Drilling rig at sunset

By Daniel Stanton

In the recent Fifth Circuit case of Hefren v. Murphy Exploration & Production Company, USA, et al., 2016 WL 1637758 (5th Cir. April 25, 2016), the court took up the riveting issue of contractual defense and indemnification. All levity aside, the issue addressed by the court is one that arises in nearly every case stemming from a casualty on the Outer Continental Shelf. In this case, an employee of Murphy, Hefren, was injured aboard the Front Runner SPAR on the OCS adjacent to the coast of Louisiana. Hefren brought suit in the Western District of Louisiana against both Murphy and McDermott, the builder of the Front Runner. Murphy achieved dismissal early on based on its status as Hefren’s employer and the employer immunity granted under the Longshore Harbor Workers’ Compensation Act. Shortly thereafter, McDermott filed a cross-claim against Murphy seeking indemnification for its defense costs based on the Master Service Contract that covered the construction of the Front Runner.

McDermott then moved for and received a summary judgment on Hefren’s claims as extinguished under the Louisiana peremptive period for claims for deficiencies in design and construction. McDermott then moved for a partial summary judgment against Murphy on its cross claim for indemnification. The district court granted McDermott’s motion and awarded McDermott its attorney fees and costs incurred in defending against Hefren’s suit. Murphy appealed the decision as contrary to the Louisiana Oilfield Indemnity Act (“LOIA”).

On appeal, the Fifth Circuit found that on its face, the LOIA voids indemnification provisions requiring a company to indemnify another for injuries to its employees caused by its own fault or negligence. But despite this, the Louisiana Supreme Court, in response to a certified question from the Fifth Circuit has stated that where an indemnitee is found free of fault after a trial on the merits, the LOIA will not bar the recovery of defense costs. See Meloy v. Conoco, 504 So.2d 833 (La. 1987). In the later case of Melancon v. Amoco Production Co., 834 F.2d 1238 (5th Cir. 1988), the Fifth Circuit further found that even when a court failed to reach the issue of the indemnitee’s fault or negligence, the LOIA would not bar the indemnitee’s recovery of defense costs where the issue of fault or negligence was not reached as a result of a legal bar. In Melancon, the indemnitee was entitled to recover because the plaintiff’s suit was barred by the Longshore Harbor Workers’ Compensation Act. In Hefren, the court found that similarly, Hefren’s claims against McDermott were legally “barred” by the statutory peremptive period. As a result, even though the court did not adjudicate McDermott free of fault after a trial on the merits, the LOIA would not bar McDermott’s claim for indemnification. The Fifth Circuit affirmed the trial court’s award of defense costs and attorneys’ fees to McDermott.

While not the most exciting issue in Fifth Circuit jurisprudence, the issue of defense and indemnity is a common one. Nearly every contract for service in the oil and gas industry includes defense, indemnity, and/or insurance clauses. While the effectiveness of these clauses may be undermined by the LOIA in many cases, Hefren clarifies and reiterates the important exception to the LOIA established by Melancon – that a finding of no fault or negligence is not required where a legal bar to the plaintiff’s recovery against the indemnitee exists.

As an aside, the 5th Circuit also ruled in this case that a SPAR was an immovable under Louisiana law. Thus, the 5 year preemptive period for defects in construction or improvement of immovable property applied to the Front Runner SPAR.