 (5th Cir. 1990), the United States Fifth Circuit Court of Appeals, whose jurisdiction includes the states that generate the majority of oil and gas drilling, exploration, and production activities in the U.S.’s portion of the Gulf of Mexico (Texas, Louisiana, and, to a lesser extent, Mississippi and Alabama), utilized a six-part test for determining whether a particular contract is maritime or not that required answering the following questions:
- What did the specific work order in effect at the time of injury provide?
- What work did the crew assigned under the work order actually do?
- Was the crew assigned to work aboard a vessel in navigable waters?
- To what extent did the work being done relate to the mission of that vessel?
- What was the principal work of the injured worker?
- What work was the injured worker actually doing at the time of injury?
As is plainly evident, the Davis test is highly case-specific, difficult to answer without access to a “global” set of facts concerning the work at issue in a casualty (which often cannot be obtained without the benefit of the civil litigation discovery process), and arguably cuts against the original intent behind the use of knock for knock provisions in oilfield services contracts (i.e., defining, reducing, and controlling risks for the contracting parties and their insurers). According to an amicus brief filed in the In re Larry Doiron, Inc.[1] appeal, “The result [of the Davis test] has been a tsunami of litigation; in the years since [Davis] was decided, [the Fifth Circuit] has been presented with this issue at least 20 times, and the district courts throughout the Fifth Circuit have had to deal with this issue at least 68 times. And, of course, these numbers reflect only the reported decisions; there are undoubtedly hundreds of other unreported cases where parties were confronted with this question.”
It was these concerns that led, at least in part, to the Fifth Circuit’s recent decision in Doiron,in which it replaced Davis with a simpler test that asks only two questions:
- Is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?
- Does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?
If the answer to both questions is yes, then the contract is maritime and thus subject to federal maritime law.
Applying the Doiron Test
The underlying facts at issue in Doiron were relatively typical for the types of disputes to which the Davis test had previously been applied. Apache owned a gas well located in navigable water in Louisiana. Apache had previously entered a blanket master services contract with Specialty Rental Tools & Supply (“STS”) that contained standard indemnity provisions. In early 2011, Apache issued an oral work order directing STS to perform flow-back services on the well. A stationary production platform provided the only access to the well. The work order did not require a vessel, and neither Apache nor STS anticipated that a vessel would be necessary to perform the job. After beginning the work, STS discovered that it needed a barge crane to finish the job. Apache hired Larry Doiron, Inc. (“LDI”) to provide one.
At some point after the LDI barge arrived at the work site, its crane struck and injured an STS worker. Litigation ensued, and LDI made a demand for contractual defense and indemnity to STS pursuant to the terms of the Apache-STS contracts. Applying the new test, the Fifth Circuit held that because the use of the barge was an insubstantial part of the job and not work that the parties expected to be performed, the contract at issue was nonmaritime and controlled by Louisiana law, which bars the type of indemnity provision contained in the contract. LDI was therefore not entitled to defense and indemnity from STS for the claims asserted by the STS employee.
It is important to note that the Fifth Circuit expressly stated in Doiron that it was only dealing “with determining the maritime or nonmaritime nature of contracts involving the exploration, drilling, and production of oil and gas,” though it also stated that “[i]f an activity in a non-oil and gas sector involves maritime commerce and work from a vessel, we would expect that this test would be helpful in determining whether a contract is maritime.” As recognized by Doiron, the applicable standard for determining whether any contract is maritime is set forth in the U.S. Supreme Court’s Norfolk v. Kirby opinion, as follows: To ascertain whether a contract is a maritime one, we cannot look to whether a ship or other vessel was involved in the dispute, as we would in a putative maritime tort case. Nor can we simply look to the place of the contract’s formation or performance. Instead, the answer depends upon … the nature and character of the contract, and the true criterion is whether it has reference to maritime service or maritime transactions[2].
Current Status
As of late May 2018, there were no reported decisions applying Doiron, and it remains to be seen how it will be applied by lower courts. However, it is certain that the issue of enforceability of knock for knock indemnity provisions will continue to be very significant for the companies and insurers involved in oilfield operations in the Gulf of Mexico region, and it is therefore important that all industry players be proactive in reviewing their contracts and potential liability exposure against the new Doiron test.
[1] In re Larry Doiron, Inc., 879 F.3d 568 (5th Cir. 2018), cert. denied sub nom. Larry Doiron, Inc. v. Specialty Rental Tools & Supply, L.L.P., 17-1420, 2018 WL 1763437 (U.S. May 21, 2018).
[2] Norfolk S. Ry. Co. v. Kirby, 543 U.S. 14, 23–24, (2004) (internal citations omitted).