offshore-drilling

By Sean McLaughlin

The U.S. Fifth Circuit issued a decision this week that addresses the murky question of what law applies to offshore incidents. It illustrates that the choice of law issue is not merely academic but has important real-world consequences. In this case it meant that a lawsuit for over $400,000,000 was given new life. See Petrobras Am., Inc. v. Vicinay Cadenas, S.A., No. 14-20589 (U.S. 5th Cir. 3/7/2016).

In October 2007, Petrobas America, Inc. (“Petrobas”) contracted with Technip USA, Inc. (“Technip”) to construct five “free-standing hybrid riser (“FSHR”) systems that move crude oil from wellheads on the seabed to “Floating Production Storage and Offloading” (“FPSP”) facilities on the surface of the sea. The FPSO facilities are independently moored to the seabed and store and offload, but do not transport, the production. The risers are fixed in place at the wellhead. From above, tether chains connect the upper risers to huge nitrogen-filled “buoyancy cans,” which are designed to keep tension in the risers so that they will not kink and impede the flow of oil. The buoyancy cans float 660 feet beneath the water surface; their tether chains play no role in securing the FPSO facilities.   The FSHR systems were located in the Chinook and Cascade fields in the Gulf of Mexico off the coast of Louisiana.

Technip subcontracted to Vicinay Cadenas, S.A. (“Vicinay”) the manufacture of these tether chains. Shortly after installation in March 2011, one of the tether chains broke, causing the loss of the associated FSHR system, loss of use of the FPSO facility, and lost oil and gas production. Petrobras and its underwriters sued Vicinay in March 2012 in federal district court in Houston asserting negligence, products liability, and failure to warn claims. Petrobas alleged subject matter jurisdiction based on admiralty or, alternatively, under OCSLA. Importantly, Petrobas did not assert that Louisiana law applied.

Vicinay moved for summary judgment, arguing that Petrobas’s economic damages claims were foreclosed under maritime law by East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858, 106 S. Ct. 2295 (1986). Notably, while opposing the motion, Petrobras did not contest the application of maritime law. The district court, assuming that maritime law applied, granted the motion for summary judgment. Two months later, Petrobas filed a motion for leave with the district court to amend its complaint and for the first time asserted that Louisiana law applied pursuant to the Outer Continental Shelf Lands Act (“OCSLA”). If Petrobas was correct and Louisiana law applied, then its claims should not have been dismissed because Louisiana law – unlike maritime law – allows for economic loss damages in this circumstance. See La. R.S. 9:2800.53(5); Chevron USA, Inc. v. Aker Mar., Inc., 604 F.3d 888 (5th Cir. 2010).

The magistrate denied the motion for leave because it was untimely, and the district court affirmed. Petrobas appealed. On appeal, the U.S. Fifth Circuit decided two issues: (1) Whether Petrobas waived the application of Louisiana law by failing to assert it until after summary judgment was granted; and (2) Whether maritime law or Louisiana law applied.

The U.S. Fifth Circuit held that Petrobas did not (and could not) waive the application of Louisiana law. Based on the line of cases holding that OCSLA is a congressionally-mandated choice of law that cannot be waived by agreement of the parties, the Court held that OCSLA could not be avoided “inadvertently.”

The Fifth Circuit also applied the PLT test and determined that Louisiana law, pursuant to OCSLA, applied. In doing so, the Court provided a very good analysis of the second element of PLT, whether “maritime law applies on its own force.” This element of the PLT test requires the performance of the Grubart “location” and “connection with maritime activity” tests. The Court had serious questions on whether the “location” test was satisfied, but found that since the “connection with maritime activity” test was not satisfied it did not need to reach the issue. The Court performed an excellent analysis of the “connection with maritime activity test” and explained how to properly apply it by analyzing the incident at an “intermediate level of generality.” In doing so, the 5th Circuit found that “the rupture of the tether chain was neither potentially nor actually disruptive to navigation and maritime commerce, not did it bear a substantial relationship to traditional maritime activity.” Therefore, maritime law did not apply on its own force, and per PLT, OCSLA and Louisiana law applied. The dismissal of Petrobas’ $400,000,000 damages claim was reversed, and the case was remanded to the district court for further proceedings.